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Tuesday, July 29, 2008

Spanish Mortgage Lending Down Sharply In May, Bank Credit Ratings Increasingly Under Review

by Edward Hugh: Barcelona

Spanish house sales dropped sharply again in May for the fourth month running, official figures showed on Monday, and talk of price declines is now becoming much more general. House sales fell by 34 percent year-on-year in May and mortgage borrowing was down by 40.4 percent from a year earlier, according to the latest data from Spain's National Statistics Institute. The result is rather a shocker since many had obviously been clutching at straws following April's better-than-expected year on year decline in new mortgages of only 7.8%. Reality is, unfortunately, now starting to sink in.

Sales of resale properties appear to be suffering the most, down 44% to 25,280, compared to the 21% fall (to 24,890) in the number of newly built properties sold by developers. This figure is misleading, however, as the INE’s figures are based on property transactions inscribed in Spain’s property register, not new sales achieved by developers, which are down by between 40% and 60%.

To add insult to injury Barcleona property consultant Aguirre Newman have said Spain's real estate market is depressed by anything up to 1.5 million unsold new homes (ie the estimate is now moving up from the earlier estimate of Spanish builder OHL who suggested there were between 500,000 to 1 million new homes in Spain sitting empty and waiting to be sold after overbuilding.). Aguirre Newman also report that the average time needed to sell a residential property in Barcelona has now gone up to 27 months (from 17 months one year ago).

Mortgage Security Credit Downgrades

Last week it was also announced that Moody's Investors Service has put about 16.9 billion euros of Spanish residential mortgage-backed securities under review for possible downgrades after adjusting for rising default rates and slowing house price growth. Moody's say they are in the process of reviewing 68 tranches of 13 deals after updating their model.This issue of downgrades is an important one, since if the securities are downgraded then, one way or another, they will become more difficult for the banks to finance and re-finance.

"Moody's believes that many Spanish mortgage borrowers have now debt-to-income ratios above the 40 percent benchmark observed in 2005,"

Deals singled out for review tend to have higher loan-to-value ratios and higher-risk products and have been performing below expectations, Moody's said. Riskier features are thought to include involving borrowers who are not Spanish residents (such clients account for as much as 10 percent of some deals), loans to multiple borrowers, loans as part of debt consolidation and interest-only loans.

Current ratings on the different tranches of the 13 deals from issuers including BBVA and Santander vary from triple-A to junk levels as low as Ca. The review over the next three to six months is likely to produce one-notch downgrades and some two-notch downgrades.

Standard and Poor's also said on July 10 that they were considering cutting the ratings on 298 million euros of bonds backed by subordinated debt issued by nine Spanish savings banks, including the top-ranking triple-A bonds.

Standard and Poor's said its decision to review its ratings on the bonds, a deal called AyT Deuda Subordinada I that was issued in November 2006, was due to a deterioration in the underlying debt. Both these actions constitute a further sign of the problems in the Spanish financial sector and illustrate very clearly how one problem can add to another in a cycle of progressively deteriorating headaches.

Standard also Poor's also downgraded two Spanish banks and changed the outlook on three others to negative, citing "the sharp deterioration in economic conditions and increasingly difficult operating environment in Spain." According to a pre-sale report they issued in 2006, the nine banks that issued the debt backing the deal are Caja de Ahorros y Monte de Piedad de Cordoba, Caja de Ahorro Provincial de Guadalajara, Caja Provincial de Ahorros de Jaen, Caja General de Ahorros de Granada, Caja de Ahorros y Monte de Piedad de las Baleares, Caixa d'Estalvis de Girona, Caja Insular de Ahorros de Canarias, Caixad'Estalvis Comarcal de Manlleu, and Caja de Ahorros y Monte de Piedad de Madrid. The agency only rates the last of these publicly, at AA- and it was the outlook on that rating which was modified to negative.

Of the nine banks, just four account for 78.9 percent of the debt which underlies the deal under review: Cordoba, Girona, Granada and Baleares, according to S&P.

Meanwhile Bloomberg this morning report that Banco Santander - Spain's biggest lender - have a group of bonds - which form part of an issue called Santander Hipotecario 4 - that are backed by mortgages that exceed property values by as much as 24 percent. Now Santander assert that they have not made any extensive use of the ECB liquidity facility involving collateral of mortgage backed securities, and there is no suggesting that Hipotecario 4 bonds - which presumeably still carry investment grade rating - have been used, but all of this does put the ECB in a very difficult position, since in principle (as with Italian government paper) they are willing to accept them. It is only the exercise of due discretion by Santander itself which means they are not already vaulted-up in Frankfurt.

Spanish lenders have, however, almost tripled borrowings from the ECB in the past year to 47 billion euros. Most ECB loans mature in one week or three months, but the bank have been providing some six month loans since the start of the credit crunch last August. Spanish banks increased their use of three- and six-month ECB loans to 27.5 billion euros as of June 30 - thus accountsing for for some 10 percent of the ECB's three- and six- month lending - up from from 2.4 billion euros a year earlier, according to Bank of Spain data. Of course the 10% level is completely in line with the level of Spain's participation in the eurosystem, so there is nothing necessarily preoccupying here, but the speed of the rise in borrowing is noteworthy.

Spanish loan defaults rose in May to 27.76 billion euros or 1.5 percent, from 12.05 billion euros or 0.77 percent a year earlier, according to the latest Bank of Spain data. Obviously the level of defaults varies from bank to bank. Banco Popular Espanol, Spain's third-biggest listed bank, scrapped its earnings forecast last week as bad loans more than tripled to 1.15 billion euros, or 1.89 percent of total debt.

Spanish AAA rated mortgage debt is now judged to be the riskiest on the continent, with investors demanding as much as 240 basis points above Euribor, up from 85 basis points at the end of 2007, according to Dresdner Kleinwort prices. That's more than twice the interest margin on equivalent securities in the Netherlands. Only bonds secured by home loans to U.K. borrowers with poor credit histories trade at higher spreads, according to Dresdner data.

Iberia To Join British Airways

And to cap a very busy day, British Airways and Spain's Iberia have announced they are in merger talks as airline industry participants seek to consolidate to compensate for rising oil costs that have been hitting both their top- and bottom-lines. As the level of economic activity has deteriorated in Spain and the UK, both airlines have struggled to keep their planes full. In the year to June, Iberia's passenger load factor, a measure of passengers to available seats, fell by 0.6 of a percentage point, to 79.6%. The same measure for British Airways dropped to 76.8% from April to June, down 3.4 percentage points.

And well-well-well, the main shareholder in Iberia is guess who, savings bank Caja Madrid, you know, the one who had an estimated one billion euro exposure to failed builder Martinsa-Fadesa, is very supportive of the Spanish airline's plan to merge with British Airways. "Caja Madrid is happy," according to reports. They would be, they have a 23 percent stake in Iberia, they had three Aaa rated bonds backed by mortgages placed on review for possible downgrade by Moody's only last week, and clearly they can't afford to have any more "lame duck bailouts" knocking around on their books at this point.