Fitch: Spanish Covered Bonds Not Affected by Residual Claims

The FINANCIAL — Fitch Ratings-London/ Madrid Covered bonds ratings on stand-alone cedulas hipotecarias and the structured finance ratings on multi-issuer cedulas hipotecarias would not be affected by legislative changes that undermined the residual unsecured claim against the insolvency estate of a CH issuer upon default, Fitch Ratings says.

Spanish newspaper "Expansion" reported on 4 April that the EU might consider subordinating cedulas holders to unsecured depositors (specifically those with deposits not covered by guarantee schemes). However, the article did not suggest that the EU is questioning the framework that results in the legal, valid, binding and enforceable encumbrance of assets.

Our rating criteria for covered bonds disregards any potential unsecured recourse to the insolvency estate of a defaulted issuer. In very simple terms, we check whether the stressed value of the mortgage cover pools securing CH allows us to rate the bonds above the issuing bank's rating, and we do not give any credit to further recoveries.

Under the current regime, covered bond investors in Spain have an additional unsecured claim on a bankrupt institution, which ranks pari passu with unsecured creditors (which include unguaranteed depositors), and is used if the proceeds from the cover pool are insufficient to repay their debt in full. If covered bond investors became subordinated in this additional unsecured claim, it would have no ratings implications because the additional claim is given no credit in our analysis.

We are confident that the legal framework protecting CH is not at risk. We do not expect changes to the laws that allow for the encumbrance of assets as this would go against the essence of the legal framework. Spanish law clearly identifies CH investors as special privileged creditors secured by the entire mortgage book of a bank.

Furthermore, recent legislative developments in Spain have aimed to clarify the restructuring process of troubled banks (although they do not specifically address covered bonds). These changes are described in our Special Report "Cedulas Hipotecarias Legal Framework Review", published 5 April.