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TEXT-S&P takes rating actions in 12 Spanish multi-cedulas
July 25, 2012 / 4:26 PM / 5 years ago

TEXT-S&P takes rating actions in 12 Spanish multi-cedulas

 (The following statement was released by the rating agency)
  -- 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 
  -- 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.


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 

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.

  -- 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 

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