Moody’s downgraded seven Portuguese covered bond programmes on Friday, five of them to Baa3, increasing the likelihood of them losing their investment grade ratings.

The downgrades leave mortgage covered bonds issued by Banco Comercial Português, Banco de Investimento Imobiliário (a subsidiary of BCP), Banco Espiríto Santo, and public sector and mortgage covered bonds from Caixa Geral de Depósitos at Baa3, one notch above sub-investment grade, with the ratings all remaining on review for downgrade.

“There definitely is a risk they could become sub-investment grade,” said a covered bond analyst. “Moody’s having lowered the TPI of all Portuguese covered bonds to ‘very improbable’ is a very heavy constraint.”

Fitch rates mortgage covered bonds of Caixa Geral de Depósitos A- and its public sector covered bonds BBB, while BCP covered bonds are rated BBB+ by Fitch. BES covered bonds are only rated by Moody’s.

“There is a risk that the Fitch ratings could go down as well,” said the analyst, “and if you’re only rated by one agency, you don’t have the chance of earning a better composite rating.

“Most of the D-Factors for the Portuguese programmes are still at 70%, but there are a few at 100%,” he added.

Fitch’s Discontinuity Factor reflects its opinion of the likelihood of an interruption in payments to covered bond holders, with 0% being best and 100% worst.

Banco BPI mortgage and public sector covered bonds, previously rated A1 and A2, respectively, were downgraded to A3.

BCP’s, Banco de Investimento Imobiliário’s, and BES’s covered bond programmes were previously rated A2. Mortgage covered bonds from Caixa Geral de Depósitos were rated Aa3 and its public sector bonds A1.

All programmes, and their banks’ debt ratings, remain on review for possible downgrade, pending an ongoing review of the issuing banks and a review of Moody’s expected loss analysis. The Portuguese sovereign was cut from Baa1 to Ba2 on 5 July.

The ratings of the covered bonds of Banco Santander Totta (Aa3) and Caixa Economica Montepio Geral’s (Baa3) — both already on review for downgrade — were unaffected by the downgrades of the issuers because the covered bond ratings were not constrained by the issuer ratings under Moody’s methodology.

Montepio was downgraded from Ba1 to Ba2, but its TPI Leeway is two notches.