Fitch has downgraded mortgage covered bonds issued by Banco Santander Totta and Banco BPI following a downgrade of the issuers resulting from a cut in Portugal’s rating from BBB- to BB+.

Yesterday (Wednesday) Totta’s obrigações hipotecarias (OH) were downgraded from AA- to A and BPI’s OHs from A- to BBB.

Fitch said that a further downgrade of BPI would lead to a downgrade of its OH, all else being equal, but Totta could be downgraded two notches before its OH rating, factoring in recoveries, is affected.

The respective issuers were downgraded following the cut to the sovereign’s rating, with Totta’s rating falling from AA- to A and BPI’s from BBB- to BB+.

Fitch said it had equalised the OH ratings on a probability of default (PD) basis with the ratings of the associated Portuguese banks. The Discontinuity Factor of 100% for Totta’s and BPI’s OHs allow them to be rated respectively at A and BB+ on a PD basis.

The rating agency said an uplift of up to two or three notches can be granted, depending on whether the covered bonds rating on a PD basis is in the investment grade or non-investment grade category, and provided that recoveries are outstanding in the case of a default on the OHs.

Fitch has maintained the five notch cap above the sovereign rating, with no recovery uplift granted for higher rating scenarios.

“The rating cap continues to reflect the agency’s concerns regarding the weakening sovereign profile and its impact on the ongoing performance of the cover assets,” said Fitch.

Totta’s covered bonds are rated A with no recovery uplift above the rating cap, while BPI’s covered bonds benefit from a two notch uplift for recoveries based on the current nominal overcollateralisation level of 35%. BPI, said Fitch, will publicly commit to such an overcollateralisation level from the next investor report, due in December.