Standard & Poor’s downgraded Spain’s NCG Banco from BB- to B+, on negative outlook, on Thursday because of its takeover by Venezuela’s Banesco group, a rating action that is set to result in a cut of the bank’s mortgage covered bonds as these are rated at the maximum uplift above the issuer rating.

The rating agency downgraded NCG Banco because it believes its acquisition by Banesco of Venezuela, via Spanish subsidiary Banco Etcheverria, will result in increased pressure on NCG Banco’s business position and overall creditworthiness.

S&P highlighted the “relatively tight financial flexibility” of NCG’s new owners in the context of the large size of NCG compared with Banesco, the banking group NCG will belong to. Potential implications include changes that the new shareholders could make to NCG Banco’s long term strategy and financial profile, according to S&P.

S&P’s rating of NCG Banco includes one notch of uplift for short term extraordinary government support and an additional one notch of uplift for potential extraordinary government support.

S&P revised its assessment of NCG Banco’s business position from “moderate” to “weak” and it lowered the standalone credit profile from b to b-.

The rating actions conclude a review for downgrade that was initiated on 23 December. The outlook on the issuer rating is negative.

Cédulas hipotecarias issued by NCG Banco, which was nationalised during the crisis, are rated BBB+ by S&P. At this level, the rating incorporates the maximum uplift above the issuer rating under S&P’s methodology. The covered bonds were placed on CreditWatch negative in December following the rating action on the issuer, with S&P at the time noting that a downgrade of the bank would lead to a downgrade of the mortgage covered bonds by the same number of notches, all else being equal. It said it expected to resolve the CreditWatch placement once that on the issuer is resolved.

Bernd Volk, head of covered bond research at Deutsche Bank, said that although NCG’s cédulas hipotecarias face considerable further downgrade risk, “125% overcollateralisation, 63% eligible OC and a share of 76% residential mortgage loans as collateral seems comforting, despite 10% non-performing loans and a 16.5% share of real estate developers” (as of 31 December).