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Default pain in Spain

Source: Reuters - Sat 5th Nov 2011
Default pain in Spain

Extremely poor performance of assets in Spanish RMBS, which in some cases means there is simply not enough performing collateral in the portfolios to service required cashflows, could lead to a wave of debilitating defaults in subordinate tranches.

In the cases of TDA 25 and TDA 28, loans more than 90 days in arrears (including those in default) amount to 19.64% and 21.23% of the original portfolio balance in the September investor report, according to S&P.

And defaulted loans as a proportion of the current loan balance exceed 20% in both issues - running at 23.62% and 21.02% respectively. The negative impact of these defaults on the transaction structures is compounded by paltry recovery levels on the mortgage loans.

In TDA 25, the total of defaulted loans is EUR40.6m and in TDA 28 it is EUR78.1m, but only EUR2.1m and EUR1.7m has been recovered from these troubled loans respectively - just 5.17% and 2.17%.

One reason for the low recovery rate is that Banca Civica, parent company of Credifimo which originated more than 80% of the loans, has not been exercising its first refusal right to acquire repossessed properties since December 2009.

Instead the trustee, TdA SGFT, has been managing the repossessed assets and selling them on behalf of the issuer. But with recovery proceeds being so low S&P has asked Banca Civica and TdA SGFT to provide more details on the recoveries.


The agency wants to dig deeper into the statistics because a high default rate increases the senior bonds' reliance on recoveries, and given the low proceeds generated so far, the bonds are seriously undercollateralised.

S&P estimates that the Class A notes of TDA 25 are undercollateralised by 12% of their current balance and the senior notes of TDA 28 by 10%.

The impact on bond holders is that due to the magnitude of non-performing assets, the payment rate on the underlying portfolio will slow. However, many Spanish banks began buying back their securitised bonds in the aftermath of the 2007 financial market collapse so the exact proportion held by third-parties is difficult to determine.

While both tranches have paid down by around EUR100m since closing (TDA 25 Class A was EUR250.3m launched in July 2006 and TDA 28 EUR414m in July 2007), the credit enhancement is not sufficient to maintain the notes' A+ and A ratings.

These have been slashed to B by S&P, marking a rapid deterioration for securities that were rated AAA as recently as February and May 2010 respectively. S&P's previous action on TDA 25's top tranche was a downgrade to A+ from AAA in one move in December 2009 for performance reasons. The first action on TDA 28 was a downgrade to AA in February 2010 and then to A three months later.

The remaining bonds have already defaulted and been downgraded to D between June 2009 and July 2010 due interest deferral trigger breaches.

These mechanisms are introduced in some structures to protect the senior notes. If defaults exceed predetermined levels on a particular class of notes, the interest is diverted to the top of the capital structure. And for the rating agencies, any non-payment of interest of principal constitutes a default.

Santander Hipotecario 4 has also struggled with a high proportion of non-performing assets, culminating in a principal loss for Classes C, D, E and F.

Three weeks ago the issuer announced its intention to redeem the bonds on October 17, and S&P calculated that the deal was facing a loss at redemption due to the EUR156m principal deficiency ledger.

This is the difference between the amount of bonds outstanding, EUR942.34m, and the volume of mortgages in the portfolio that were performing (i.e. not in arrears), EUR785.735m, and equated to 16.62% of the bonds.

This percentage was about five points higher than the level of credit enhancement available to the senior notes. There were sufficient funds to repay interest and principal in full on Classes A1, A2, A3 and B, but the remaining tranches lost out.

Moody's also has a negative view on the level of credit enhancement supporting Spanish RMBS, and put 112 tranches from 77 deals on review for downgrade this afternoon for that very reason. The agency cited the downgrade of Spain, explaining that the factors that caused that rating action "may lead to a significant and uniform deterioration in Spanish RMBS asset performance."


Based on these examples, and the current economic struggles in Spain, the prognosis for large swathes of the RMBS market there is not good.

"With austerity measures being implemented as well as the turmoil in the sovereign markets still ongoing, this is likely to increase the pressure on Spanish RMBS deals and hence cause arrears to also increase," said Barclays Capital analyst Dipesh Mehta in a research note.

And it is not only consumer exposures that threaten Spanish banks' stability, as the overall non-performing loan ratio of Spain's top five commercial lenders (based on their activities in Spain only) rose 21bp to 4.95% in the third quarter, according to Barclays analysts in a separate research paper.

The banking system as a whole has suffered a 61bp increase in NPLs to 7.21% over the three months ending August 31, the largest quarterly increase since March 2009.

Adjusting the ratio to include distressed real estate assets the banks have on balance sheet, the NPL for the top five rose to 7.21%, 2.67% higher than the reported average, the analysts said.

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