(Repeat for additional subscribers)
May 24 (The following statement was released by the rating agency)
Fitch Ratings has upgraded Banco Espanol de Credito's (Banesto) mortgage covered bonds
(Cedulas Hipotecarias or CH) to 'A'/Outlook Negative, removed them from Rating Watch Positive
(RWP) and transferred the ratings to Banco Santander SA (Santander,
'BBB'/Negative/'F2'). The agency has also affirmed Santander CH's 'A' rating with a Negative
KEY RATING DRIVERS
The upgrade and resolution of the RWP follows the completion of the merger
through absorption of Banesto by Santander on 6 May 2013, and Fitch's withdrawal
of Banesto's Issuer Default Rating (IDR, see "Fitch Affirms Santander's, BBVA's
and CaixaBank's Ratings", published on 23 May 2013 at www.fitchratings.com).
The 'A'/Outlook Negative rating of Santander CH's as well as the former
Banesto's CH rests on Santander Long-term IDR of 'BBB+', an unchanged
Discontinuity Cap (D-Cap) of 0 (full discontinuity risk) and the level of
overcollateralisation (OC) of 89.0% relied upon by Fitch, which provides more
protection that the agency's revised 'A' breakeven OC of 76%. In Fitch's
opinion, an OC of 76% between the merged cover pool and the aggregated CH would
provide recoveries in excess of 91% on CH assumed to be in default in a 'A'
scenario, justifying a two-notch uplift from the bank's IDR.
The Negative Outlook on Santander's CH reflects primarily the Negative Outlook
on the bank's IDR.
As a consequence of the merger, all assets and liabilities of Banesto have been
absorbed by Santander. For the mortgage cover pool and the outstanding CH, the
merger leads to a consolidated mortgage cover pool of approximately EUR81.0bn as
of March 2013 providing security to aggregated outstanding CHs of EUR40.7bn as
of 24 May 2013, resulting in a total OC of 99% and an eligible OC of 42.4%.
These post-merger figures are supported by separate cover pool data files
submitted by Santander and Banesto to Fitch. Fitch has been informed by
Santander that the post-merger official cover pool data tape as of June 2013
will be delivered in August 2013; therefore, the above aggregation of cover pool
statistics is subject to confirmation.
In line with Fitch's covered bond criteria for 'F2' rated Spanish issuers in the
absence of contractual minimum levels of OC, the agency gives credit to the
lowest OC observed of the past 12 months reduced by 10%. Given the merger, the
12 months look-back period for Santander's CH starts in May 2013. Additionally,
the RWP resolution on Banesto?s CH rating has been taken without the application
of such 10% OC haircut considering the only applicable level of OC relied upon
is now at the merged level.
The merged cover pool comprises 63% exposure to residential mortgage loan
borrowers, 21% to commercial borrowers and 16% to real estate developers. The WA
seasoning of the cover pool is estimated at six years and its WA remaining term
to maturity 16 years. Fitch considers Santander's CH to be materially exposed to
maturity mismatches as the agency estimates the WA life of the cover assets to
be 9.1 years compared with 3.3 years for the covered bonds. Conversely, the
interest rate mismatches between a predominantly floating rate cover pool (90%)
and almost entirely fixed rate liabilities are risk-neutral for covered bond
holders as the stressed net present value of the cover pool would not be greatly
impacted by the prevailing interest rate environment.
In a 'A' scenario, Fitch has calculated a stressed credit loss rate of 24.0% for
the entire cover pool associated with a cumulative weighted average (WA) default
rate of 34.9% and WA recovery rate of 31.1%. Similarly, under a base case stress
scenario, Fitch derives a WA loss rate of 11.1% associated with a WA default
rate of 19.0% and WA recovery rate of 41.5%.
Fitch's unchanged D-Cap of 0 for Santander's covered bonds implies an
interruption of payments on the CH upon the issuer default. This continuity risk
analysis is driven by the liquidity gap and systemic risk assessment for Spanish
covered bonds issued by banks rated at or above the sovereign
('BBB'/Negative/'F2'). In Fitch's opinion, there is a lack of specific
protection against liquidity shortfalls post assumed issuer insolvency and only
intervention by the Spanish authorities would avoid a default on the CH in this
scenario. As a result, the covered bonds can only be rated based on recoveries
from the cover pool given a default of the issuer, up to two notches above
The CH 'A' rating would be vulnerable to downgrade if any of the following
occurred: (i) Santander's Long-term IDR was downgraded by at least one notch; or
(ii) the programme relied upon OC falls below the 76% breakeven OC calculated by
The Fitch breakeven OC for the covered bond rating will be affected, among
others, by the profile of the cover assets relative to outstanding covered
bonds, which can change over time, even in the absence of new issuances.
Therefore it cannot be assumed to remain stable over time.