Covered bond programmes of five Italian financial institutions were placed on review for possible downgrade by Moody’s on Friday, after the rating agency put 16 Italian banks on negative review on Thursday, although the impact on the OBG market was less dramatic than on senior unsecured and stocks.

The Republic of Italy’s Aa2 rating was placed on review on 17 June.

Mortgage backed programmes from Banco Popolare, Banca Monte dei Paschi di Siena, and Banca Carige, and public sector covered bonds from Intesa Sanpaolo, Banco Popolare, and Cassa Depositi e Prestiti were all included in the rating action.

All Italian covered bonds are currently rated Aaa. Unlike the other programmes, the issuance of state-owned CDP is not under the country’s obbligazioni bancarie garantite legislation, but it has been considered a part of the asset class.

The prospect of a wave of downgrades of Italian banks’ senior ratings had a strong impact on Italian banks’ share prices on Friday, in combination with news that a UBI Banca rights issue was not fully covered, according to syndicate bankers. Trading of UniCredit and Intesa Sanpaolo stocks was suspended on Friday, such was the volatility.

“There were very significant moves on Friday in Italian names on the equity side,” said a syndicate official, “but it’s more related to the credit and FIG side rather than covered bonds.”

RBS senior analyst Frank Will said that the extent of any market reaction in the event that downgrades of Italian covered bonds follow should be determined by the severity of Moody’s actions.

“I think what Moody’s has highlighted here was the risk that the issuers could be downgraded,” he said. “Any issuer downgrades below the magic A3 threshold will trigger covered bond downgrades given Moody’s rating methodology.

“If these covered bonds are downgraded to Aa1 then the market reaction will be relatively limited, but if they’re downgraded two notches then we will see some more negative reactions.”

Moody’s said that if the issuers behind the mortgage backed programmes were to be downgraded below A3 then their Timely Payment Indicators (TPIs) could lead to downgrade of the respective covered bonds, below Aaa.

The public sector covered bond programmes were placed on review because of the issuer and sovereign being placed on review, said Moody’s. Downgrades of the issuers’ and Italy’s sovereign ratings could affect the expected loss or the TPI.

Bernd Volk, head of covered bond research at Deutsche Bank, said that a worsening of the TPI of Italian mortgage covered bonds seems unlikely, with the exception of that of Intesa Sanpaolo’s mortgage backed covered bonds, which have RMBS in the cover pool, and already have a TPI of Improbable.

“Overall, Moody’s has a pretty harsh linkage between senior and covered bonds ratings,” he added. “We highlight that even in case of some Danish mortgage covered bonds (which among all legal frameworks benefit from the strictest balance principle), Moody’s is no longer willing to grant the maximum delinkage between senior and covered bond ratings (i.e. a TPI of ‘very high’).”