(The following statement was released by the rating agency)
Oct 11 - Fitch Ratings has placed NCG Banco's (NCG Banco, 'BB+'/RWN/'B') Cedulas Hipotecarias (CH; mortgage covered bonds) on Rating Watch Negative (RWN).
The rating action follows the placement of NCG Banco's Long-term Issuer Default Rating (IDR) on RWN (see "Fitch Places NCG Banco on RWN" published on 10 October 2012 at ). The resolution of the RWN on the covered bond ratings will depend on NCG's recapitalisation plan and the resolution of the RWN on NCG Banco's IDR.
The CH rating is mainly based on NCG Banco's Long-term IDR of 'BB+'/RWN, the Discontinuity Cap (D-Cap) assessment of 1 (very high risk) and the overcollateralisation (OC) ratio of 72% that Fitch takes into account within its analysis.
As of August 2012, NCG Banco's total CH amounted to EUR11.96bn and were secured over the bank's total mortgage cover pool of EUR26.27bn, resulting in a total OC of 120%. According to Fitch's covered bond criteria, for Spanish issuers rated below 'F2' and in the absence of contractual minimum levels of OC, the agency applied a 30% haircut on the lowest OC observed of the last 12 months (103%) to derive a total OC credited level of 72% within its analysis, assuming a static mortgage pool composition.
The 'BBB+' rating on NCG's CH would be vulnerable to a downgrade if the issuer's IDR was downgraded, or the programme OC dropped below Fitch's breakeven OC ratio of 68%. In Fitch's view, sizeable reductions in the amount of mortgage loans securing CH are likely to occur for Spanish issuers that transfer mortgages to the Asset Management Company when it is established. This would cause a drop in OC ratios, but could partly be offset by the lower risk of the remaining cover pool. The agency will investigate the resulting effect upon clarification of the profile of the assets to be transferred.
The Fitch breakeven OC for a given covered bonds rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore it cannot be assumed to remain stable.