Fitch has placed on Rating Watch Negative covered bonds issued by seven Italian banks pending a reassessment of refinancing cost assumptions for Italian mortgage loans and hence overcollateralisation levels deemed necessary to support the rating of each programme.

Obbligazioni bancarie garantite (OBG) issues of Banca Carige, Banca Monte dei Paschi di Siena, Banco Popolare di Milano, Banco Popolare, Credito Emiliano, Unione Banche Italiane, and UniCredit are affected by the rating action. Fitch rates the covered bonds AAA.

The negative reviews are the result of a downgrade of the sovereign from AA- to A+ on Friday and subsequent rating actions on major Italian banks on Tuesday.

Fitch said that it expects that the largest banks will manage to raise sufficient funding in difficult market conditions and that, as yet, there are no strong signs of deleveraging and balance sheet downsizing.

“However, uncertainty over the resolution of the euro zone crisis gives rise to a significantly increasing upward path of refinancing spreads, which is reflected in a higher OC supporting a given rating level,” it said. “The RWN will be resolved based mainly on the recalculation of the level of OC supporting the rating of each programme as well as liquidity mitigants, if any, put in place by the issuers.”

Fitch is adjusting upwards its stressed refinancing cost assumptions for Italian mortgage loans, which will result in an increase in the level of overcollateralisation deemed necessary to support a given rating level.

The rating agency noted that extendible maturities available in the Italian covered bond programmes justify a lower probability of default (PD) for the OBG compared with their issuers’.

It said that a triple-A rating of the OBGs is achievable as long as an issuer’s rating is at least BBB+.