Moody’s downgraded Banco Popular Español covered bonds from A3 to Baa2 and put Banco Sabadell covered bonds on review for downgrade yesterday (Thursday), after taking similar actions against the two Spanish banks’ issuer ratings.

Banco Popular was cut from Ba1 to Ba3, on negative outlook, and the new rating, in combination with a Timely Payment Indicator (TPI) of “improbable” assigned to the banks’ mortgage and public sector programmes, resulted directly in their downgrades to Baa2. The two programmes have zero TPI leeway, meaning that a further downgrade of the issuer might lead to a downgrade of the covered bonds, all else being equal.

Banco Sabadell’s Ba1 rating was put on review for downgrade and Moody’s noted that, with Sabadell’s mortgage and public sector covered bonds having TPIs of “improbable” and hence zero TPI leeway at the Ba1 rating, a downgrade of the covered bonds because of a TPI cap might result from a downgrade of the issuer below Ba1, all else being equal.

According to Florian Eichert, senior covered bond analyst at Crédit Agricole, a one notch downgrade of the issuer would lead to a Baa1 rating and a two notch downgrade, Baa2.

RBS analysts said that the negative rating actions, which come after cédulas downgrades by Moody’s earlier this week, strengthen the case for downgrades of multi-cédulas.

“Banco Popular is only involved in a handful of multi cédulas,” they said today (Friday). “The IM Cédulas 1 GBP and 3 GBP (ES0347858005 and ES0318822006) effectively contain exclusively Banco Popular risk (with Banco Popular Español even being the provider of the liquidity facility) and should therefore move broadly in line with the single cédulas rating.

“Although both banks have equal amounts of outstanding cédulas, the impact of a downgrade of Banco Sabadell’s covered bonds on multis would be disproportionally higher. Sabadell has participated in the majority of AyT transactions.”