Fitch yesterday (Monday) cut obbligazioni bancarie garantite issued by Banca Popolare di Milano from AAA to AA+ and maintained them on Rating Watch Negative following a downgrade of the issuer on Friday.

The rating agency also cut Credito Emiliano on Friday, from A to BBB+, and yesterday said it is maintaining Credem’s OBGs, rated AAA, on Rating Watch Negative (RWN).

Fitch cut BPM two notches, from A- to BBB. The revised issuer default rating (IDR), combined with an unchanged Discontinuity Factor (D-Factor) of 16.5%, allows the covered bonds to be rated as high as AA- on a probability of default (PD) basis, compared with AA+ previously.

The rating agency said that because it lowered BPM’s short term IDR to below F2 it will only give credit to a level of overcollateralisation (OC) that is in the form of either a contractual or public commitment on the part of the issuer or, if the issuer does not commit to any OC level, the one required by law.

Fitch said that the level of asset percentage (AP) of 81.5% to which BPM is committing to in a performance test report allows for stressed recoveries in excess of 91% in a AA+ scenario, justifying a AA+ rating on the covered bonds.

Everything else being equal, the OBGs issued can be rated as high as AA+ if the issuer’s IDR is at least BBB, said Fitch.

The rating agency is increasing its stressed refinancing cost assumptions for Italian mortgage loans, which will result in an increase in the level of OC supporting a given rating.

“The RWN will be resolved when the new levels of supporting OC will be determined and these will be compared to the lowest level of OC available over the past 12 months or to the level of OC the issuer commits to, as the case may be,” it said.