Cédulas cuts last Wednesday for the first time took ratings of Spanish covered bonds into junk territory, according to analysts, with Catalunya Banc’s cédulas retaining ECB repo access due to a timely S&P rating but Ba1 for Dexia Sabadell’s having consequences for Dexia MA.

Five cédulas ratings were cut to Ba1 by Moody’s last Wednesday (27 June), affecting mortgage and public sector covered bonds issued by Catalunya Banc and NCG Banco, and Dexia Sabadell public sector cédulas, while Banco de Valencia mortgage cédulas were cut to Ba2.

HSBC Trinkaus head of covered bond research Johannes Rudolph said that Moody’s rating actions led to a segment of publicly placed covered bonds for the first time carrying speculative ratings, aside from the remainder of a October 2016 National Bank of Greece issue. Only Cypriot and Greek covered bonds backed by Greek assets have otehrwise so far lost central bank repo eligibility as a result of their being rated sub-investment grade.

Around Eu2.05bn of Ba1-rated NCG Banco were publicly placed, according to Rudolph, with the other standalone cédulas retained.

All of the aforementioned cédulas have been “deleted from the ECB database”, he said, with the exception of Catalunya Banc’s cédulas hipotecarias, which on 21 June were assigned a BBB+ rating by Standard & Poor’s, on CreditWatch developing.

Analysts drew attention to the consequences of the downgrade Dexia Sabadell’s cédulas territoriales in particular.

“While the headline sounds like a usual market contagion impact,” said Bernd Volk, head of covered bond research at Deutsche Bank, “there seems also a direct impact of the downgrade of Sabadell’s cédulas to sub-investment grade and Dexia MA.”

This is because the cédulas were largely acquired by Dexia MA as collateral for its obligations foncières until a downgrade of the cédulas to Baa2 by Moody’s in November meant they were no longer cover pool eligible and, according to analysts, the French issuer delivered them to the Eurosystem for repo, using the cash as a cover pool asset.

However, with last week’s downgrade to Ba1 the cédulas are no longer eligible as collateral for repo with the ECB.

Volk said it will be interesting to see how Dexia MA will manage this situation, and that a solution is likely to be found anyway given ongoing support and part government ownership.

“While a very interesting story and highlighting the problem of rating downgrades for covered bonds and covered bond issuers, we do not expect a negative spread impact for Dexia MA obligations foncières,” he added.

Rudolph at HSBC Trinkaus noted that the Sabadell cédulas downgrade happened just before quarter-end and that he is therefore curious as to how Dexia MA will deal with the situation and whether its parent will buy the cédulas.

Some Eu5.05bn NCG Banco standalone cédulas, split between Eu2.05bn of publicly placed issues and Eu3bn of retained issues, and around Eu1.1bn of Banco de Valencia retained cédulas will have lost ECB repo eligibility, added Rudolph.

The downgrades put NCG Banco and Banco de Valencia under greater distress, he said, with use of the cédulas as collateral for Emergency Liquidity Assistance (ELA) funds with the national central bank a possibility, or “establishing contact with a rating agency that looks more favourably upon the cédulas”.

Several Portuguese covered bonds are on the edge of falling into sub-investment grade territory, with Moody’s reviewing for downgrade Baa3 rated public sector covered bonds issued by Banco BPI and Caixa Geral de Depósitos, and Baa1 rated Banco Santander Totta mortgage issues. The rating agency yesterday (Wednesday) confirmed Banco Espírito Santo mortgage covered bonds at Baa3.

Five Portuguese covered bond issuers have sought covered bonds ratings from DBRS, which rates the programmes in the single-A category.

“Maybe DBRS will get further covered bond rating mandates soon (after having some in Portugal and Ireland already), simply to provide a higher buffer regarding ECB access,” suggested an analyst last month.