(The following statement was released by the rating agency) OVERVIEW
-- We have taken various rating actions in 12 multi-cedulas transactions and removed them from CreditWatch negative.
-- These rating actions affect about EUR35 billion of multi-cedulas bonds.
-- The actions reflect our view of higher credit risk in six of the transactions, as a consequence of the latest rating actions on the financial institutions participating in the rated transactions during the first half of 2012.
-- The rating actions also reflect the positive effect of a number of new covered bond ratings and closer maturities since our last analysis.
-- We have also considered the impact of increased concentration in the financial institutions sector in recent months as a result of the reorganization of the Spanish financial sector. MADRID (Standard & Poor's), July 25, 2012--Standard & Poor's Ratings Services today lowered its credit ratings in six "repackaged" Spanish covered bonds ("multi-cedulas") transactions, affirmed its ratings in three transactions, and raised its ratings in another three. At the same time, we removed our ratings in all 12 transactions from CreditWatch negative, where we placed them on May 23, 2012. The complete list of public ratings affected by today's rating actions is available in "Spanish Multi-Cedulas Rating Actions As Of July 25, 2012," published today. Today's rating actions reflect mainly an increase in credit risk that we have seen in the multi-cedulas transactions driven by the latest rating actions or credit estimate revisions on Spanish financial institutions issuing the cedulas (the "cedulas issuers"). Another trigger was the positive effect of newly assigned ratings to some cedulas issued by several of the underlying participants in these transactions. On May 23, 2012, we placed our ratings in 43 multi-cedulas transactions on CreditWatch negative while we reviewed the effect of several rating factors that had continued to deteriorate since our August 2011 analysis (see "Ratings In 43 Spanish Mortgage Multicedulas Transactions Placed On CreditWatch Negative," published on May 23, 2012 and "46 Spanish Multi-Cedulas Downgraded Given Lower Creditworthiness, Increased Concentration, And Updated Credit Risk Model," published on Aug. 1, 2011). Since then one transaction has redeemed and we are today taking rating actions on 12. The remaining 30 transactions are still under review. The multi-cedulas transactions are repackagings of Spanish cedulas, usually mortgage or public-sector covered bonds ("cedulas hipotecarias" or "cedulas territoriales"). Our ratings on the transactions' multi-cedulas bonds reflect our opinion on the likelihood of the full and timely payment of the bonds according to their original terms and conditions. If a cedulas issuer defaults just before the final maturity date, the rated multi-cedulas bonds would, according to their terms and conditions, typically be subject to an extension of the bond's scheduled maturity. Our ratings on the multi-cedulas bonds reflect our view on the likelihood that the dedicated reserve fund or liquidity line (the sources of credit enhancement for the bonds) would mitigate potential interest shortfalls during the cedulas issuer's recovery period. The recovery periods that we assumed are equal or shorter in length than the maximum extension period provided for in the transaction documents. If during this period the cedulas hipotecarias are recovered, the funds will be used to fully redeem the bonds proportionally to the recovered cedulas, without necessarily waiting for the full extension period to expire. We generally assume that if a cedulas issuer defaults, a full recovery on the underlying cedulas and ultimate repayment of their principal would take place, provided the underlying cedulas are sufficiently collateralized. Nevertheless, based on our latest analysis, we believe the credit enhancement to cover possible interest shortfalls in six of the 12 transactions analyzed would not be sufficient to pay interest on all of the bonds to the current rating level if a cedulas issuer were to default. CREDIT MOVEMENTS As part of our analysis, we have taken into account updated credit estimates on each of the cedulas issuers (where neither the cedulas issuer nor the underlying cedulas has a public rating). According to our rating definitions, a credit estimate is a confidential indication of the likely issuer credit rating (ICR). The estimate is based on a variety of sources, including quantitative models, where applicable, and an abbreviated methodology that draws on our analytical experience and sector knowledge. These estimates do not involve direct contact with the obligor's management or in-depth insight into operating, financial, or strategic issues that such contact allows. Accordingly, the weighted-average credit estimates and ratings on cedulas issuers in the multi-cedulas transactions have moved downward since we last reviewed the multi-cedulas bonds in August 2011. We use these assessments as inputs into the CDO Evaluator credit risk model (see "Spain Embraces Structural Diversity in the Securitization of Covered Bonds," published on Dec. 2, 2004). The model establishes a scenario default rate (SDR), which is one of the driving variables we use to assess whether the credit enhancement available to each multi-cedulas bond is commensurate with its rating. The SDR results from the CDO Evaluator credit risk model have increased in general terms as deteriorating creditworthiness has resulted in lower credit estimates (and ratings), leading to the negative rating actions on six transactions. However, over the past six months, we have assigned new ratings to cedulas hipotecarias issued by several of the underlying issuers. We have therefore used these ratings as the input parameters for our CDO Evaluator when assessing the SDR in the related transactions, rather than the ICR or credit estimate on the cedulas issuers. Since our ratings on the cedulas hipotecarias are typically higher than ICRs or credit estimates, the effect for these transactions has been positive. In addition, increased concentrations from new mergers since last year contributed to rising SDRs for most transactions. Therefore, the effect on the SDR has been very dependent on the underlying composition of the participating issuers, and whether or not these issuers' cedulas hipotecarias are rated. The probability of default assumed in our analysis substantially increases when credit estimates and ratings on the assets deteriorate from investment to speculative grade. As a result, the deteriorating creditworthiness of the cedulas issuers toward these rating categories increases the SDR results. To assess whether the credit enhancement provided is commensurate with our ratings, we compare the liquidity line or reserve fund available with the stressed (for floating-rate bonds) interest that might need to be paid during the workout of a defaulted cedulas issuer. We assess the credit enhancement level as the product of the stressed interest rate to be paid on the multi-cedulas, the SDR, and the recovery period. We aim to resolve the CreditWatch placements on the remaining 30 transactions within the next month. RELATED CRITERIA AND RESEARCH
-- Spanish Multi-Cedulas Rating Actions As Of July 25, 2012, July 24, 2012
-- Counterparty Risk Framework Methodology And Assumptions, May 31, 2012
-- Ratings In 43 Spanish Mortgage Multicedulas Transactions Placed On CreditWatch Negative, May 23, 2012
-- Assessing Asset-Liability Mismatch Risk In Covered Bonds: Revised Methodology And Assumptions For Target Asset