Standard & Poor’s upgraded 13 multi-cédulas and downgraded 12 yesterday (Tuesday) upon implementation of a new “weak-link” approach to the Spanish instrument, bringing all its ratings of the covered bonds to between BBB+ and BBB-.

The rating actions are in line with the expected outcome announced when S&P put the covered bonds on review on 30 April following an update to its multi-cédulas methodology published on 31 March.

Under its new approach, the rating agency assesses the creditworthiness of the individual mortgage covered bonds (cédulas hipotecarias) backing the multi-cédulas, S&P said, and then determines the maximum achievable rating by constraining it at the level of the weakest cédulas included.

“Following the abovementioned ‘weak-link’ approach, today’s upgrades reflect that the lowest assessment or rating on the cédulas hipotecarias backing the multi-cédulas portfolio exceeds the current ratings on the multi-cédulas,” the rating agency said. “Where we have lowered our ratings, this is because at least one of the cédulas hipotecarias participating in those multi-cédulas is rated or has been assessed at a lower rating than the current multi-cédulas ratings.”

Seven multi-cédulas also had their ratings affirmed.

When S&P does not rate an underlying cédulas or the respective issuing bank, it bases its opinion of the credit quality of the cédulas only on the collateral. And when it does not rate the issuing bank, S&P’s criteria limits its rating of the cédulas at BBB+.

“S&P rates fewer than 50% of all outstanding single-cédula programs,” said Michael Spies, covered bond and SSA strategist at Citi. “This essentially made it necessary to assess the cover pool quality for those programs that are not rated.

“As many unrated programs are found in several multi-cédulas, we already expected S&P to rate all multi-cédulas in the triple-B area. And this was confirmed.”

The rating action took in issuance off several multi-cédulas platforms: AyT Cédulas Cajas, Cédulas Grupo Banco Popular, Cédulas TdA, IM Cédulas and Pitch.

Ten issues were lifted out of junk territory, with AyT Cédulas Cajas Global Series XII and XIV, for example, upgraded from BB- to BBB-. They had been the multi-cédulas with the lowest ratings from S&P and the three notch upgrades were the equal highest yesterday alongside that of IM Cédulas 5, which was raised from BB+ to BBB+. Four AyT Cédulas Cajas issues were meanwhile downgraded by three notches from A+ to BBB+, which were the biggest downgrades together with a similar cut to a Cédulas Grupo Banco Popular issue.

“Those multi-cédulas that were upped from sub-investment-grade should obviously find support,” said Spies. “However, we think IM Cédulas 06/20 clearly stands out in this regard after the upgrade from BB+ to BBB+.

“The structure is one of the few that are solely rated by S&P. This means that the agency’s credit assessment is a main driver of demand for the multi-cédulas.”

He noted that the IM Cédulas issue trades some 50bp wider than an AyT Cédulas Cajas issue in the same part of the curve that was cut to BBB+ and is thus now similarly rated.