Overview -- We consider Spain's financial agency Instituto de Credito Oficial (ICO) to be a government-related entity under our criteria. -- We believe that ICO has an integral link with, and plays a critical role for the Spanish government. We therefore equalize our long-term rating and outlook on ICO with those on Spain. -- As a result, we are affirming our 'BBB-/A-3' ratings on ICO. -- The negative outlook on ICO mirrors the outlook on Spain. Rating Action On Nov. 27, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-/A-3' long- and short-term issuer credit ratings on Spain's financial agency Instituto de Credito Oficial (ICO). The outlook is negative. Rationale We equalize our 'BBB-' long-term rating on ICO with that on the "https://www.globalcreditportal.com/ratingsdirect/entityPage.do?entityId=106200 &sid=831259&sind=A&" (BBB-/Negative/A-3). This reflects our opinion that there is an "almost certain" likelihood that the Spanish government would provide timely and sufficient extraordinary support to ICO in the event of financial distress. We consider ICO to be a government-related entity (GRE). In accordance with our criteria for GREs, our rating approach is based on our view of ICO's: -- "Integral" link with the Spanish government. Endowed with special public status, ICO essentially functions, in our view, as a financial extension of the central government. In turn, the government has historically granted the agency strong support in the form of a wide direct, irrevocable, unconditional guarantee covering all of ICO's debt; and -- "Critical" role as an entity specially formed to carry out key financial aspects of national economic policies on behalf of the Spanish government. The government mandates ICO to: -- Provide financial backing for small and midsize enterprises (SMEs). To this end, ICO channels loans ("mediation loans") to the Spanish banking system, which then on-lends these funds to SMEs. Each bank absorbs the commercial risk linked to the final SME loan; -- Offer long-term loans in sectors of national interest, as well as manage export-promoting financial instruments and concessionary lending programs for developing countries on the government's behalf; and -- Grant financial support in the event of natural disasters and economic crises. In our opinion, ICO's critical role has been reinforced in 2012. It now plays a central role in implementing the Spanish government's liquidity facilities to help Spanish regions and municipalities. ICO participated in the funding of these facilities and also acts as the administrative and paying agent, which is crucial for their smooth functioning. These facilities include direct loans (EUR5.3 billion) to regions to cover debt maturities due in the first half of 2012, a supplier debt refinancing mechanism for regions and municipalities (EUR27 billion, out of which EUR6.3 billion was funded by ICO) and an EUR18 billion credit facility--the Fondo de Liquidez Autonomico--to cover debt service and the authorized deficit for regions, in which ICO only acts as an administrative and paying agent. Unlike commercial banks, ICO's strategy is not to maximize profit, but to fulfill its public service mandate; consequently, its profitability remains low, though positive. What we see as ICO's relatively low net income has traditionally constrained its ratio of capital to risk-weighted assets. However, we believe that the government's commitment to prevent this ratio from falling below 9.5% through capital injections consistently offsets the agency's low net income. In our view, capital injections from the Spanish government will remain necessary over the medium term to comply with ICO's capitalization requirements. We expect ICO's solvency ratio to be about 14.0%-14.5% at year-end 2012. Liquidity ICO funds its liquidity needs primarily through the capital markets, reflecting its wholesale profile and therefore relatively negligible customer deposits. However, ICO's spreads over Spanish government bonds have widened since the beginning of the crisis in 2008. Over 2012, ICO's access to the capital markets remained adequate. As of October 2012, ICO had raised EUR16 billion, which represents the funding target for full-year 2012 according to the issuer. We expect ICO to somewhat reduce its borrowings over the coming years. ICO's debt maturities over the next 12 months account for about EUR17 billion, which is EUR10 billion lower than the maturity of its financed assets. Outlook The negative outlook on ICO mirrors that on Spain. A downgrade of the sovereign would result in a downgrade of ICO. The negative outlook on Spain reflects our view of the external and domestic risks to Spain's financial position, and the impact we believe this may have on the sovereign's creditworthiness. We could further lower our ratings on Spain, and thus on ICO, if, all other things being equal, we observed that: -- Political support for the current reform agenda was waning, for example due to an even steeper than anticipated GDP contraction, accompanied by further increases in unemployment that undermined the government's willingness to implement additional reforms; -- Eurozone support was failing to engender sufficient confidence to keep government borrowing costs at sustainable levels and to stem capital outflows; -- Net general government debt was likely to rise above 100% of GDP during 2012-2014 due to deviations from the government's fiscal targets, weakening growth, increasing one-off debt items, or if interest payments rose above 10% of general government revenues during this period. We could also lower the ratings on ICO independently of any rating action on the sovereign. This could occur if, over the next 24 months, we reassessed ICO's "role" for and "link" with the Spanish government, and thus the likelihood of central government support. In our view, we could revise our assessment of the likelihood of support from "almost certain" currently if ICO's special public status were changed or if the central government stopped guaranteeing ICO's debt or injecting capital to support the entity's capital ratio. However, we currently see these scenarios as very unlikely. We could revise the outlook on Spain, and thus on ICO, to stable if we saw that the government's budgetary and structural reform measures, coupled with a successful eurozone support program, stabilized Spain's credit metrics. Related Criteria And Research -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 -- Spain Ratings Lowered To 'BBB-/A-3' On Mounting Economic And Political Risks; Outlook Negative, Oct. 10, 2012 Ratings List Ratings Affirmed Instituto de Credito Oficial Issuer Credit Rating BBB-/Negative/A-3 Senior Unsecured BBB- Senior Unsecured* BBB- Commercial Paper* A-3 *Guaranteed by the Kingdom of Spain. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.