Fitch yesterday (Tuesday) upgraded public sector covered bonds issued by Italy’s Cassa Depositi e Prestiti, which will hold an adjourned bondholder meeting on 12 March to seek approval of resolutions necessary to consummate a buyback of some Eu529m of covered bonds tendered by investors.

Fitch has upgraded the covered bonds from AA to AA+ and removed them from Rating Watch Positive because the cover pool (patrimonio separato) has been returned to the issuer in exchange for a full cash collateralisation of the principal and interest due on the covered bonds, and because of the segregation of the cash collateral account and investment account. The rating action also reflects contractually undertaken portfolio investment guidelines, according to Fitch.

“Following the approval of a resolution by CDP’s board of directors, the rights and the obligations and the cashflows deriving from the segregated collection account and the investment account (except for any interest and other proceeds, other than reimbursement of capital) have been assigned to the ‘patrimonio separato’, to the satisfaction of the rights of the covered bondholders,” said the rating agency.

The rating agency said that aggregate amounts equal to Eu5.335bn have been deposited in the collection account and invested in eligible investments, which have also been segregated to the satisfaction of the rights of the covered bondholders.

As of February 2012, the portfolio comprised two main exposures: around 58.5% European Investment Bank (AAA/RWN/F1+) and 41.5% FMS Wertmanagement (AAA/Stable/F1+).

Fitch said that its covered bonds methodology is not applicable because the cover pool has been desegregated and returned to CDP and the cover pool has been fully cash collateralised to the benefit of the bondholders, and that the rating of the covered bonds is based on the investment guidelines outlined in the documentation.

Most of CDP’s outstanding bonds mature within the next 12 months, according to Fitch: Eu3bn in January 2013 and ¥10bn in January 2017 (Eu92m).

CDP is buying back Eu437.2m (14.6%) of the Eu3bn January covered bonds and all of the Japanese yen covered bonds, it announced on Monday. That is the second highest take-up in a cash-for-covered bond tender offer launched this year, after a 42% acceptance rate for a National Bank of Greece tender offer that closed in the middle of January.

CDP’s tender offer expired last Monday (20 February) and is part of the issuer’s steps to terminate its covered bond programme.

Banca IMI, BNP Paribas, Deutsche Bank, Nomura and UniCredit are joint dealers on the tender offer, with Deutsche Bank also the cash manager of CDP’s programme.

Stelios Manetas, of BNP Paribas’ liabilty management team, said that the transaction was intended as an offer of liquidity, to provide investors with an opportunity to exit large positions that it would otherwise not be possible, or would be difficult, to unwind.

The purchase price was par, representing a discount to the market price, according to Manetas, with the bonds trading at around 101.5 when the tender offer was announced.

The yen covered bonds were a private placement held by one investor, according to Manetas.

Execution of the buyback is conditional upon approval of two extraordinary resolutions, with a bondholder meeting on 24 February having failed to get the necessary quorum and therefore been adjourned to 12 March.

The resolutions are aimed at removing any restriction on the principal amount of covered bonds CDP may purchase (“the 50% resolution”) and removing any restrictions on the funds CDP may use to purchase the covered bonds (“the segregated rights resolution”). Approval of the resolutions is necessary to consummate the buyback, according to Manetas.

Manetas said that the number of investors participating in the tender offer was insufficient for a quorum at the initial meeting, with a consent fee for favourable voting only instructions made intentionally unappealing.

“Typically you give a premium of around 25 cents or more as an incentive depending on the proposals put forward,” he said. “But in this case it was well below the market price, because the issuer did not want to turn the transaction into a consent exercise.”

The quorum for the adjourned meeting is lower and is expected to be satisfied by the investors that have submitted their bonds for tender, according to Manetas.

“We expect the resolutions to be approved,” he said, “to allow the issuer to release the funds from the segregated cash account to buy back the bonds.”