Moody's reviews Spanish covered bond ratings for possible downgrade
Madrid, May 20, 2009 -- Moody's Investors Service has placed on review for possible downgrade the Aaa
ratings of seven programmes of mortgage covered bonds (Cédulas Hipotecarias or CHs); the Aaa ratings of
four programmes of public-sector covered bonds (Cédulas territoriales or CTs); and the Aaa ratings of 57
series of Spanish Covered Bonds issued under multi-issuer covered bond programmes.
The rating actions follow rating reviews taken by Moody's Financial Institutions Group on the underlying
institutions supporting these Covered Bonds. The reviews reflect Moody's expectations that the asset quality
of Spanish banks will continue to deteriorate, leading to significantly higher credit losses than previously
incorporated in the ratings and putting a strain on capitalisation.
Pressure on asset quality across all asset classes is coming from the now deep recession in Spain, which is
expected to continue throughout 2009 and into 2010, coupled with very negative prospects for the labour
market and the continued abrupt adjustment in the real estate and construction sector. The rapid
deterioration of most banks' loan portfolios, which started to become more visible in 2008, has severely
reduced the general loan loss provisions that have so far protected these banks from losses. While the asset
quality deterioration initially stemmed mostly from exposure to the commercial real estate sector, other asset
classes are now also increasingly affected by the magnitude and breadth of the recession, thus having an
impact on the much broader banking system. For further information on the rating actions taken by Moody's
Financial Institutions Group, please refer to "Moody's reviews Spanish banks' ratings" published on 19 May
2009 on www.moodys.com
Moody's aims to conclude the reviews for the vast majority of the covered bond programmes once the
reviews of the issuers' debt ratings are completed, which is expected to be within the next few weeks.
However, Moody's notes that the review of the covered bond programmes could be extended if issuers prove
their willingness and capability to enhance their programmes in an effective manner to reduce the refinancing
risk.
REVIEW OF SINGLE ISSUERS' COVERED BONDS
The review of the Aaa ratings of single issuers' covered bond programmes has been driven by the ratings
constraints by timely payment considerations.
Under Moody's rating methodology for Covered Bonds, the ratings assigned to Covered Bonds are
constrained by the combination of the credit strength of the Issuer and the Timely Payment Indicator (TPI) for
the Covered Bonds. (For further details, please see "Timely Payment in Covered Bonds following Sponsor
Bank Default"). The primary reason for the TPI constraint is the uncertainty surrounding refinancing risk
following an Issuer default which could diminish the probability of full and timely payments under the Covered
Bonds. This probability further decreases as the Issuer's rating deteriorates.
As is the case for other Covered Bonds, Spanish Cédulas are exposed to refinancing risk. This arises
following an Issuer default. When this happens, the Covered Bond must be repaid from the assets it is
backed by. For "bullet bonds", the natural amortisation of the assets cannot be relied on to repay the bonds.
This means that funds need to be raised against the assets backing the covered bond, possibly through the
firesale of the assets. The discount on the price achieved to complete this firesale, in the potentially stressed
environment following the default of the bank that originated these assets, is referred to as refinancing risk.
Although the Spanish Legislation stipulates the redirection of all cash flows stemming from the CH Cover
pool to the CH holders in an insolvency situation and even stipulates that the insolvency administrator of CHs
should avoid any payment shortfall, there are no legal provisions ensuring a perfect match between assets
and notes. Moreover, the credit deterioration of mortgage Cover Pools and high concentration to real-estate
developers negatively impacts the liquidity of such assets and their timely enforcement. For public-sector
Covered Bonds, although the credit deterioration of assets is much less pronounced, the Legislation has not
been modified, unlike that governing mortgage Covered Bonds, which was amended in December 2007. This
means that there is still some uncertainty regarding the ability of the administrator to raise bridge funding
against the Cover Pool.
Moody's considers that Spanish Covered Bonds entail a certain degree of refinancing risk. The published
TPIs currently assigned to CH and CT programmes are "Probable" and "Probable-High", respectively.
Under Moody's methodology, a TPI of "Probable" combined with an Issuer long-term debt rating below A3
would constrain the rating of the Covered Bonds to Aa1 or below. CHs issued by entities whose long-term
rating could be downgraded below A3 have been placed on review for possible downgrade. Similarly, a TPI
of "Probable-High" would also constrain the Aaa ratings of CTs for issuers rated below A3. Hence those CTs
whose issuers could be downgraded below A3 have been put on review for possible downgrade. The main
difference in the rating impact to Covered Bonds between "Probable" and "Probable-High" starts for entities
rated below Baa2.
In addition, the respective committed levels of over-collateralisation (OC) for CHs are no longer sufficient
under the Expected Loss analysis for some transactions to maintain their current ratings or even lower
ratings. This also applies for CH programmes which have not been put on review for possible downgrade, but
whose long-term ratings might be downgraded as low as A3.
If issuers' debt ratings were downgraded below A3, Moody's would only take into consideration in its analysis
amounts of OC regarded as committed. Moody's currently regards the statutory level of 25% over the eligible
Cover Pool as the committed level of OC. The rating agency regards OC as committed if the Issuer has a
legal obligation to provide it, either by incorporating it into the terms and conditions of the notes, or any other
type of arrangements making the obligation irrevocable, as long as the Issuer's rating is below A3, and legally
valid, binding and enforceable by the investors. Despite the fact that the Spanish CHs benefit from the whole
mortgage Cover Pool as security and thus current OC levels are very high, nothing prevents the Issuers from
issuing further CHs or securitising large pools either of eligible or ineligible assets, which could rapidly erode
the protection levels. This is proved by the fact that many issuers are very close to the 25% statutory level
compared with last year. In some cases this threshold has been hit, which has forced issuers to remedy a
breach following the steps enshrined in the law.
The following Covered Bond programmes of single issuers have been placed on review for downgrade (in
alphabetical order):
1) Banco Pastor, S.A.:
Aaa Mortgage Covered Bonds ratings on review for downgrade. TPI: Probable.
This action follows the review for downgrade of the Issuer's A2 long-term debt rating and P-1 short-term
rating.
Previous rating action: Upgraded to Aaa from Aa3 on 26 July 2006.
2) Caixa Catalunya:
Aaa Mortgage Covered Bonds ratings on review for downgrade. TPI: Probable.
This action follows the review for downgrade of the Issuer's A2 long-term debt rating and P-1 short-term
rating.
Aaa Public-Sector Covered Bonds on review for downgrade. TPI: Probable-High.
This action follows the review for downgrade of both the A2 long-term debt rating and P-1 short-term rating.
Previous rating action: Mortgage Covered Bonds upgraded to Aaa from Aa2 on 11 August 2006.
Public-sector covered bonds assigned Aaa on 12 December 2005.
3) Caixa Galicia:
Aaa Mortgage Covered Bonds ratings on review for downgrade. TPI: Probable.
This action follows the review for downgrade of this Issuer's A2 long-term debt rating and P-1 short term
rating.
Aaa Public-Sector Covered Bonds on review for downgrade. TPI: Probable-High.
This action follows the review for downgrade of the Issuer's A2 long-term debt rating and P-1 short term
rating.
Previous rating action: Mortgage Covered Bonds assigned Aaa on 4 January 2007.
Public-sector covered bonds assigned Aaa on 18 July 2006.
4) Caja de Ahorros de Valencia, C y A. (Bancaja):
Aaa Mortgage Covered Bonds ratings on review for downgrade. TPI: Probable.
This action follows the review for downgrade of the Issuer's A2 long-term debt rating and P-1 short term
rating.
Previous rating action: Assigned Aaa on 25 January 2008.
5) Caja de Ahorros del Mediterráneo (CAM):
Aaa Mortgage Covered Bonds ratings on review for downgrade. TPI: Probable.
This action follows the review for downgrade of the Issuer's A2 long-term debt rating and P-1 short term
rating.
Aaa Public-Sector Covered Bonds on review for downgrade. TPI: Probable-High.
This action follows the review for downgrade of the Issuer's A2 long-term debt rating and P-1 short term
rating.
Previous rating action: Mortgage Covered Bonds assigned Aaa on 27 June 2008.
Public-sector covered bonds assigned Aaa on 23 January 2008.
6) Caja General de Ahorros de Canarias (debt rating unrated):
Aaa Public-Sector Covered Bonds on review for downgrade. TPI: unpublished as the issuer is not publicly
rated by Moody's. However due to the credit deterioration of the issuer, Moody's considers that the rating of
its Covered Bond programme may be negatively affected.
Previous rating action: Assigned Aaa on 22 February 2008.
7) Caja Insular de Ahorros de Canarias:
Aaa Public-Sector Covered Bonds on review for downgrade. TPI: Probable-High.
This action follows the review for downgrade of the Issuer's A3 long-term debt rating.
Previous rating action: Assigned Aaa on 23 May 2008.
8) Cajamar Caja Rural, Sociedad Cooperativa de Crédito
Aaa Mortgage Covered Bonds ratings on review for downgrade. TPI: Probable. This action follows the review
for downgrade of the Issuer's A2 long-term debt rating and P-1 short term rating.
Previous rating action: Assigned Aaa on 25 June 2008.

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