Ratings Safe for CajaSur Spanish Covered Bonds, Despite Government Takeover
Moody's Investors Service affirmed ratings of Spanish mortgage covered bonds, Cédulas Hipotecarias or CHs, following the Bank of Spain's takeover of the issuer, CajaSur. Advocates say the ability of the platform to survive the cull intact is proof of the product's resilience. This week, Moody's also affirmed ratings on 22 series of Spanish multi-issuer covered bonds, SMICBs or multi-Cédulas, issued by CajaSur. "Moody's view is that the credit profile of the issuer has not changed following the actions of the Bank of Spain, and as a result, Moody's has affirmed the covered bond ratings," the credit-rating agency said in a statement on the action. Covered bonds, currently under larger consideration in the US legislature, are so named for the dual recourse provided, where the issuer is on the hook to pay out regardless of whether or not the collateral performs as expected. Usually, covered bonds hedge this risk by using over-collateralization as credit enhancement. This allows for non-performing mortgages to be pulled from bonded pools and replaced with performing mortgages. However, the US version is raising some eyebrows among European experts. The June issue of HousingWire magazine, for example, contains commentary on the American vision of covered bonds from market players such as Commerzbank, Merrill Lynch and others -- as well as an exclusive interview on the topic with the executive director of the Association of German Pfandbrief Banks, Jens Tolckmitt (Subscribe here). As with all covered bonds, Moody's said, the rating of the CHs is linked to the credit quality of the issuer both from an expected loss and timely payment perspective. CHs are full-recourse obligations of the issuer and are secured on the entire pool of mortgages owned by that bank. Additionally, SMICBs represent the repackaging of a portfolio of CHs, and therefore have their ratings linked with the credit quality of the underlying participating issuer. Events that impact the senior unsecured rating of the issuer could lead to rating actions on the covered bonds. In the case of CajaSur, the Bank of Spain took control of the issuer over concerns about the firm's future viability following recent losses. The takeover means CajaSur will receive capital injections to ensure all financial obligations are met. "In light of the actions taken by the Bank of Spain, Moody's believes that the issuer's credit profile may be maintained at its current level, as it reflects a combination of weak intrinsic strength, and ongoing availability of government support," Moody's said. "In this regard, Moody's notes that its analysis of the issuer has always included a certain amount of assumed state support for the issuer, so the actual provision of such support will not necessarily impact the rating." The affirmation of ratings for the CHs and SMICBs -- as well as the Bank of Spain's takeover of CajaSur -- come as no surprise to industry participants. London-based Tim Skeet, head of covered bonds for Bank of America/Merrill Lynch, called the rating action "good news." He said the takeover of CajaSur by the Bank of Spain came as no surprise, although he noted covered bonds by nature do not default when the issuer fails. "The stress in the Spanish housing and banking market falls mainly in the Cajas domain and the CajaSur news is proof that the government can cut through the politics of the local regions to start sorting out the mess," Skeet tells HousingWire. "I am very positive on all this news and it was long anticipated." Write to Diana Golobay.