Moody’s today (Thursday) followed up on sovereign rating actions taken earlier this week by downgrading or placing on review 28 Italian and Spanish covered bond programmes and cutting 43 multi-cédulas after lowering the TPI for most mortgage-backed issuance from these jurisdictions and negative action on issuer ratings. Nine Portuguese programmes and 24 from non-peripheral European countries were put on review for downgrade.

Seventeen standalone Spanish programmes were affected and 11 OBG programmes.

The rating agency on Monday adjusted the ratings of nine sovereigns in order to “reflect their susceptibility to the growing financial and macroeconomic risks emanating from the euro crisis and how these risks exacerbate the affected countries’ own specific challenges”.

As part of Monday’s rating action Moody’s downgraded Spain from A1 to A3, Italy from A2 to A3, and Portugal from Ba2 to Ba3. It also changed the outlook to negative on Austria, France and the UK, which are rated Aaa.

Twelve standalone cédulas programmes were cut while five were placed on review for downgrade.

Moody’s lowered the Timely Payment Indicator (TPI) from “probable” to “improbable” for all Spanish mortgage backed covered bonds and for the majority of mortgage backed obbligazioni bancarie garantite (OBG) issuance.

This is in line with its assessment that the declining credit strength of the respective sovereign means the government and financial institutions may be less able and/or willing to provide or obtain funds to support the refinancing of covered bonds after an issuer default.

The majority of the 43 multi-cédulas downgraded by Moody’s remain on review for downgrade either because some of the participants’ ratings are still on review for downgrade, or because rating assessments are ongoing after merger announcements amongst participants. Some multi-cédulas ratings are constrained by Moody’s TPI analysis.

Eight Italian covered bonds were downgraded by Moody’s and three were placed on negative watch, with Moody’s adding that covered bonds issued by Cassa Depositi e Prestiti continue to be rated Aa1 and remain on review for downgrade. The rating agency will assess the rating implications of the cash-collateralisation mechanism of future payment obligations on then outstanding covered bonds, following both the exercise of the voluntary programme termination in November 2011 and the conclusion of the tender offer announced early February.

Nine Portuguese covered bonds were placed on review following the downgrade of the sovereign and subsequent reviews for downgrades of various Portuguese covered bond issuers.

The TPIs assigned to the programmes are unchanged, at “very improbable”, the lowest category.

“The ‘very improbable’ is very harsh,” said Michael Michaelides, covered bond analyst at RBS. “It means the Portuguese covered bonds have a less than 25% chance of timely payment in the event of a bank default.”

He added that the Portuguese covered bonds were not downgraded, unlike the Spanish and Italian programmes, only because TPIs for the Portuguese programmes had already previously been lowered.

“Spanish and Italian programmes have been downgraded because of this double whammy of Moody’s view of the TPI having changed for the mortgage covered bonds and bank downgrades,” he said. “The proof in this is that in both Italy and Spain the public sector covered bonds have not been downgraded as their TPIs were already ‘improbable’.”

The rating agency also placed on review for downgrade three Austrian, 13 Danish, one Finnish, one French, four German, and two Dutch covered bond programmes following Moody’s decision to review for downgrade the rating of the banks supporting the covered bonds.

Lists of covered bond programmes affected in the various jurisdictions can be found by clicking on the following links (Moody’s website access required):

standalone Spanish programmes, multi-cédulas, Italy, Portugal, other European programmes