Fitch upgraded 13 multi-cédulas series yesterday (Thursday) to reflect a strengthened cédulas hipotecarias framework following approval of the BRRD and upon an improvement in the credit quality of the participating issuers.

The affected multi-cédulas and the associated rating changes are: AyT Cédulas Cajas Global II, X, XIV (BBB sf to BBB+ sf); AyT Cédulas Cajas Global IV (BBB+ sf to A sf); AyT Cédulas Cajas Global VII (BBB sf to A- sf); AyT Cédulas Cajas V Class B (BBB sf to A- sf); AyT Cédulas Cajas VIII Classes A and B (BBB sf to A sf); AyT Cédulas Cajas X A (BBB+ sf to A sf); Cédulas TDA 3 (BBB sf to A sf); IM Cédulas 7 Class A (BBB+ sf to A- sf); Programa Cédulas TdA Series A1 and Series A3 (BBB sf to A sf).

The outlooks for the upgraded multi-cédulas are all stable, with the outlooks of AyT Cédulas Cajas Global X and AyT Cédulas Cajas VIII Classes A and B having been changed from negative. In addition to the upgrades, the ratings of 19 multi-cédulas were affirmed, and 10 of these had their outlooks changed from negative to stable.

“The upgrades reflect the strengthened framework of cédulas hipotecarias (CH) after the approval of the EU Bank Recovery & Resolution Directive (BRRD),” said Fitch. “They also reflect the improved credit quality of MICH portfolios over the last six months, reducing liquidity needs for each rating level.”

The rating agency noted IDR and viability rating (VR) upgrades of various banks participating in multi-issuer cédulas hipotecarias (MICH) and Spanish banking sector consolidation, where lower rated banks have been absorbed by higher rated banks.

Fitch said that as a starting point for its liquidity needs analysis it has assumed as a starting point the VR or IDR of participating banks.

“MICH series have been upgraded only if the final rating of the series is able to support an eventual rating downgrade of the participating banks’ IDRs to the VR level,” it said. “The revision of outlooks to stable outlook from negative on the 10 tranches reflects our view that the respective MICH transactions would be able to tolerate a downgrade of the IDRs of participating banks to their VR.

“This is because the VRs of some participating banks have recently been upgraded.”

Fitch updated its MICH criteria on 25 June and said yesterday that it now captures an issuer default rating (IDR) uplift of up to two notches above the IDR of each CH issuer to determine the liquidity needs of each MICH transaction, whereas previously only one notch of uplift was captured for banks rated below the sovereign IDR.

Fitch said it had incorporated in its analysis recalibrated refinancing spreads of mortgage loans, and new residential mortgage backed securities and SME CLO rating criteria.

The weighted average market value loss of MICH-issuing banks has decreased from 14.7% to 12.7%, and the weighted average default rate of MICH-issuing banks has increased from 17.5% to 18.7% at a BBB sf rating scenario over the last six months, noted the rating agency.

Fitch complemented its analysis of MICH portfolios exposed to single obligors with a relative weight of 33% or more in value terms with its specific discontinuity risk assessments for those obligors. Five multi-cédulas series are subject to this discontinuity risk, based on exposures to Kutxabank (BBB stable); Liberbank (BB+ negative); Unicaja (BBB- stable); Caja Laboral Popular Cooperativa de Crédito (BBB+ stable); and Cajas Rurales Unidas, Sociedad Cooperativa de Crédito (BB negative).

The rating agency added that it has incorporated into its analysis potential effects of further consolidation in the Spanish banking sector.