Moody’s downgraded Spain’s NCG Banco from B3 to Caa1 yesterday (Monday) following a transfer of its ownership from the Spanish government to Banesco Group, with the rating action expected to lead to a downgrade of the issuer’s covered bonds.

NCG Banco covered bonds are rated Ba1 by Moody’s, which placed them on review for downgrade in December, mirroring a rating action on the issuer. The rating agency assigns the mortgage covered bonds a Timely Payment Indicator of “probable” and said that the TPI leeway is limited.

A covered bond analyst today said that yesterday’s downgrade of the issuer “can be expected to trigger a downgrade on the covered bond rating as well”. She noted that an NCG Banco January 2019 covered bond is the widest trading euro benchmark covered bond, with a spread of around 240bp over mid-swaps.

She said that she expects limited widening pressure as a result of the rating action given that the January 2019 cédulas already trade at a wide premium from an issuer ratings perspective.

The downgrade of the issuer from B3 to Caa1 reflects Moody’s view of a lower probability of systemic support after the exit of the Fund for Orderly Bank Restructuring (FROB) from the bank’s capital, which follows the transfer of ownership of NCG Banco to Banesco Group (pictured) from a majority ownership by the Spanish government via FROB.