Fallen Angels of the Spanish banking system

Two new angels in Spanish banking fell yesterday. Fitch Rating downgraded both Novacaixagalicia to BB +, a level considered high risk or, as is known in financial circles, the junk bond. Both entities and enter the list of the fallen angels of the Spanish financial sector.

Agencies use this term to refer to those issuers whose ratings lost investment grade and goes to the category of junk bond (below BBB-, according to the classification of Fitch and Standard & Poor's or Baa3 from Moody's) . "The rating actions reflect the need for banks to increase their core capital in the short term, from a low level, due to the strict regulations imposed by 10%," said Fitch.

Fitch also justifies its decision in both cases at the high exposure of the entities to the construction and property development in an environment of economic weakness in Spain and falling margins in the financial sector. The low profitability of the business and the difficulties in accessing wholesale funding markets are other reasons he puts forth the agency to explain the deterioration of the notes of both groups of regional banks.

Moody's already got the level of junk bond rating of Banco de Valencia, Pastor and CatalunyaCaixa, when he made a massive downgrade the ratings of the bank on 24 March. And Fitch, too, with CAM on 2 April after breaking his alliance Base Bank. Only two previous two fallen angels in Spain.

Fitch cut the rating of CCM on February 19 and March 29 was operated by the Bank of Spain. Currently, the Bank CCM maintains a rating of BBB +. In turn, on CajaSur took the same verdict on April 21 and May de2009 2010 also was seized by the regulator.

But what are the consequences for an issuer of debt will degrade to these levels? Many investment funds can not invest in debt with a rating below BBB-or Baa3. However, there are, however, funds specializing in high yield debt.

A downgrade often leads to an increase in funding costs, but all issuers that are in those levels have long been without resorting to wholesale markets, due to the low receptivity of investors. On the other hand, there is a good introduction for the market, in the case of seeking to raise private capital to meet the minimum requirements imposed by the Government.