Fitch has revised its recovery uplift assumptions for cédulas hipotecarias after reviewing Spain’s covered bond framework in light of new legislative measures introduced as part of the restructuring of the country’s banking sector, the rating agency said today (Friday), but no impact is expected on cédulas ratings.

Fitch said that after reviewing a law to reform the banking system that the Spanish parliament approved in November (Law 9/2012), the rating agency now understands that the Spanish covered bond framework provides for equal credit treatment for all the cédulas of an issuer. This means that upon an issuer default the receipts from cover pool disposals are allocated on a pro rata basis without discriminating according to bond maturity, according to the rating agency.

The new understanding has positive implications for Fitch’s recovery uplift analysis for the rating of cédulas, it said, which previously had been conducted a “conservative manner”.

Previously Fitch’s stressed estimate of cover pool proceeds would have had to meet 100% of the outstanding covered bonds for a maximum rating uplift to be assigned, which is the rating agency’s policy regarding jurisdictions were covered bonds are subject to time subordination risk. Now, it will grant a full uplift when the overcollateralisation taken into account between the total mortgage book and outstanding cédulas is able to reach stressed recoveries of at least 91%.

Fitch noted that the maximum recovery uplift assigned to Spanish programmes remains unchanged.

The rating agency said that no positive rating impact for cédulas is expected following the review of the law because its liquidity gap analysis, which is the weakest component of Fitch’s cédulas continuity analysis, remain unchanged.

Fitch noted that some elements introduced by Law 9/2012 – such as early measures, restructuring and resolution processes for domestic banks – are net positive and should provide greater confidence to cédulas investors as an active management of institutions will be conducted by the Fund for Orderly Bank Restructuring (FROB) ahead of a traditional insolvency.

However, it also highlighted that the measures could lead to troubled banks not maintaining stable levels of overcollateralisation.

“We believe that the powers granted to the FROB by the new Law 9/2012, in particular relating to the transfer of assets and/or liabilities to a bridge bank or an asset management company introduce uncertainty with regards to the ability of the troubled bank to maintain a stable level of OC between the total mortgage book and outstanding cédulas hipotecarias,” said Carlos Masip, director at Fitch.