Standard & Poor’s placed on CreditWatch the ratings of 30 multi-cédulas yesterday (Thursday), with seven placed on positive review and 23 on negative, with six of the latter already rated BBB- and therefore at risk of being junked, according to an analyst.

The rating agency said that it will review changes to its credit estimates and ratings of the underlying assets, to determine whether a rating change is required for the multi-cédulas. It will also assess changes in asset concentration and a shorter time to maturity compared with its latest review in the process.

The affected transactions include multi-cédulas issued under the following programmes: AyT Cédulas, Cédulas TDA, IM Cédulas, and PITCH.

Bernd Volk, head of covered bond research at Deutsche Bank, noted that six of the  publicly outstanding multi-cédulas on negative review are rated BBB- and therefore at risk of losing investment grade status: Cédulas TDA 2031, Cédulas TDA 2027, Cédulas TDA 2025, Cédulas TDA 2021, AyT Cédulas 2022, and AyT Cédulas 2017.

“In our view, the S&P multi-cédulas rating approach is flawed on various levels,” he said. “However, we highlight that the respective Cédulas TDA series trade with a pick-up of only between 15bp-25bp versus Spanish sovereign bonds.

“Hence, investors not able to hold multi-cédulas rated (split) sub-investment grade, should sell, particularly given the strong spread tightening in the past 18 months.”

S&P noted that its ratings of multi-cédulas take into account its assumption of an expected full recovery of the underlying cédulas if an underlying issuer defaults, and whether an extension of the scheduled maturity of the multi-cédulas, coupled with a dedicated reserve fund liquidity line, is able to mitigate shortfalls.

“For S&P, a very important aspect in their multi-cédulas rating is the size of the liquidity line relative to the overall transaction,” said Florian Eichert, senior covered bond analyst at Crédit Agricole. “In this regards, the less participants a transaction has, the greater the concentration is, the larger individual entities within the structure become, and the larger liquidity lines would have to be able to cover the risk of a single participant defaulting.

“Consequently, S&P has always looked at consolidation within the banking sector as rather negative for multis.”

The rating agency also affirmed the rating of 13 multi-cédulas. It said it will resolve the CreditWatch placements in the next two months.