The floods that hit Spain on October 29, 2024 left a trail of destruction across the area around Valencia City and areas of Castilla La Mancha and Andalucía. More than 200 people have already been confirmed dead; some are still missing, and the number of casualties may rise. The severe physical damage to housing, business premises, railway and roads infrastructure, cars, fleets, and land highlighted the increasing risks posed by extreme weather events. Furthermore, although reconstruction efforts are underway, restoring normal conditions will take time due to the severity of the damage.

While the scale of the loss is still unclear, S&P Global Ratings anticipates the floods will only have a marginal negative impact on the asset quality of rated structured finance transactions, and no rating movements are anticipated.

Support Is Available

It remains difficult to measure the overall impact on residential homes and properties, and the extent of the disruption to individuals who may have been displaced or lost their jobs. However, most costs resulting from the floods are expected to be covered by Spain's compulsory catastrophic risk insurance consortium (Consorcio de Compensación de Seguros) and the central government (see "Insurance Brief: Flash Floods In Spain Have Limited Effect On Insurance Ratings," Nov. 7, 2024, and "Valencia's Credit Quality Unlikely To Suffer After Floods, Thanks To Central Government Funding," Nov. 5, 2024). We expect that support will help contain the financial burden on Spanish banks (see "Spanish Government And Insurance Consortium Will Take Most Of Flood Cost Burden; Impact On Banks Will Be Contained," Nov. 7, 2024).

Support measures include:

• Direct transfers to affected households and companies;
• A moratorium on banks debt, which consists of a three-month grace period on interest and principal payments, followed by an additional nine-month moratorium on principal payments. It is unclear at this stage if such moratoriums, if used, will be reported as arrears;
• Access to financing through a state-guaranteed mechanism provided by Spain's public lending institution (Instituto de Crédito Oficial), similar to the mechanism used during the pandemic, but now available to households and businesses; and
• Tax delays and exemptions.

The Effect On RMBS

Natural disasters, such as storms and floods, can affect RMBS noteholders in several ways. The two most notable are:

• Liquidity disruptions, since borrowers are unable to meet their monthly mortgage payments; and
• Decreases in recovery values of defaulted properties.

The Spanish government's measures to offset temporary liquidity stresses and losses suggest that temporary payment disruptions should not have a material impact on RMBS's outstanding ratings. The COVID-19 pandemic provided examples of how moratoriums can impact the collateral performance. In that instance, loans under those moratoriums represented on average 10% of the total mortgage market. The result was only a minor deterioration in the collateral performance of residential mortgage-backed transactions, with no impact on liquidity or our credit ratings.

If, in the case of the floods, affected borrowers ultimately default despite temporary assistance, recoveries on such loans may be limited due to incurred property damage. As a result, transactions with material exposure to the affected region may sustain losses. However, if there is appropriate insurance coverage, these losses should be mitigated. Moreover, credit enhancements in the transactions we have analyzed have built up over time, which may further reduce the impact of potential losses.

To assess the potential effect of the floods on the RMBS we rate, we carried out a preliminary study focusing on the affected areas. The total balance of mortgages located within the Valencia province is approximately 6% of the total balance of the RMBS transactions we rate. The number of transactions with more than 10% of collateral in regions affected by the floods is limited (see table 1). We consider the percentages presented in table 1 to be conservative since not all properties and residents in the province were affected. The Valencia province has 2.65 million inhabitants distributed across 266 municipalities, while the affected area comprises 78 municipalities with 858,000 inhabitants. This represents one-third of the province's population. We have not considered other provinces, such as Albacete or Malaga, since the number of affected municipalities in those provinces is fewer than five. Therefore, we expect the exposure to the affected areas will likely be lower. The percentages of table 1 reflect the geographical concentration in the entire province that englobes a bigger area than the one affected.

Table 1

We do not expect to see a significant impact on the performance of our rated transactions, and no rating movements are anticipated. That view is based on our assumption that only one-third of the geographical concentration percentages presented in the table above are affected by the floods.

The majority of RMBS rated by S&P Global Ratings have low exposure (if any) to the floods and may benefit from the structural mitigants described above, further supporting our view on their credit quality.

The Effect On ABS

We currently consider the floods are unlikely to affect our ratings on auto ABS, consumer ABS, or the credit card transactions that we rate. These portfolios are usually well-diversified geographically, without high concentrations in a single region or province; however, they will likely include loans to borrowers residing in the impacted areas (see table 2). We think the percentages presented below are very conservative because not all properties and residents in the region were affected by the flood, therefore the exposure to the potential affected areas is significantly lower. The geographical concentration figures presented in table 2 are broader than those shown for the RMBS transactions since they refer to the entire Autonomous Community of Valencia rather than just the Valencia province.

Table 2

Since most costs resulting from the floods are expected to be covered, and vehicle insurance typically provides support for damaged vehicles, if arrears increase in those transactions, the temporary liquidity stresses would likely be minimal. During the pandemic, moratoriums represented between 10%-15% of the portfolios, the deterioration in collateral performance was not significant, and there was no impact on liquidity or creditworthiness. These transactions also benefit from reserve accounts, liquidity facilities, and in some cases, significant credit enhancement buildups, which shield them from potential increases in losses.

The Effect On Covered Bonds

Covered bonds are a dual recourse instrument, and the effect of these floods should be addressed by considering both the potential effects on the issuer and the collateral's credit quality. As indicated above, the bulk of the costs associated with the floods will be assumed by Spain's compulsory catastrophic risk insurance consortium and the central government. Therefore, the costs that Spanish issuers will have to absorb will be contained.

Natural disasters affect the collateral of mortgage covered bond programs in a similar way to RMBS transaction, as explained above. Regarding the potential impact on the collateral of our rated covered bond programs, loans concentrated in the Valencia province--the only province affected in the Valencia Region (Autonomous Community of Valencia)--represent, on average, 7.59% of the cover pool. This concentration is higher in Cajamar, where the available credit enhancement increased to 55% last week as a result of the early redemption of a €1 billion covered bond.

Table 3

Considering the current levels of overcollateralization in these programs, the required credit enhancement for the ratings, the issuers' ability to remove loans and add new eligible loans to their cover pools, and the measures taken by the government and the insurance consortium, we believe there will not be a significant impact on either the performance of the pools or our required credit enhancement due to these floods.

The Full Extent Of Flood Damages And Losses Is Unknown

The extent of the damage and losses will unfold over the coming months. It is our expectation that temporary liquidity stresses or potential losses will not have a material effect on our ratings on RMBS, ABS, and the covered bond programs we rate. We will, however, continue to closely monitor the exposed pools and determine whether that view warrants revision.

Related Research

• EMEA Structured Finance Chart Book: November 2024, Nov. 13, 2024
• European RMBS Index Report Q2 2024, Aug. 16, 2024
• A Primer On Spain's RMBS Market, Feb. 6, 2024