(The following statement was released by the rating agency)
Oct 05 - Spanish covered bond issuers that plan to transfer mortgages to the proposed Asset Management Company (AMC) when it is established, will see a dip in the amount of collateral supporting their covered bond programme, Fitch Ratings says.
In Spain, covered bonds are secured by the whole of a bank’s mortgage loan portfolio and therefore swapping mortgages for government guaranteed debt issued by the AMC, at a price yet to be determined, will result in a drop in the collateral. This is similar to securitisations, in which mortgages are sold and therefore can no longer be used as a security for outstanding covered bonds.
These government guaranteed bonds are higher credit quality than the troubled mortgage assets transferred, but will in principle not be available as cover pool assets to the covered bond investors. The exact format of the guaranteed bonds is still being designed, but we expect them to be used as eligible collateral for ECB repo transactions. Fitch will contact affected banks to determine if they intend to amortise existing retained covered bonds with the funds obtained via the repo transactions.
The vast majority of mortgages that will be transferred to the AMC are likely to be troubled developer loans. Fitch assumes high default rates and low recovery rates for these loans (approximately 70% default rate and a 20% recovery rate under a ‘BBB’ rating scenario) so the benefit to the cover pool is limited, but it is not zero. For instance, where 30% of a bank’s mortgage portfolio consists of developer loans, this could add 7% to 10% to the net present value estimation of the collateral pool.
We expect the banking authorities to develop a solution that protects covered bondholders senior creditors if an extreme case materialises where the transfer of mortgages is so large that the volume of eligible mortgage cover assets dip below the legal minimum of 125% of the covered bond liabilities.
The resulting drop in the coverage will be partly offset by the lower risk of the remaining cover pool.