Mortgage covered bonds of Portugal’s Caixa Económica Montepio Geral were yesterday (Tuesday) cut to Baa3 by Moody’s, but could yet be junked if the bank’s issuer rating, which is on negative review, is lowered, warned analysts. Meanwhile, Moody’s affirmed five Greek covered bond programmes at Ba3.

Moody’s cut Montepio’s covered bonds from Baa2 to Baa3 after having on 5 July lowered Portugal’s sovereign debt rating from Baa1 to Ba2. Portugal remains on review for possible downgrade, with Moody’s citing “growing risk that the country will need a second round of official financing before it can return to the private market and the increasing possibility that private sector creditor participation will be required as a pre-condition”.

Moody’s said the downgrade of Portugal’s sovereign debt had constrained the Timely Payment Indicator (TPI) on Portuguese mortgage covered bonds, which it lowered from “improbable” to “very improbable”. The ability and willingness of the Portuguese government and the country’s financial institutions to support any covered bonds following issuer default weakens as the sovereign’s credit strength declines, said Moody’s.

The combination of a TPI of “very improbable” and an issuer rating of Ba1 constrains the rating of Montepio’s covered bonds at Baa3.

Montepio’s mortgage covered bonds remain on review for further downgrade, largely owing to the ongoing review for downgrade of the issuer’s rating and a review of Moody’s expected loss analysis.

“At first glance one could think this is good news as this is the weakest Portuguese covered bond issuer,” said Bernd Volk, head of covered bond research at Deutsche Bank. “However, this downgrade is due to a worsening of the TPI to ‘very improbable’ and not due to the pending downgrade of the senior rating.

“Moody’s seems clearly on a roll here. If the bank (which is on review) is downgraded in the near future, covered bonds could go down again. In our view, while Moody’s still has plenty of room under its method, Montepio faces the highest risk of a sub-investment grade rating among Portuguese covered bonds.”

Covered bond analysts at Natixis said that they expect all other Portuguese covered bonds to downgraded because they believe Portuguese banks’ senior unsecured ratings will be cut and because Moody’s has lowered the TPIs.

Dexia analysts said that Montepio’s covered bonds are nevertheless “shielded from the impact” of being downgraded to junk given that they are rated BBB by Fitch, which would keep them within the threshold of the ECB’s collateral framework.

Five Greek covered bond programmes were confirmed at Ba3 by Moody’s yesterday, concluding reviews for downgrade in place after the rating agency downgraded Greece’s sovereign rating to Caa1 on 1 June and subsequently lowered the ratings of Greek banks.

The programmes are those of Alpha Bank (direct issuance programme), EFG Eurobank Ergasias (EFG) (programmes I and II), and National Bank of Greece (NBG) (programmes I and II).

The rating agency said it “does not currently” assign ratings higher than Ba3 to covered bonds issued by Greek banks. The combination of the TPIs and the issuer ratings cap the Greek covered bond ratings at a higher level than Ba3, according to the rating agency.

The TPIs are “improbable” for Alpha Bank’s covered bonds, EFG’s programmes and NBG’s programme II, while NBG’s programme I has a TPI of “very improbable”.

Though any issuer downgrade increases the expected loss on the covered bonds, Moody’s noted that in all the above cases overcollateralisation was sufficient to achieve a Ba3 rating.

Moody’s said a multiple notch downgrade of the covered bonds could occur in the event of a sovereign downgrade negatively affecting the issuer’s senior unsecured ratings and the TPI, a multiple notch downgrade of the issuer, or a material reduction of the cover pool.