A new Spanish law published today (Tuesday) that provides a more flexible securitisation framework could make it easier for Spanish banks to create conditional pass-through covered bonds via structured issuance than in cédulas, and could help them fund through structured SME covered bonds, according to Moody’s.

The securitisation measures are a key part of a law published by the Spanish government that is aimed at stimulating the financial sector, the rating agency said today.

“The new law seeks to consolidate existing securitisation regulation, bring the Spanish legal system in line with its European counterparts, and bolster transparency and investor protection,” says Alberto Barbachano, vice president and senior analyst at Moody’s.

The rating agency noted that the law allows securitisation funds to guarantee third-party liabilities, and thereby paves the way for structured covered bonds, with the effective ring-fencing of specific assets from a bank’s balance sheet by enabling securitisation funds to guarantee bank bonds. The new law also sets out specific role requirements for management companies, including the active administration and management of assets in securitisation funds.

According to Moody’s, the law would furthermore facilitate the issuance of conditional pass-through covered bonds since, post-issuer insolvency, the independent company actively managing the cover pool would follow the agreed conditions of the transaction – unlike in cédulas, where the insolvency administrator would follow insolvency legal principles.

Meanwhile, structured covered bonds could accept a wider range of riskier assets than cédulas, said Moody’s, such as loans granted to SMEs or other corporate loans or bonds.

The rating agency suggested that until an overhaul of the cédulas law being consulted on by the Spanish ministry of finance is implemented – which might include SMEs as eligible assets – the new securitisation law could serve as a bridge regulation to enable Spanish issuers to fund SMEs through covered bonds.

“Although liquidity is not an issue for Spanish banks for now, the possibility of extending maturities under favourable market conditions is another incentive for Spanish banks to issue covered bonds,” José de León, senior vice president and manager, Moody’s, told The CBR. “Given that the capacity for issuance of mortgage covered bonds in some cases is almost fully deployed, the issuance of covered bonds backed by other type of assets, such as SME, cannot be disregarded.

“Although the regulatory treatment in terms of capital requirements or LCR for SME covered bonds might not be as  favourable as with mortgage or public sector covered bonds, we have to remember that secured funding, including this type of covered bonds, would be exempted from bail-in under BRRD.”