The FINANCIAL — London-10 October 2011: Fitch Ratings says that its downgrade of the Spanish sovereign rating to 'AA-'/Negative from 'AA+' will not affect the overwhelming majority of Spanish structured finance (SF) ratings.
The agency has already tightened its rating criteria for Spanish SF transactions throughout the current stress period and has no plans to revise its base case or stresses in response to the sovereign downgrade.
Structured finance transactions guaranteed by the sovereign may be downgraded. These include a handful of SME CLO tranches and a series of bonds, called FADE, that are backed by outstanding electricity tariff deficit credit rights. Fitch will conduct transaction-specific analysis to assess the implications.
The agency has been progressively tightening its Spanish SF rating criteria since 2008. Recent changes include increasing its expectation for peak-to-trough home price decline to 30% from 25% in light of the property overhang in the market, the end of fiscal support for home acquisition and the lack of credit available in the economy. In the same criteria report, Fitch increased the haircut it applies to house prices to reflect the lower values achieved in forced and quick sales.
Notwithstanding its recent criteria changes, the agency continues to have concerns about the Spanish property market. "Fitch is currently looking at developments in loan origination volumes and the value of foreclosed homes to make sure the latest data is reflected in its analysis," says Juan Garcia, Senior Director and Fitch's head of structured finance in Spain.
If the sovereign downgrade has implications for Spanish bank ratings, this may affect the eligibility of counterparties in Fitch-rated transactions. If not remedied, this could lead to rating action. Additionally, rating volatility on financial institutions will potentially have negative effects on multi-issuer cedulas hipotecarias ratings.
The sovereign rating of 'AA-' in itself does not prevent Spanish SF from achieving 'AAAsf' ratings, when sufficient credit and structural mitigants are in place.
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