(Repeat for additional subscribers)
May 24 (Reuters) - (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 Outlook.
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 Santander’s IDR.
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 Fitch.
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.