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April 9 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has maintained NCG Banco's ('BB+'/RWN/'B') (Cedulas Hipotecarias, CH) 'BBB+' rating on Rating Watch Negative (RWN). The rating actions follows the transfer of mortgage assets to the newly established asset management company in Spain, SAREB, combined with the early amortisation of some outstanding mortgage covered bonds.
The CH remain on RWN due to the RWN on NCG Banco's Long-term Issuer Default Rating (IDR; see "Fitch Places NCG Banco on RWN" dated 10 October 2012 at www.fitchratings.com) and also due to the uncertainty about potential future cover pool changes resulting from the restructuring plans agreed ahead of the bail-out, which include the sale of part of NCG Banco business units. The CH rating will remain on RWN until there is certainty about the actual assets and liabilities that could eventually be sold, and the effect on the CH rating. As of March 2013, NCG Banco's total mortgage cover pool amounted to EUR18.6bn after a EUR6.3bn asset transfer to SAREB was executed just before year end, and the early recognition of c. EUR0.8bn of defaulted assets with mortgages guarantee. The majority of transferred assets were mortgage loans granted to real estate developers or land (EUR5.9bn). The transfer of assets has notably improved the current risk profile of the collateral, which is now mostly composed of residential mortgage loans (78%). The expected credit loss rate of the portfolio has decreased to 22.0% from 25.9% under a 'BBB+' rating scenario. Despite the better credit profile, break-even overcollateralisation (OC) for the CH rating has increased to 79% due to the inclusion of additional sensitivities regarding excess margin and updated market value decline assumptions for Spanish residential properties and properties secured lending to SMEs.
NCG Banco has publicly announced that by mid-April 2013 it will early amortise EUR800m of CH. With this additional amortisation, the total amount of early redemptions since the transfer of assets to SAREB will amount to EUR2.1bn. The CH balance outstanding by the time this additional early redemption is completed will be EUR8.4bn. This results in a total OC of 120%, as in August 2012, leaving the effect of the transfer of assets to the SAREB neutral for CH holders in terms of OC.
According to Fitch's covered bond criteria, for Spanish issuers rated below 'F2' and in the absence of contractual minimum levels of OC, a 30% haircut is applied to derive a total OC credited. This haircut has been applied to the OC expected after the completion of the series of early amortisations rather than to the lowest level of the last 12 months to derive a total OC credited level of 84%. This is an exception to Fitch's covered bonds rating criteria, which stipulates that for issuers rated 'F2' and below, and in the absence of a public or contractual commitment, the agency would base its assessment on the lowest OC of the last 12 months. In Fitch's view, this is justified by the visibility of the measures taken by NCG Banco since the transfer of assets in order to bring OC levels back to previous levels.
The 'BBB+' rating is based on NCG's Long-term IDR of 'BB+' and a Discontinuity Cap of 1 (very high discontinuity risk). It also incorporates stressed recoveries from the total mortgage book in the event of a covered bonds default. The driver of the D-Cap is Fitch's assessment of very high liquidity gap and systemic risk. In the absence of specific provisions to bridge maturity mismatches between hard bullet liabilities and long term amortising loans, this assessment is derived from the comfort given by the domestic importance of CH as a funding instrument for Spanish banks.
The 'BBB+' rating of NCG Banco's CH would be vulnerable to a downgrade if the bank's Long-Term IDR was downgraded by one or more notches to 'BB' or below; or if the liquidity risk was judged to cause full discontinuity, resulting in a D-Cap of 0. The current rating is also exposed to falls in OC credited by Fitch below the 'BBB+' breakeven OC of 79%. OC could be affected by potential future cover pool changes in the event of the sale of part of NCG Banco's business units.