Moody’s yesterday (Tuesday) confirmed at A3 mortgage and public sector covered bonds issued by Banco Sabadell after having cut the issuer from Ba1 to Ba2, noting that the level of OC compensates for increased expected loss from the issuer downgrade.

Moody’s downgraded Sabadell and placed the Spanish bank’s ratings on negative outlook mainly because of a deterioration in the quality of the bank’s assets. The cut concluded a review for downgrade initiated in July.

The issuer downgrade increased the expected loss on Sabadell’s cédulas, said Moody’s, but the level of overcollateralistion held by the issuer in both the mortgage and public sector programmes compensates for this and supports an affirmation of the cédulas rating at A3.

Moody’s assigns a Timely Payment Indicator (TPI) of Probable to the covered bonds, which in combination with the Ba2 issuer rating caps the cédulas rating at A3.