S&P yesterday (Wednesday) published its new methodology for rating multi-cédulas, adding that it expects to lower around 40% of its ratings by an average of two to three notches and raise around 40% by an average of two notches, also taking into account updated criteria for European CRE collateral.

The updated process is organised into two key stages, Standard & Poor’s said: first assessing the creditworthiness of individual cédulas hipotecarias in the portfolio, then determining the multi- cédulas’ maximum achievable rating by applying a “weak link” approach. The underlying bonds with the weakest credit quality will constrain the ratings irrespective of the relative size of the various bonds comprising the multi-cédulas portfolio, according to the rating agency.

“This approach primarily reflects the consequences of the restructuring of the Spanish financial system,” it said, “which led to a consolidation of the savings bank sector, a drop in the number of issuers of cédulas hipotecarias pooled in multi-cédulas structures, and, therefore, significantly less diversification of issuers in these pools.”

The criteria also take into account whether the cédulas hipotecarias or their issuers are rated by S&P.

The publication of the criteria followed a request for comment, published on 11 December, although S&P noted that no material changes have been made.

S&P published its new methodology for analysing European commercial real estate (CRE) collateral in European covered bonds on Tuesday.

Following a test on representative transactions, S&P said it expects less than 10% of its rated covered bonds that are fully or partly backed by CRE assets to be downgraded by one notch as a result of the CRE criteria if issuers take no mitigating action, and none to be upgraded.

The rating agency added that the CRE criteria would be applied simultaneously with the updated multi-cédulas criteria to multi-cédulas exposed to commercial real estate.

The two methodologies will take effect on 30 April, with a review of all affected ratings intended to be completed within six months of the effective date, said S&P.