Fitch lowered Spanish multi-issuer cédulas hipotecarias to sub-investment grade for the first time yesterday (Tuesday), downgrading four series of MICH to BB+sf, citing concentration risk in the country’s banking sector and credit deterioration.

Fitch, Canary Wharf

“Banking sector consolidation has resulted in significantly increased CH concentrations in the portfolios of the MICH classes,” the rating agency said. “The average number of CH issuers participating in a MICH transaction is now nine, down from 14 when considering portfolio compositions at transaction closing dates. Fitch expects the consolidation to continue.

“Additionally, the credit quality of CH issuers has suffered during the crisis.”

The four multi-cédulas series downgraded were: AyT Cédulas Cajas Global VIII, AyT Cédulas Cajas X Class B, Cédulas TDA 7 Class A, and IM Cédulas 9. IM Cédulas 9 is on stable outlook and the others negative outlooks. All other classes of multi-cédulas were affirmed at BBBsf.

According to Bernd Volk, head of covered bond research at Deutsche Bank, the cédulas all remain ECB repo eligible thanks to Baa1 ratings from Moody’s.

Regarding AyT Cédulas Cajas Global VIII, AyT Cédulas Cajas X and Cédulas TDA 7, Fitch said that liquidity support is not sufficient to ensure at least one year’s coverage of a stressed MICH coupon given the default of a share of the portfolio of cédulas hipotecarias under an investment grade rating stress. It said the estimated liquidity shortfall is explained by consolidation in the banking system and the credit deterioration of some MICH-participating banks.

A high concentration of cédulas hipotecarias of Cajas Rurales Unidas (CRU) (BB, stable) in IM Cédulas 9 exposes the transaction to systemic risk, said the rating agency. It assigns the cédulas hipotecarias of CRU a Discontinuity Cap (D-Cap) of 1 under, meaning that their rating on a probability of default basis is BB+.

Fitch said that there is material risk that full redemption is not achieved within the three years allowed by a flexible maturity in the structure of IM Cédulas 9, because CRU’s CH are materially exposed to maturity mismatches, with the cover assets having a weighted average residual life of 11.5 years versus 4.3 years for the hard bullet CH.

The rating agency noted that the downgrades were not driven by material changes to overcollateralisation ratios of participating banks, which it said have generally remained stable or even improved in recent months. It said the lowest OC levels over the past 12 months of all participating banks allow for 100% principal recovery under BBBsf rating stresses.

Fitch also, last Friday, updated its rating criteria for MICH, although it said this would have no impact on existing MICH ratings.

It said it now estimates MICH liquidity needs by analysing the rating default rate of the portfolio of cédulas hipotecarias: i) over a risk horizon of one year (rather than the entire life of the MICH); and ii) assuming the probability of default of the CH corresponds to a rating of one notch above the issuer rating, where this uplift does not result in ratings higher than the Issuer Default Rating of the sovereign.