Moody’s downgraded Spain’s Bankia, Catalunya Banc and NCG Banco by two notches yesterday (Tuesday) and followed these up with cuts to their covered bond programmes, with Bankia’s being lowered to sub-investment grade. The latter is expected to hit “numerous” multi-cédulas.

Bankia’s mortgage and public sector cédulas were cut from Baa1 to Ba1 after the bank was downgraded from Ba2 to B1, on negative outlook. Its parent, Banco Financiero de Ahorros (BFA), was cut from B2 to Caa1, on negative outlook.

Catalunya Banc was downgraded from B1 to B3, on negative outlook, and its mortgage and public sector covered bonds from Ba1 to Ba2. NCG Banco was cut from B1 to B3, on negative outlook, and its mortgage covered bonds from Ba1 to Ba2.

The three programmes have Timely Payment Indicators (TPIs) of improbable from Moody’s, which said that Bankia’s programmes have a TPI leeway of one notch, while Catalunya Banc’s and NCG Banco’s cédulas have “limited” TPI leeway, meaning that a further downgrade of either bank may lead to a downgrade of the covered bonds.

The three banking groups are owned by Spain’s Fund for Orderly Bank Restructuring (FROB). Moody’s cited remaining vulnerabilities in their credit profiles even after the receipt of extensive public sector support packages, saying this is largely due to their continuing very weak asset quality, weak profitability levels, and very challenging restructuring requirements.

At least Eu9.5bn of Bankia cédulas hipotecarias are included in multi-cédulas transactions, according to Bernd Volk, head of covered bond research at Deutsche Bank, who said that “numerous” multi-cédulas seem likely. He noted that a further Eu4.8bn of Catalunya Banc and Eu5.1bn of NCG Banco cédulas hipotecarias are in multi-cédulas.

According to RBS analysts – who said they expect a “material” impact on multi-cédulas ratings – Moody’s is the only rating agency that does not yet rate any multi-cédulas below investment grade, although the rating agency has had the whole asset class on review for downgrade since October 2012.

They said that three multi-cédulas series are at risk of losing their ECB eligibility should Moody’s downgrade them to sub-investment grade: AyT Cédulas Cajas Global 8, Cédulas TDA 7, and IM Cédulas 9.

Crédit Agricole senior covered bond analyst Florian Eichert said that all the cédulas hipotecarias downgraded by Moody’s retain ECB eligibility thanks to BBB ratings from Standard & Poor’s. However, he noted that Catalunya Banc cédulas should drop out of iBoxx indices as they no longer have an average investment grade rating.

Deutsche’s Volk said that, with 78% total OC and 32.4% eligible OC as of 31 March and further support for Bankia likely in case of need, the downgrade of Bankia’s cédulas hipotecarias seems harsh.

FROB is restarting the sale process of NCG Banco and Catalunya Banc and Crédit Agricole’s Eichert cited a Spanish media report that the plan is to dispose of NCG by October, with Santander or BBVA rumoured to bid, and Catalunya Banc’s sale is expected thereafter.

“Should those banks be sold eventually, the pools and Cedulas would eventually be merged with that of the buyer and the underlying ratings of that buyer would determine the Cedulas rating,” said Eichert.

“Bankia will not be sold so there is no potential for a stronger entity determining the ratings going forward. As opposed to the other two banks, Bankia’s Cedulas have one notch TPI leeway though so from here we have at least a bit of room to breathe on the rating side.”