Moody’s has cut the ratings of eight public sector backed Spanish covered bonds and 43 multi-cédulas, and placed on review for downgrade three standalone programmes and one multi-cédulas after having downgraded the sovereign’s and some issuers’ ratings. S&P yesterday cut BBVA public sector covered bonds.

Moody’s rating actions, announced today (Thursday), reflect a negative impact on its view of the likelihood of timeliness of payment and expected losses as a result of the rating agency’s downgrade of Spain from Aa2 to A1 on Tuesday and subsequent downgrades of some covered bond issuers.

Moody’s yesterday downgraded the issuer ratings of Banco Santander, Banco Bilbao Vizcaya Argentaria, CaixaBank, La Caixa and Confederación Española de Cajas de Ahorros.

Seven of the eight standalone cédulas territoriales programmes that were downgraded today were cut by two notches. These and their new ratings are: Banca Civica (A2), Banco CAM (Baa2), Banco CCM (A2), Bankia (A1), Catalunya Banc (Baa2), Dexia Sabadell (A1), and NCG Banco (A2). Public sector covered bonds issued by Banesto were downgraded by one notch, from Aaa to Aa1.

The programmes carry the highest possible rating under Moody’s Timely Payment Indicator (TPI) framework after the rating agency lowered the TPIs of Spanish public sector backed covered bonds from either “probable-high” or “probable” to “improbable”.

The move reflects Moody’s view that as the credit strength of the sovereign declines, the Spanish government and financial institutions may be less able and/or willing to provide or obtain funds to support the refinancing of covered bonds, after an issuer default.

“In addition, the collateral comprising public sector loan pools backing the covered bonds is becoming less creditworthy and therefore less attractive to potential buyers or providers of funding, with significant discounts likely to be required if the issuer defaults and the pool has to be liquidated,” it said.

Moody’s maintained the TPIs assigned to Spanish mortgage covered bonds at “probable”, citing the systemic importance of cédulas hipotecarias for the funding of Spanish banks and the high level of protection provided to covered bondholders under the Spanish legal framework for mortgage backed covered bonds, which are secured by an issuer’s entire mortgage loan portfolio.

“Therefore, Moody’s believes that the downgrade of the sovereign to A1 does not increase the probability of late payments on mortgage covered bonds to the extent it changes their current TPI,” it said, adding that a further downgrade of the Spanish sovereign or a worsening of the economic environment could cause a lowering of the TPIs.

Triple-A rated public sector backed covered bonds issued by Banco Santander and BBVA, and Aaa  mortgage backed covered bonds issued by Banco Sabadell were placed on review for downgrade to reflect Moody’s assessment that expected losses on Spanish covered bonds in the event of an issuer default have increased.

The rating agency said that its expected loss analysis for all Spanish covered bonds has been negatively impacted by downgrades of the issuing banks and the sovereign debt rating, and an increase in refinancing margins observed in Spain.

It noted that issuers may be able to offset any increase in expected loss by adding further collateral or otherwise restructuring their programmes, but that in the case of issuers with covered bonds rated Aaa, large amounts of additional collateral over and above the statutory levels would be necessary to maintain expected loss consistent with a Aaa rating.

In addition to downgrading the ratings of 43 multi-cédulas and placing on review for downgrade the rating of one other, Moody’s also kept on review for downgrade the ratings of 20 multi-cédulas.

It said that the rating actions were prompted by the downgrade of the Spanish sovereign and the downgrades of many of the issuing banks, some of which occurred before the sovereign downgrade. The downgrades negatively affected the multi-cédulas through their effect on Moody’s expected loss analysis and timely payment considerations.

“Moody’s notes that all Spanish SMICBs [multi-cédulas] remain on review for downgrade because either some of the participants’ ratings are still on review for downgrade, or rating assessments are ongoing after merger announcements amongst participants,” it said. “During the review, Moody’s will assess whether the weakest entities participating in a SMICB could further constrain the final rating of the SMICB due to timely payment concerns.”

Standard & Poor’s yesterday downgraded from AA+ to AA, negative outlook, US dollar public sector covered bonds issued by BBVA.

It said that under its asset liability mismatch (ALMM) framework the covered bonds could be rated at least three notches higher than the issuer (AA-), but that the rating agency’s criteria on non-sovereign ratings that are higher than the sovereign ratings where the assets are originated limit to one notch the differential between the sovereign rating and the cédulas territoriales with a high sensitivity to sovereign risk.

S&P downgraded Spain from AA to AA- last Thursday (13 October) and cut BBVA’s issuer rating from AA to AA- last Monday.