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Fitch: Spain Covered Bond Proposals' Rating Impact Hinges on OC
November 20, 2014 / 11:43 AM / 3 years ago

Fitch: Spain Covered Bond Proposals' Rating Impact Hinges on OC

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Potential Development in Cedulas Framework here MADRID/LONDON, November 20 (Fitch) The balance between quantity and quality of collateral would be key to the ratings impact of possible changes to Spain's covered bonds framework, Fitch Ratings says. A more restrictive cover pool definition would reduce overcollateralisation (OC) and could lead to lower ratings. If sufficient OC were maintained, other contemplated changes, particularly to liquidity provisions, could be positive for ratings. A government consultation paper discussing how Spain's covered bond regulatory framework might be brought into line with best practices recommended by the European Bank Authority asks, among other questions, whether two new asset categories, "selected assets" and "eligible but non-selected assets", should be created. Enabling issuers to select cover assets would be a radical change in Spain, where at present an issuer's entire mortgage book, both eligible and non-eligible, and including weaker-quality commercial and real estate developer loans, secures its outstanding cedulas hipotecarias (CH). Higher expected loss rates for pools with a high proportion of commercial and developer mortgages increase the breakeven OC for a given rating, as a larger amount of collateral offsets the stresses applied by the agency. A more selective, granular, residential mortgages-only cover pool could result in lower breakeven OC ratios to support the same rating, because a more stringent definition of collateral could help reduce stressed expected losses on the mortgage portfolios. But smaller cover pools will have a negative ratings impact if the OC delivers lower recovery expectations on CH assumed to be in default. Our analysis suggests that if OC dropped to the legal minimum requirement of 25%, it would not deliver recoveries corresponding to the current ratings of CH programmes, even if collateral were only composed of prime, granular residential assets. Spanish mortgage covered bond ratings would therefore be likely to be downgraded by at least one notch. Where the risks associated with lower OC did not materialise, other, positive changes suggested in the consultation could be more significant. In particular, the consultation considers various liquidity buffers and an increased, mandatory percentage of liquid assets. This would be an improvement on the current voluntary liquidity provisions, which are not used, exposing Spanish programmes to maturity mismatches reflected by a full discontinuity or very high Discontinuity Cap (D-Cap) risk assessment. Liquidity provision could make higher ratings achievable if it matched interest and principal long enough for an administrator to refinance cover pool assets to meet future payments. While there would still be a very high liquidity risk, equivalent to a D-Cap of 1, for a one-year protection period (which we think sufficient to partially liquidate a residential mortgage portfolio under stressed conditions in most established markets), one-year coverage of interest and principal payment could translate into a one-notch increase in CH ratings (assuming the sovereign remains in the 'BBB' category). Comments on the consultation are due by 24 November . Our full response, "Fitch: Potential Development in Cedulas Framework", published today, is available at Contact: Carlos Masip Director Structured Credit +34 91 702 5773 Fitch Ratings Espana, S.A.U. Plaza de Colon 2 Torre II, Planta 5 Madrid, 280046, Spain Alvaro Utrera Associate Director Structured Finance +34 91 702 5775 Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email:; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Covered Bonds with Extendible Maturities here Multi-Issuer Cédulas Hipotecarias OC Tracker - Amended here Cedulas Hipotecarias Legal Framework Review here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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