(The following was released by the rating agency)
— Under the terms of the agreement with the eurozone to recapitalize its banking sector, several Spanish banks are likely to receive government support, and holders of those banks’ hybrids and subordinated debt will possibly absorb losses.
— We are therefore placing on CreditWatch with negative implications our ‘BB+’ long-term rating on Banco Popular Espanol S.A. (Popular). We are also maintaining on CreditWatch negative our ratings on Bankia S.A. (Bankia), Banco Financiero y de Ahorro (BFA), and Ibercaja Banco S.A. (Ibercaja). We are lowering our issue rating on Bankia’s nondeferrable subordinated debt to ‘CC’ from ‘CCC-‘.
— The rating actions affect only those Spanish banks whose ratings currently benefit, or are likely to benefit, from an uplift above their stand-alone credit profiles (SACPs) for short-term government support.
— The CreditWatch negative status of the four entities mainly reflects uncertainty over how the recapitalization, if it were to happen, and associated restructuring plan could affect the banks’ business and financial profiles, and thus their SACPs.
MADRID (Standard & Poor’s) Aug. 8, 2012—Standard & Poor’s Ratings Services today said it placed on CreditWatch with negative implications its ‘BB+’ long-term counterparty credit rating on Banco Popular Espanol S.A. (Popular).
We also placed on CreditWatch negative our ‘B’ issue rating on its nondeferrable subordinated debt and our ‘CCC+’ issue rating on its hybrid debt. We affirmed the ‘B’ short-term rating on Popular.
We also maintained on CreditWatch with negative implications our ‘BB+’ long-term rating on Bankia S.A. (Bankia), ‘B+’ long-term rating on its parent company Banco Financiero y de Ahorros S.A. (BFA), and ‘BBB-/A-3’ long- and short-term ratings on Ibercaja Banco S.A. (Ibercaja). We affirmed the ‘B’ short-term ratings on Bankia and BFA. We lowered our issue rating on Bankia’s nondeferrable subordinated debt to ‘CC’ from ‘CCC-‘.
We maintained on CreditWatch with negative implications our ‘B+’ and ‘BB+’ issue ratings on Ibercaja’s preference shares and nondeferrable subordinated debt. BFA’s hybrid ratings are at ‘C’, reflecting that nonpayment has already occurred. Our rating actions follow the publication of the Memorandum of Understanding (MoU) signed by Spain that governs the process of recapitalization and restructuring of Spanish financial institutions earmarked to receive government support.
The MoU follows Spain’s request in June for EU financial assistance and the ensuing agreement on a EUR100 billion bailout for Spanish banks. The rating actions thus only affect those institutions for which we incorporate the potential for short-term extraordinary government support in our ratings. The ratings on these banks are, or are likely to be, higher than our assessments of their stand-alone credit profiles (SACPs) because of this potential for short-term government support.
We currently incorporate four notches for short-term government support in our ratings on Bankia and one-notch in Popular’s ratings. We note that Popular has not received or requested government support, whereas Bankia has. We are not including at present short-term government support in our ratings on Ibercaja, but, as reflected in our CreditWatch listing, we will very likely include it if the three-way merger with Liberbank S.A. and Banco CajaTres S.A. (both not rated) is completed.
We have not taken any rating actions on other Spanish financial institutions so far, as we do not yet have enough information to assess whether they are likely to receive capital support from the government. Once more information is available, if we estimate that other Spanish financial institutions are likely to receive government support, we anticipate there could be similar ratings implications for these entities as described in this article.
Furthermore, we expect to review how the Spanish banking system’s funding and liquidity continues to evolve. Earlier this year, we commented on the impact of the European Central Bank’s (ECB, unsolicited AAA/Stable/A-1+) unprecedented funding operations and how these had materially reduced the risk of a liability-driven bank failure (see “ECB’s Funding “Bazooka” Gives Eurozone Banks Time To Reshape Their Business Models and Balance Sheets,” published Feb 29, 2012).
However, we also noted that the ECB’s actions did not address the underlying structural issues in the banking sector and that we viewed such support as temporary. The Spanish banking system is a major beneficiary of the ECB actions and as time progresses we would expect our assessments of individual banks “funding and liquidity” to be more actively differentiated, and, where appropriate, to recognize where short-term support is being provided.
At present we do not have enough detailed information to assess the full impact on the business and financial profiles of the banks affected by today’s actions as a consequence of receiving government support, if they were to receive it, and complying with the conditions required in the MoU. Nevertheless, we see potential for downward pressure on their SACPs upon the materialization of the support and, consequently on their counterparty credit ratings.
We note that the issue ratings on the hybrids and both deferrable and nondeferrable subordinated debt of these banks are more vulnerable to multinotch rating downgrades than counterparty credit ratings and senior debt ratings. This is because, according to the MoU, holders of these instruments of banks that receive government support will be asked to share the burden of the recapitalization. This would most likely take the form of participation in “voluntary” and, where necessary, “mandatory” subordinated liability exercises (SLEs) that we think we would likely view as “distressed exchanges” under our criteria, and thus tantamount to default.
We think that a restructuring and recapitalization via government support could potentially affect our assessment of the four key factors that we assess in determining the banks’ stand-alone credit profiles (SACPs). Our assessment of the banks’ business positions could be affected because banks receiving government support will have to present restructuring plans that assure their long-term viability without ongoing government support. Restructuring plans will be required to include, among others, initiatives to downsize businesses, which we think could potentially have negative implications on their franchises and business stability, and our view of the strategic challenges ahead.
We believe that undertaking a restructuring plan under adverse economic and financial conditions is particularly difficult, and more so if the institutions involved have not fully completed or are in the early stages of the merger processes. The magnitude of any restructuring required will be an important factor in deciding on any potential reassessment. Our assessment of banks’ capital and earnings could also change if the amount of capital support to be received, if any, is different from the assumptions we are incorporating into the ratings and/or takes a different form (share capital as opposed to hybrid instruments).
Given that the capital shortfall, if any, that banks will be required to cover will be calculated on the basis of surviving a scenario of severe economic stress, we think that the eventual capital support from the state could be higher than the assumptions we have incorporated into our forecasts. Whether it is enough and of a quality sufficient to lead to a different capital and earnings assessment is still unclear, though.
We also see that the transfer of banks’ impaired assets to an external asset management company, which will be mandatory for banks receiving government support, could also be positive for our view of the banks’ future capital or risk positions. This is because in exchange for most of the assets transferred, banks will likely receive debt issued by the asset management company, but guaranteed by the government. They will receive only a minor part in the form of equity in the asset management company.
At this point it is unclear whether the transfer will be limited to problematic real estate exposures or could include other assets. In addition, we will take into account the relative size and pricing of the assets to be transferred in our assessments. In addition to monitoring the evolution of trends in the Spanish banking system funding and liquidity, we will also assess how some of the measures included in the banks’ restructuring plans as a prerequisite for government support could affect our current assessment of the banks’ funding and liquidity, given that banks are expected to present plans to rebalance their funding profiles and reduce reliance on central bank funding.
Downsizing could also have negative implications for the stability of customer deposits. A transfer of risk assets on the other hand could help to ease pressure. We aim to resolve or update the CreditWatch status of our ratings once more information on the recapitalization and restructuring is forthcoming. We will assess the implications of, among other things, the magnitude of the capital shortfalls, if any, that each financial institution will have to fulfill, whether capital will be fully or partially provided by the government, and, in turn, the details of the risk asset transfer mechanism and conditions imposed on each institution.
We could lower our ratings if we consider that the benefits of banks’ own measures or the government support received in the short term are not sufficient for us to raise our SACPs on the banks to the levels we currently envisage. This could happen if any of the factors we consider in our SACP assessments are revised downward.
Conversely, if our conclusion is that banks’ SACPs would be, following the measures undertaken by banks or reception of government support, at the level we currently incorporate into the ratings, the ratings could be affirmed. See the list below for the rating actions on the financial institutions and their relevant subsidiaries. We will publish individual research updates on the banks identified below, including a list of ratings on affiliated entities, as well as the ratings by debt type—senior, subordinated, junior subordinated, and preferred stock.
— Banks: Rating Methodology And Assumptions, Nov. 9, 2011 — Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 — Bank Capital Methodology And Assumptions, Dec. 6, 2010 — Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011 — Use Of CreditWatch And Outlooks, Sept. 14, 2009 — Analytical Approach To Assessing Nonoperating Holding Companies, March 17, 2009
Banco Popular Espanol S.A.
Long-Term Counterparty Credit Rating
BB+/Watch Neg BB+/
Negative Nondeferrable Subordinated Debt Rating
B/Watch Neg B
Preference Shares Rating CCC+/Watch Neg CCC+
Maintained On CreditWatch
Bankia S.A. Long-Term Counterparty Credit Rating
Banco Financiero y de Ahorros S.A.
Long-Term Counterparty Credit Rating
Ibercaja Banco S.A.
Counterparty Credit Rating BBB-/Watch Neg/A-3
Nonderrable Subordinated Debt Rating BB+/Watch Neg
Preferred Stock Rating B+/Watch Neg
Bankia S.A. Nondeferrable Subordinated Debt Rating
Banco Popular Espanol S.A.
Banco Financiero y de Ahorros S.A.
Short-Term Counterparty Credit Rating B
NB. This list does not include all ratings affected.