TEXT-Moody's may cut 15 Spanish covered bonds

(The following statement was released by the rating agency)

June 15 - Moody's Investors Service has today placed on review for downgrade the ratings of 15 Spanish covered bonds and changed the review placement of three covered bond ratings to direction uncertain from review for upgrade. The ratings of 19 covered bonds remain under review for downgrade. Moody's review will assess the degree to which the sovereign downgrade has the potential to affect the covered bond ratings through both the expected loss and TPI framework analysis. Today's rating announcements reflect the weakening of the Spanish government's creditworthiness, as captured by Moody's downgrade of Spain's government bond ratings to Baa3 from A3 on 13 June 2012, and the initiation of a review for further downgrade. For more details on the rationale for the sovereign downgrade, please refer to the press release (here). Please click on this link here for the List of Affected Credit Ratings. This list is an integral part of this press release and identifies each affected issuer.For additional information on covered bond ratings, please refer to the webpage containing Moody's related announcements http:// www.moodys.com/eusovereign. RATINGS RATIONALE Today's announcements follow Moody's downgrade of Spain's sovereign rating to Baa3 on review for downgrade from A3. Following this sovereign rating action, Moody's has placed or kept on review for downgrade the ratings of 34 Spanish covered bonds and changed to review direction uncertain (from review for upgrade) the ratings of three covered bonds. These actions reflect the potential negative impact of the sovereign rating on the various components of Moody's analysis of Spanish covered bonds. Firstly, the sovereign downgrade and the continued weakness of the Spanish economy might have a negative effect on Moody's expected loss analysis of the covered bonds, through amongst other factors (i) the refinancing margins and (ii) credit-risk deterioration of the underlying assets. Secondly, the likelihood of timely payment for the covered bonds could be reduced. Moody's review will assess whether the sovereign downgrade might affect the covered bond ratings through: (1) The Expected Loss Moody's will take a view on the increased expected loss borne by the covered bonds, as a consequence amongst other factors of the following: (i) The increased funding costs for the sovereign. Therefore, Moody's will reconsider the refinancing margins it uses in its analysis of Spanish covered bonds. (ii) The credit deterioration of the underlying cover pools might accelerate, especially for public-sector assets, due to the sovereign downgrade. However, Moody's notes that issuers may be able to offset any deterioration in the expected loss analysis if sufficient collateral is held in the cover pool. (2) The TPI Framework As the credit strength of the sovereign declines, the Spanish government and financial institutions may be less able and/or willing to provide or obtain funds to support the refinancing of covered bonds, after an issuer default. Following the downgrade of the sovereign, Moody's will reassess the rating caps under the TPI framework. Moody's TPI framework limits a covered bond rating to a certain number of rating levels above the issuer rating of the relevant bank. The amount of uplift will depend on the TPI assigned and for all Spanish covered bonds, Moody's currently assigns a TPI of "Improbable". The indicative rating uplift for covered bonds based on TPIs can be found in Moody's published TPI table. However, Moody's notes that there are many factors that might influence the application of TPIs, in particular for sub-investment-grade-rated issuers. KEY RATING ASSUMPTIONS/FACTORS The ratings assigned by Moody's address the expected loss posed to investors. Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors. Covered bond ratings are determined after applying a two-step process: an expected loss analysis and a TPI framework analysis. - EXPECTED LOSS: Moody's determines a rating based on the expected loss on the bond. The primary model used is Moody's Covered Bond Model (COBOL), which determines expected loss as (i) a function of the issuer's probability of default (measured by the issuer's rating); and (ii) the stressed losses on the cover pool assets following issuer default. - TPI FRAMEWORK: Moody's assigns a TPI, which indicates the likelihood that timely payment will be made to covered bondholders following issuer default. The effect of the TPI framework is to limit the covered bond rating to a certain number of notches above the issuer's rating. SENSITIVITY ANALYSIS The robustness of a covered bond rating largely depends on the issuer's credit strength. A multi-notch downgrade of the covered bonds might occur in certain limited circumstances, such as (i) a sovereign downgrade that negatively affects both the issuer's senior unsecured rating and the TPI; (ii) a multi-notch downgrade of the issuer; or (iii) a material reduction of the value of the cover pool. As the euro area crisis continues, the covered bond ratings remain exposed to the uncertainties of credit conditions in the general economy. The deteriorating creditworthiness of euro area sovereigns as well as the weakening credit profile of the global banking sector could negatively affect the ratings of covered bonds. (Caryn Trokie, New York Ratings Unit)