Full text: Moody’s reviews five Spanish covered bond programmes for downgrade
The following is the press release Moody’s issued in putting the covered bonds of four Spanish banks on review for credit ratings downgrades.
Madrid, December 13, 2011 — Moody’s Investors Service has today placed on review for downgrade the following covered bond ratings, prompted by Moody’s corresponding reviews for downgrade of the issuers’ long-term unsecured debt ratings:
- Public-sector covered bonds issued by Caixabank S.A.: Aaa on review for downgrade; previously, Aaa first-time rating assigned, on 01 July 2011.
- Mortgage covered bonds issued by Bankia S.A.: Aa2 on review for downgrade; previously, Aa2 first-time rating assigned on 07 July 2011.
- Public-sector covered bonds issued by Bankia S.A.: A1 on review for downgrade; previously, downgraded to A1 from Aa2, on 20 October 2011.
- Mortgage covered bonds issued by Bankinter S.A.: Aaa on review for downgrade; previously, Aaa first-time rating assigned on 25 January 2008
- Mortgage covered bonds issued by Ibercaja Banco S.A.: Aa1 on review for downgrade; previously, Aa1 first-time rating assigned on 07 October 2011
RATINGS RATIONALE
The rating announcements follow the review for downgrade of the issuers’ long-term unsecured debt ratings. The issuer reviews follow the rating agency’s reassessment of the financial strength of all Spanish banks, reflecting the likelihood of increased loss expectations. In particular, this relates to their commercial real-estate exposures and the likelihood of reduced earnings-generation capacity available to either strengthen provisions (or capital), given the weakened growth outlook for the Spanish economy. For further details, please refer to "Moody’s reviews Spanish banks’ ratings for downgrade; removes systemic support for subordinated debt", published on 12 December 2011
Any downgrade of the issuers’ ratings would negatively affect the covered bonds through their effect on both the expected loss method and the timely payment indicator (TPI) framework.
EXPECTED LOSS METHOD
As the issuer’s credit strength is incorporated into Moody’s expected loss assessment, any downgrade of the issuer’s rating will increase the expected loss on the covered bonds. However, Moody’s notes that issuers may be able to offset any deterioration in the expected loss analysis if sufficient collateral is held in the cover pool.
TPI FRAMEWORK
The current TPIs for the mortgage covered bonds are "Probable " and for the public-sector covered bonds are "Improbable". Given these TPIs, the ratings of the affected covered bonds would be constrained, all other variables being equal, if:
- Caixabank’s long-term debt rating were to be downgraded by two notches (to A2 from Aa3) its public-sector covered bonds would be downgraded to Aa1.
- Bankia’s long-term debt ratings were to be downgraded by one notch (to Baa3 from Baa2) its mortgage covered bonds would be downgraded to A1 and its public-sector covered bonds would be downgraded to A2.
- Bankinter’s long-term debt ratings were to be downgraded by two notches (to Baa1 from A2) its mortgage-sector covered bonds would be downgraded to Aa1.
- Ibercaja Banco’s long-term debt ratings were to be downgraded by one notch (to Baa2 from Baa1) its mortgage-sector covered bonds would be downgraded to Aa2.
The current ratings assigned to the existing covered bonds of the above programmes can be expected to be assigned to all subsequent covered bonds issued under the relevant programme and any future rating
actions are expected to affect all covered bonds issued under the programme. If there are any exceptions to this, Moody’s will in each case publish details in a separate press release.
The rating assigned by Moody’s addresses the expected loss posed to investors. Moody’s ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors.
KEY RATING ASSUMPTIONS/FACTORS
Covered bond ratings are determined after applying a two-step process: expected loss analysis and TPI framework analysis.
EXPECTED LOSS: Moody’s determines a rating based on the expected loss on the bond. The primary model used is Moody’s Covered Bond Model (COBOL), which determines expected loss as a function of the issuer’s probability of default — measured by its long-term unsecured debt rating — and the stressed losses on the cover pool assets, following issuer default.
The cover pool losses are based on Moody’s most recent modelling and are an estimate of the losses Moody’s currently models if the relevant issuer defaults. Cover pool losses can be split between Market Risk and Collateral Risk. Market Risk measures losses as a result of refinancing risk and risks related to interest-rate and currency mismatches (these losses may also include certain legal risks). Collateral Risk measures losses resulting directly from the credit quality of the assets in the cover pool. Collateral Risk is derived from the Collateral Score.
The Cover Pool Losses of Caixabank’s public-sector covered bond programme are 50%, with Market Risk of 39.0% and Collateral Risk of 11.1%. The Collateral Score for this programme is currently 20.1%.
The Cover Pool Losses of Bankia’s mortgage covered bond programme are 38.3%, with Market Risk of 21% and Collateral Risk of 17.3%. The Collateral Score for this programme is currently 25.7%.
The Cover Pool Losses of Bankia’s public-sector covered bond programme are 23.4%, with Market Risk of 18.9% and Collateral Risk of 4.4%. The Collateral Score for this programme is currently 8.9%.
The Cover Pool Losses of Bankinter’s mortgage covered bond programme are 40.3%, with Market Risk of 25.8% and Collateral Risk of 14.5%. The Collateral Score for this programme is currently 21.6%.
The Cover Pool Losses of Ibercaja Banco’s covered bond programme are 39.2%, with Market Risk of 25.9% and Collateral Risk of 13.3%. The Collateral Score for this programme is currently 19.8%.
For further details on cover pool losses, collateral risk, market risk, collateral score and TPI Leeway across all covered bond programmes rated by Moody’s please refer to "Moody’s EMEA Covered Bonds
Monitoring Overview", published quarterly. These figures are based on the latest data that has been analysed by Moody’s and are subject to change over time. These numbers are updated quarterly in the "Performance Overview" published by Moody’s.
TPI FRAMEWORK: Moody’s assigns a TPI, which indicates the likelihood that timely payment will be made to covered bondholders following issuer default. The effect of the TPI framework is to limit the covered bond rating to a certain number of notches above the issuer’s rating.
SENSITIVITY ANALYSIS
The robustness of a covered bond rating largely depends on the credit strength of the issuer. The TPI Leeway measures the number of notches by which the issuer’s rating may be downgraded before the covered bonds are downgraded under the TPI framework. Based on the current TPIs, the TPI Leeway for the different covered bond programmes are:
- Caixabank S.A. public-sector covered bonds: two notches. This means that the issuer rating would need to be downgraded to A2 before the covered bonds are downgraded, all other variables being equal.
- Bankia’s mortgage covered bonds: zero notches. This means that the issuer rating would need to be downgraded to Baa3 before the covered bonds are downgraded, all other variables being equal.
- Bankia’s public-sector covered bonds: zero notches. This means that the issuer rating would need to be downgraded to Baa3 before the covered bonds are downgraded, all other variables being equal.
- Bankinter’s mortgage covered bonds: one notch. This means that the issuer rating would need to be downgraded to Baa1 before the covered bonds are downgraded, all other variables being equal.
- Ibercaja Banco’s mortgage covered bonds: zero notches. This means that the issuer rating would need to be downgraded to Baa2 before the covered bonds are downgraded, all other variables being equal.
A multiple-notch downgrade of the covered bonds might occur in certain limited circumstances. Some examples might be (i) a sovereign downgrade negatively affecting both the issuer’s senior unsecured rating and the TPI; (ii) a multiple-notch downgrade of the issuer; or (iii) a material reduction of the value of the cover pool.
As noted in Moody’s comment ‘Rising Severity of Euro Area Sovereign Crisis Threatens Credit Standing of All EU Sovereigns’ (28 November 2011), the risk of sovereign defaults or the exit of countries from the Euro area is rising. As a result, Moody’s could lower the maximum achievable rating for covered bonds transactions in some countries, which could result in rating downgrades.
RATING METHODOLOGY
The principal methodology used in this rating was "Moody’s Approach to Rating Covered Bonds" published in March 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
The lead analyst and rating office for each of the transactions affected are generally different from the contact and office listed at the end of this press release. For each transaction, the lead analyst name and the rating office is available on the issuer page on www.moodys.com
Source: Moody’s
About Edward Harrison
Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.
