The cancellation or amortisation of cédulas by issuers that have transferred mortgages to Spain’s bad bank has offset a reduction in total overcollateralisation levels, said Fitch today (Wednesday), meaning that investor protection has hardly diminished.

The transfer of assets to Sareb, Spain’s bad bank, by issuers such as Bankia, NCG Banco and Catalunya Banc has caused total overcollateralisation of these banks’ covered bonds to drop by 14% on average, according to Carlos Terre, director, structured credit at Fitch.

However, eligible OC has increased by 8% because issuers have amortised or cancelled some of their existing cédulas, with the retired covered bonds likely to have been those retained for use for repo with the European Central Bank, he said.

In addition, the vast majority of mortgages that were transferred to Sareb are troubled developer loans, so that, after credit and market value stresses are applied, the cédulas offer almost the same level of protection despite the reduction in the size of the collateral available to investors, according to Terre.

“Investors remain protected because it is riskier loans that have been transferred and because banks have amortised outstanding cédulas,” he said.

The rating agency has lowered estimated per cent losses for cover pools following the asset transfers, although it noted that it has increased market value decline assumptions to capture the challenges facing the Spanish housing market.