Mortgage covered bonds issued by Credito Emiliano and public sector covered bonds issued by Intesa Sanpaolo were downgraded by Moody’s yesterday (Tuesday) following a reassessment of their overcollateralisation levels.

Credito Emiliano’s covered bonds were downgraded from Aaa to Aa1 following a downgrade of the issuer to A3 on 5 October.

Any downgrade of the issuer’s ratings increases the expected loss on the covered bonds, said Moody’s. It added that an increase in expected loss could be compensated by increasing overcollateralisation levels, but that the OC level Credem indicated it intends to maintain is only sufficient for Moody’s to be able to assign a Aa1 rating.

With a Timely Payment Indicator (TPI) on the Credito Emiliano programme of “probable”, Moody’s TPI framework does not constrain the rating below Aaa.

Credito Emiliano’s covered bonds have a TPI leeway of one notch, meaning the programme could be further downgraded if the issuer rating is downgraded below Baa1, all other variables being equal.

Intesa Sanpaolo

Intesa Sanpaolo’s public sector covered bonds were downgraded from Aa1 to Aa3 following cuts to the issuer’s rating in recent months. The bank was downgraded from Aa3 to A2 on 6 October, when the covered bond review was initiated.

Under Moody’s TPI framework, a combination of an A2 issuer rating and the programme’s TPI of “improbable” would allow the covered bonds rating to be as high as Aaa, but Moody’s said that based on feedback from the issuer it expects overcollateralisation to be only sufficient to achieve a Aa3 rating.

The TPI on these covered bonds is “improbable”, but Moody’s TPI framework does not constrain the rating.

The TPI leeway for the programme is two notches, so the covered bonds could be downgraded as a result of a TPI cap if the issuer falls below Baa1, all other variables being equal.