Moody’s and DBRS upgraded the covered bonds of Banco Popular Español on Friday, to Aa2 and AAA, respectively, reversing recent downgrades of the cédulas after the bank was acquired by Santander. Despite a post-rescue rally, potential is seen for a further tightening of Popular’s spreads.

Banco Popular Español was entered into resolution and subsequently sold to Banco Santander last Wednesday, after the ECB determined the troubled bank was failing or likely to fail.

Popular faced growing troubles over a severe capital shortfall, weakening solvency levels and challenges in facing non-performing assets after restating results, leading to multiple downgrades to its ratings this year – including Moody’s cutting its cédulas from Aa2 to A2 in April.

On Friday afternoon, the rating agency raised its ratings of Popular’s mortgage and public sector covered bonds from A2 back to Aa2. This came after it upgraded the issuer from B2 to Ba1 on Thursday, on the back of Popular’s acquisition by Santander.

DBRS had downgraded Popular’s cédulas twice this year, along with those of subsidiary Banco Pastor, first from AA (high) to AA in February, then from AA to AA (low) to April.

The rating agency on Friday upgraded Popular’s and Pastor’s cédulas from AA (low) to AAA. This came after it upgraded the issuers’ senior unsecured ratings from BB (low) to A, and critical obligations ratings (CORs) from BBB (low) to A (high) on Thursday. DBRS also on Friday upgraded the obrigações hipotecárias of Banco Popular Portugal from BBB (low) to A (low).

After Popular’s acquisition was announced, its outstanding cédulas, which had been underperforming, tightened some 50bp across the curve, to offer a pick-up of around 10bp versus the cédulas of its new parent.

“Further performance will depend upon the integration of Banco Popular’s covered bonds within Banco Santander,” said Maureen Schuller, head of financials research at ING. “More spread convergence can be expected if the covered bond programmes of the two banks will be merged.

“Based upon the current pool compositions, Banco Santander’s programme has stronger collateral pool features with a collateral risk assessment of 10.6% at Moody’s, while Banco Popular’s programme has a collateral risk assessment of 24.7%.”

The first paragraph of this article was amended after publication to correct the new Moody’s rating of Banco Popular’s cédulas.