Fitch upgraded CRU cédulas hipotecarias yesterday (Wednesday) and affirmed its public sector covered bonds plus the cédulas of four other Spanish banks after it lowered breakeven OC levels due in part to reduced stressed refinancing spreads for Spanish mortgage loans.

Fitch upgraded the mortgage backed covered bonds of Cajas Rurales Unidas Sociedad Cooperativa de Credito (CRU) from BBB to BBB+, on stable outlook, and affirmed the issuer’s cédulas territoriales (CT) at BBB, on negative outlook.

CRU was formed as a result of the merger of Cajamar and Caja Rural del Mediterraneo Ruralcaja in November 2012.

The rating agency also affirmed the cédulas hipotecarias (CH) of four other Spanish banks at the following rating levels: Banco Santander, A; Caja Laboral Popular Cooperativa de Credito, A-; Banco Mare Nostrum, BBB+, and NCG Banco, BBB+. The outlook on the covered bonds’ ratings is negative.

A covered bond analyst said that the upgrade of CRU’s cédulas hipotecarias means that the covered bonds should rejoin the Markit iBoxx EUR Covered index after the next index rebalancing in November.

The rating actions are due to less conservative breakeven overcollateralisation (OC) levels for a given rating level, after Fitch lowered its stressed refinancing spreads for Spanish mortgage loans and applied them to the modelling of recoveries default. Conclusions from a review of the legal framework for Spanish mortgage and public sector covered bonds also played a role in the rating actions, according to Fitch.

In CRU’s case, the rating agency lowered the breakeven OC to 68% in a BBB+ stress scenario – it had been 65.1% for a BBB rating – and said that the 146% OC level that Fitch gives credit to “now provides more protection” than the new breakeven OC level.

“Therefore the CH rating has been upgraded to BBB+,” it said, “which is the maximum achievable CH rating given the bank’s Issuer Default Rating of BB/Negative, an unchanged Discontinuity Cap of 1 (very high discontinuity risk) and a further benefit of three notches for recoveries given default.”

Fitch lowered refinancing spreads for Spanish mortgage loans from 650bp-750bp per annum in a base case scenario to 450bp-550bp.

“This is consistent with a significant reduction of CH spreads and senior tranches of Spanish residential mortgage securities experienced over the last year, which Fitch uses as a proxy to determine the margin above a reference rate required by a potential buyer of Spanish mortgage loans,” said the rating agency. “Refinancing spreads for Spanish local authorities have not been modified.”

Fitch said that the lowering of the breakeven OC for a given covered bond rating is also due to an updated cover pool valuation method and because the rating agency is now modelling cover pool cashflows to be allocated pro rata to all outstanding cédulas hipotecarias in the event of a default thereof.

“This recognises the equal treatment of all bondholders under a given cédulas programme, should cover assets be disposed of,” said Fitch in relation to the second aspect. “By contrast, the agency previously applied a more cautious approach that considered time subordination risk, based on a lack of clear cross-default provision between cédulas of different maturities.

“As a consequence, Fitch is assigning its maximum rating uplift for recovery given default purposes when credited OC sustains stressed recoveries of at least 91% rather than 100% of all outstanding cédulas in a given rating scenario.”