* Bankia, Catalunya Banc and NCG fall deeper into junk
* Covered bond ratings slash rules out issuance
By Aimee Donnellan
LONDON, July 3 (IFR) - Moody's slashed the ratings of three bailed-out Spanish banks by two notches on Tuesday evening, sending them deeper into junk territory and raising concerns that they will be locked out of the public funding market permanently.
Moody's cut the rating of Bankia to B1, while the ratings for Catalunya Banc and NCG Banco were downgraded to B3. All three's ratings are on negative outlook.
The actions deliver a further blow to the prospects of Catalunya Banc and NCG gaining access to the capital markets, and to government's attempts to sell them.
A recent government-commissioned report on the lenders by investment bank Nomura and consultancy McKinsey suggested quickly selling Catalunya Banc and NCG Banco before their assets deteriorate further, two banking sources said.
The downgrade has also dealt yet another blow to Bankia, the largest of the three banks. It had been hoping to return to the public market following a mandatory exchange of its hybrids into equity it undertook earlier this year.
According to a source with an understanding of the Spanish lender's funding strategy, it had been considering issuing a covered bond in the third quarter of this year, but DCM bankers say that this looking more unlikely.
Moody's highlighted all three banks' weak asset quality, poor profitability levels and challenging restructuring requirements as the reasons for the downgrades.
The impact on Bankia's potential borrowing costs was plain to see on Wednesday as its outstanding covered bonds widened by almost 50bp (according to Tradeweb).
Bankia has been locked out of the market since February 2012, when it sold a two-year EUR500m covered bond at mid-swaps plus 290bp.
That issue has been on a rollercoaster ride in the secondary market, widening to 930bp at its widest level in the summer of 2012. It was bid at mid-swaps plus 252bp on Wednesday.
Issuing covered bonds would have been the trio's obvious funding option, but the subsequent lowering of their Cedulas Hipotecarias ratings after the senior downgrades will restrict the number of investors that are eligible to buy their paper.
Bankia's Cedulas Hipotecarias and Territoriales were cut by three notches to Ba1 from Baa1.
So far, the downgrade does not yet impact the ECB-eligibility of these programmes, since at least one investment-grade rating is still available.
However, analysts at Deutsche Bank and RBS say they expect these ratings actions to have a material impact on Multi-Cedulas Ratings. (Reporting by Aimee Donnellan; Editing by Alex Chambers and Philip Wright)