Liquidity support programmes used by Spain’s regional and local governments are credit positive for Spanish public sector covered bonds because of the prevalence of municipal and regional debt in the bonds’ cover pools, said Moody’s today (Tuesday).

The rating agency noted that on 14 January 13 more Spanish municipalities joined the 88 already making use of the extraordinary financial support programme available to municipalities under financial strain. The measures are designed to help regional and local governments (RLGs) improve their liquidity positions, and, together with other liquidity support programmes for RLGs, are credit positive for Spanish public sector covered bonds given that the majority of the loans backing cédulas territoriales (CTs) are loans granted to RLGs (80%), according to Tomas Rodriguez-Vigil, analyst at Moody’s. (See chart below.)

“Previous programmes have helped CTs issuers maintain extremely high over-collateralisation (OC) levels in their programmes, making a default on the CTs less likely and increasing recoveries in the event of default,” he said. “Thanks to the support programmes, which provided RLGs with greater capacity to repay their debt, arrears have remained low for the past two years.”

He noted that the credit risk of cédulas territoriales has improved as a result of the liquidity support, but that it remains high compared with that of other European public sector covered bonds. The ratings assigned to cédulas territoriales are not affected because they are already limited by Moody’s Timely Payment Indicator (TPI) framework and/or Spain’s country ceiling (A3), he added. (Article continues below chart.)

Source: Moody’s

The rating agency said that the central government support has helped keep arrears low, although they have increased slightly over the last two years. It estimates that arrears in cover pools will remain stable to the next two years because regional fiscal positions will improve and RLGs may prioritise payment of their financial debt obligations in response to a constitutional change.

“Currently, non-performing loans represent less than 1% of the public-sector pools’ amount, or less than five times the level for residential mortgage loans,” said Rodriguez-Vigil.

According to Moody’s the extraordinary financial support programmes available to Spanish municipalities comprise liquidity support through the participation in State taxes, the rescheduling of debts with the Social Security or the Public Finance, the rescheduling of short term debts to long term debts, and the funding of the negative residual treasury for overhead costs.

The measures are the latest in a series of support programmes introduced by the Spanish central government, similar to a Regional Liquidity Fund and a Fund for Financing Payments to Suppliers (FFPP).