Spanish Building Society Downgrade Risk
May 25th, 2009
Bad debt problems at Spanish banks and cajas, the regional savings and loans institutions, have triggered at least one skipped interest payment on a mortgage-backed bond this week and prompted new warnings of imminent downgrades by credit rating agencies.
Caja Madrid, Spain’s fourth biggest financial institution, on Wednesday confirmed that a deterioration of the underlying mortgages had caused the automatic cancellation of more than €1m ($1.4m) in interest owed to junior holders of mortgage-backed securities issued in 2006 and 2007 by special purpose vehicles.
However, Caja Madrid, the originator of the mortgages packaged in the relevant securities, said no outside bondholders were affected since it had kept the junior tranches for itself and only the triple A paper had been sold. Senior holders will be affected only if more underlying mortgage holders default.
“It’s happened before in Spain. It’s happened before in other jurisdictions,” said one Caja Madrid executive.
Moody’s, the credit rating agency, meanwhile put half of Spain’s banks and unlisted cajas, the regional savings and loans institutions, on notice of possible credit downgrades because it expects asset quality to deteriorate further during the country’s deep recession.
Moody’s said it had placed 36 banks and cajas on review for possible downgrades of their bank financial strength ratings – including all the listed banks. Of the banks reviewed, 34 were likely to face downgrades for their deposit and senior debt ratings and 22 for their subordinated or hybrid securities.
The agency also warned it might downgrade the triple A ratings of seven Spanish programmes of mortgage covered bonds, four public sector covered bond programmes and 57 series of multi-issuer covered bonds.
So far, most Spanish banks have remained relatively robust during the global financial crisis, in part because of “generic” loan loss provisions they were obliged to make in previous years by the Bank of Spain.
However, the proportion of non-performing loans has risen sharply in recent months to reach 4.27 per cent of the Spanish banking system’s assets in March. Even that figure has been flattered by corporate debt restructurings organised by the banks to keep some of their large Spanish property and construction clients afloat.
Moody’s expressed concern that the bad loan problem was now spreading from property to other sectors of the economy.
The agency expected most of the senior debt downgrades to be limited to one or possibly two notches, and none was likely to fall below Baa3, the agency’s lowest investment grade.
Story from Financial Times
