Fitch raised the country ceiling for Spain from AA to AA+ on Friday in connection with an upgrade of the sovereign from BBB to BBB+, a move that covered bond analysts expect to lead to an upgrade of Santander’s cédulas, with the impact on other Spanish issuers’ covered bonds less clear-cut.

According to covered bond analysts, the rating action on the sovereign will have a limited impact on cédulas ratings, with Banco Santander’s covered bonds likely to be the main beneficiary. Santander mortgage backed cédulas are rated A by Fitch, on positive outlook, while the bank itself is rated BBB+.

“We should see an impact on the programme of Santander as it is rated below its maximum achievable rating under Fitch’s new methodology, where Santander covered bonds could achieve up to four notches of uplift over its IDR rating, ” said Agustín Martin, head of European credit research and covered bonds at BBVA. “Having said that, will the bank’s senior unsecured rating be upgraded to A-, one notch above the sovereign? If this is the case, Santander covered bonds could be upgraded to AA, just one notch below the new rating ceiling set at AA+.”

Calmarza said that any upgrades of the rating of covered bond programmes of other Spanish issuers depends on whether or not their senior unsecured ratings are raised, and he added that he felt this was “not so clear-cut”.

“For most of the lower tier issuers, the senior unsecured rating is above the issuer’s viability, partly on the back of the sovereign support, and most of their cédulas programmes are on negative outlook by the agency,” he said.

“Fitch’s methodology does not perceive the smaller issuers as systemic,” he added. “They have little senior unsecured and hybrid debt outstanding so the impact should be negligible to Santander.”

Another analyst noted that at Fitch sovereign risk is incorporated into covered bond ratings not via a separate sovereign ceiling methodology but via Discontinuity Caps (D-Caps) assigned to covered bond programmes. In Santander’s case the D-Cap is 0, and 1 for other Spanish issuers, he noted, in turn limiting the cédulas ratings to two or three notches, respectively, above the issuer ratings.

“And since banks’ ratings were limited to one notch above the sovereign, covered bonds were indirectly limited at three notches above the sovereign,” he said.

Under Fitch’s methodology, Santander, at BBB+, has been rated one notch above the Spanish sovereign, and the analyst said that the issuer should be upgraded by one notch following the sovereign action. He noted that the rating agency assigned a two notch uplift above the issuer default rating as the starting point for Santander’s covered bond rating under its new criteria reflecting bank bail-in rules.

“I think it’s fairly straightforward to say that Santander’s cédulas will move up,” said the analyst. “The question is whether Fitch will base the upgrade on the sovereign and the bail-in methodology or do sovereign first and then the bail-in later.”

He said that in case of the former the cédulas rating will move from A to A+ and but if the rating agency reflects the sovereign upgrade and bail-in criteria changes in one rating action on the covered bonds then the cédulas would most likely be upgraded to either AA- or AA, depending on overcollateralisation levels.

The rating action on the Spanish sovereign reflects Fitch’s belief that risk to Spain’s creditworthiness has decreased following an improvement in the country’s financing conditions since the sovereign was downgraded to BBB in June. In addition, Fitch noted that the economic outlook in Spain has become more certain and the risk of its banks posing an additional burden on the sovereign has diminished.

“Spain’s fiscal track record over the past two years has been strong, in our opinion,” said Fitch. “Its headline fiscal deficit (excluding bank support) declined by 2.5% of GDP in 2012-2013, despite a 2.2% drop in nominal GDP over the same period.”