Cédulas ratings would be unaffected by any EU legislative changes that undermined investors’ residual claim against a defaulted issuer, Fitch said today (Monday) in response to a media report on Thursday that some said misleadingly suggested covered bonds could be subject to bail-in.

The rating agency’s comments were made in reference to a report by Spanish newspaper Expánsion, which it said stated that the EU might consider subordinating cédulas holders to unsecured depositors, specifically those with deposits not covered by guarantee schemes.

Gunnar Hökmark, EP Rapporteur on banking resolution

The Expánsion article was picked up by other media outlets, such as Bloomberg, which however later published an article that rejected the prospect of covered bonds being made to incur losses as part of a bail-in of a bank. It quoted Gunnar Hökmark, the European Parliament’s rapporteur on banking resolution, as stating that “secured liabilities such as covered bonds shall not be subject to bail-in”.

Fitch noted that the Expánsion article did not suggest that the EU is questioning the framework that results in the “legal, valid, binding and enforceable” encumbrance of assets, and said that it is confident the legal framework protecting cédulas hipotecarias is not at risk.

“We do not expect changes to the laws that allow for the encumbrance of assets as this would go against the essence of the legal framework,” it said. “Spanish law clearly identifies cédulas hipotecarias investors as special privileged creditors secured by the entire mortgage book of a bank.”

With respect to ratings, Fitch clarified that it does not give any credit for recoveries that would stem from covered bond investors’ unsecured recourse to the insolvency estate of a defaulted issuer, so that any changes to the status of this claim would not have any rating implications. This applies to standalone cédulas hipotecarias and multi-cédulas, according to the rating agency.

Other market participants went beyond Fitch’s reassurance, with a banker saying that the Expánsion article caused a lot of confusion when it was published and incorrectly captured thinking among those legislators leading the development of bank resolution law in the EU.

“The article in the Spanish press about covered bonds being subject to bail-in was totally wrong,” said Richard Kemmish, head of covered bond origination at Credit Suisse. “The Economic & Monetary Affairs Committee referred to in the article is actually pushing for covered bond’s exemption from bail in to be automatic, not up to national discretion.”

In October ECON (the Economic & Monetary Affairs Committee) of the European Parliament put forward proposals under which voluntary overcollateralisation of covered bonds would be explicitly protected, rather than a choice as the European Commission proposed. (See here for previous coverage.)

Florian Eichert, senior covered bond analyst at Crédit Agricole, also said that the Expánsion article falsely stated that covered bonds could be included in bail-ins, but acknowledged that there are differences of opinion between the different parties involved in the EU law-making process about the status of voluntary OC and the residual unsecured claim against the issuer.

The Expánsion article also made the situation sound more dramatic than it necessarily would be, he said, with it being very difficult to imagine how enforcing losses on covered bondholders’ via their residual claim against the insolvency estate would work in practice.

“We do not have the final wording yet but, even if the worst comes to the worst in the current political climate and the residual claim is bail-in-able, we have a very practical problem that we cannot get our head around,” he said. “Resolution means the bank remains a going concern, which means no covered-bond-specific action needs to be taken and, as long as that does not happen, the pool is not wound down, which means no one really knows what a potential residual unsecured claim would be worth.

“And how do you write down something whose value you don’t even know?”