TEXT-S&P rates NCG Banco's Spanish mortgage covered bonds 'BBB'
OVERVIEW -- We are assigning our 'BBB' rating to NCG Banco S.A.'s (Novagalicia) mortgage covered bonds and placing them on CreditWatch negative. -- The ratings incorporate the maximum possible uplift under our covered bond criteria, in line with Novagalicia's current overcollateralization levels. -- The negative CreditWatch reflects our view that the covered bonds could be negatively affected by the transfer of assets from the mortgage book to the asset management company and our current view of the issuer's creditworthiness. MADRID (Standard & Poor's) Nov. 8, 2012--Standard & Poor's Ratings Services today assigned its 'BBB' long-term credit rating to NCG Banco S.A.'s (Novagalicia) mortgage covered bonds ("cedulas hipotecarias"). At the same time, we placed the rating on CreditWatch with negative implications (see list below). The covered bonds are senior secured debt issued by Novagalicia. To assign the rating, we applied our 2009 covered bond criteria (see "Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds," published on Dec. 16, 2009). Under our criteria for rating covered bonds, we evaluate the maximum potential rating on a covered bond program based on our assessment of the bank's creditworthiness and what we evaluate as the maximum number of notches of ratings uplift. The maximum number of notches of uplift results from our assessment and classification of the program's asset-liability mismatch (ALMM) risk and the program categorization. When determining the program categorization, we consider primarily our view of the jurisdiction of a program and its ability to access external financing or monetize the cover pool. Finally, we assign the covered bonds to one of three distinct categories. Under our criteria, to achieve the maximum potential number of notches of uplift, the available credit enhancement needs to be commensurate with the target credit enhancement. Following our analysis, and given our view of the Spanish legal framework, we have categorized Novagalicia's mortgage covered bonds in category "1" and determined a "moderate" ALMM classification. Based on our criteria and the application of our credit and cash flow stresses from the latest information we received from the issuer, we have assessed the overcollateralization available, which led us to assign a 'BBB' long-term rating to Novagalicia's covered bonds. We also placed the rating on these covered bonds on CreditWatch negative. This reflects the fact that, all other things remaining equal, any change in the issuer's creditworthiness or in the overcollateralization levels driven by the transfer of assets to an asset management company could lead to a negative rating action on the covered bonds. Our ratings on Novagalicia's mortgage covered bonds follow our analysis of the issuer's asset and cash flow information as of June 30, 2012. We assess the cover pool's credit risk as per our "Criteria For Rating Spanish Residential Mortgage-Backed Securities," published on March 1, 2002, "Methodology And Assumptions: Update To The Cash Flow Criteria For European RMBS Transactions," published on Jan. 6, 2009), "Principles Of Credit Ratings," published on Feb. 16, 2011, and "Expanding European Covered Bond Universe Puts Spotlight On Key Analytics," published on July 16, 2004. We evaluate cash flows generated by the cover pool, and the cash flow required to service outstanding covered bonds under severe economic conditions. This evaluation aims to determine whether the assets in the cover pool are sufficient to meet the payments on the covered bonds in a timely manner. Our cash flow analysis assesses the cover pool's performance by considering: -- Credit risk (as described in the paragraphs below); -- Interest rate and currency risk; -- ALMM risk resulting from cash flow mismatches between assets and liabilities in terms of maturity, and from market value mismatches if the program has to liquidate assets; -- Prepayment risk and servicing costs; and -- An appropriate stress-testing of these risks, using our cash flow model (Imake). In our modeling, we use cash flow assumptions as per our general cash flow criteria ("Cash Flow Criteria for European RMBS Transactions," published on Nov. 20, 2003, and "Methodology And Assumptions: Update To The Cash Flow Criteria For European RMBS Transactions" published on Jan. 6, 2009), because we consider these to be appropriate to apply to covered bonds, due to the similar cash flow risk nature of residential mortgage-backed securities (RMBS) and covered bonds. The ratings on the covered bonds reflect our expectation of timely payment of interest and ultimate repayment of principal by the final maturity date of the covered bonds. As of June 30, 2012, the key characteristics of the combined residential mortgage books of the three entities were: Classification of ALMM mismatch Moderate Program categorization 1 Maximum potential rating A- Current available credit enhancement (%) 107.46 Target credit enhancement commensurate with the highest credit rating (%) 118.45 Note: We calculate the current credit enhancement as assets /liabilities. ALMM--Asset-liability mismatch. LIABILITIES MATURITY PROFILE Year Percentage of covered bonds outstanding (%) 2012 6.15 2013 11.12 2014 22.35 2015 14.70 2016 7.07 2017 5.43 2018 5.73 2019 13.18 2020 1.39 2021 2.51 2022 1.08 2023 0.84 2025 5.10 2027 1.67 2031 1.67 TOTAL 100.00 Currently Novagalicia has outstanding mortgage covered bonds for EUR11.960 million, with a weighted-average life of 4.23 years and the highest maturity concentration taking place in 2014 (22.35% of the outstanding notes). MORTGAGE BOOK CHARACTERISTICS Residential Mortgage Loan Book Principal balance (EUR) 14,940,225,609 Total number of loans 187,879 Average loan size (EUR) 79,520 Weighted-average LTV ratio (%) 58.92 Weighted-average seasoning (months) 56.40 Weighted-average term to maturity (months) 296 Floating-rate loans (%) 98.96 Weighted-average margin (bps) 84 LTV--Loan-to-value. Nonresidential Mortgage Loan Book Principal balance (EUR) 11,599,997,854 Total number of loans 27,870 Average loan size (EUR) 416,218 Weighted-average LTV ratio (%) 60.18 Weighted-average seasoning (months) 47.55 Weighted-average term to maturity (months) 170.71 Floating-rate loans (%) 96.51 Weighted-average margin (bps) 158 LTV--Loan-to-value. For our credit and cash-flow analysis we have not given credit in the collateral to land and intercompany mortgage loans. This results in a lower nonresidential book of EUR9,871.5 million, which means that the available credit enhancement is 107.46% MORTGAGE LOAN BOOK GEOGRAPHIC DISTRIBUTION (%) Andalucia 6.16% Aragon 1.13% Asturias 1.10% Balearic Islands 1.21% Basque Country 2.01% Canary Islands 1.65% Cantabria 0.33% Castilla-La Mancha 0.75% Castilla-Leon 3.44% Catalonia 7.11% Extremadura 0.25% Galicia 51.86% La Rioja 0.32% Madrid 9.15% Murcia 0.93% Navarra 0.29% Valencia 9.45% Others 2.88% Galicia is the region with the highest concentration (51.86%) as the two cajas that form the bank (Caixa Galicia and Caixanova) have historically developed their activity in this region. We assessed the likelihood that the borrowers would default on their mortgage payments (the foreclosure frequency), and the amount of loss on the subsequent sale of the property (the loss severity, expressed as a percentage of the outstanding loan). We determined the total mortgage balance that we assume will default, and the total amount of this defaulted balance that is not recovered for the entire residential book, by calculating the weighted-average foreclosure frequency (WAFF) and the weighted-average loss severity (WALS). The product of the WAFF and WALS is the net loss that we assume may affect the portfolio in a 'AAA' scenario. At the 'AAA' level, the WAFF and WALS results were: Residential Mortgage Book : WAFF (%) 24.96 WALS (%) 27.77 Assumed net credit loss (WAFF x WALS) (%) 6.93 Non-Residential Mortgage Book WAFF (%) 75.07 WALS (%) 75.93 Assumed net credit loss (WAFF x WALS) (%) 57.00 Our assessment indicated that this combination of factors, along with the appraisal of other risk factors, is commensurate with a 'BBB' rating on Novagalicia's cedulas hipotecarias. RELATED CRITERIA AND RESEARCH -- Covered Bond Ratings Framework: Methodology And Assumptions, June 26, 2012 -- Counterparty Risk Framework Methodology And Assumptions, May 31, 2012 -- Covered Bonds Counterparty And Supporting Obligations Methodology And Assumptions, May 31, 2012 -- Covered Bonds Counterparty And Supporting Obligations Methodology And Assumptions, May 31, 2012 -- Assessing Asset-Liability Mismatch Risk In Covered Bonds: Revised Methodology And Assumptions For Target Asset Spreads, April 24, 2012 -- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011 -- Principles Of Credit Ratings, Feb. 16, 2011 -- Methodology: Credit Stability Criteria, May 3, 2010 -- Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds, Dec. 16, 2009 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Methodology And Assumptions: Update To The Cash Flow Criteria For European RMBS Transactions, Jan. 6, 2009 -- European Legal Criteria For Structured Finance Transactions, Aug. 28, 2008 -- Cash Flow Criteria For European RMBS Transactions, Nov. 20, 2003 RATINGS LIST Rating Program/ To From Country: Covered bond type RATINGS ASSIGNED; ON CREDITWATCH NEGATIVE NCG Banco, S.A. BBB/Watch Neg Not rated Spain: Mortgage Covered Bonds ("Cedulas Hipotecarias")