Fitch yesterday (Wednesday) downgraded seven Italian obbligazioni bancarie garantite programmes, reflecting the rating agency’s view that refinancing of the cover assets will be more challenging after a downgrade of the sovereign to A-.

Italy’s sovereign rating is used by Fitch as an indicator to assess the likelihood of a refinancing of Italian cover pools taking place during the maturity extension provided by each of the programmes’ documentation, as well as the cost at which such refinancing could occur in a stressed situation.

Following the sovereign downgrade, Fitch has narrowed the link between the ratings on a probability of default (PD) basis of the covered bonds and the ratings of the issuers.

The downgrades comprise covered bonds issued by: Banca Carige, from AA+ to AA; Banca Monte dei Paschi di Siena, from AAA to AA; Banca Popolare di Milano, from AA+ to AA; Banco Popolare, from AAA to AA; Credito Emiliano, from AAA to AA+; UBI Banca, from AAA to AA+; and UniCredit, from AAA to AA+.

“In Fitch’s view,” said the rating agency, “the combination of extendible maturities available in the Italian OBG programmes (12 to 15 months), with a liquidity reserve covering the potential interest shortfall after an issuer’s insolvency, continue to justify a lower PD for the mortgage covered bonds compared to their issuers’.”

But the rating agency believes that the euro-zone crisis, a marked deterioration in Fitch’s forecasts of Italy’s near term economic outlook, and aless predictable wholesale market access that Italian banks face may reduce the likelihood that an Italian financial institution could buy a portfolio of Italian mortgage loans in the event of a default of one of its competitors.

Fitch has therefore decided to narrow the differential between the rating of the issuer and the covered bonds rating on a PD basis through an adjustment of the liquidity gap component within the Discontinuity-Factors (D-Factors) assigned to each programme.

The maximum achievable covered bond ratings, on a PD basis, are based on the combination of the issuers’ current rating with the D-Factors assigned to the relevant programme. The D-Factors assigned to the Italian mortgage covered bonds programmes and the maximum achievable covered bond ratings have been revised as follows:

• Banca Carige, D-Factor increased from 18.3% to 27.5%, OBG’s maximum achievable rating on a PD basis from AA- to A+
• Banca Monte dei Paschi di Siena, D-Factor increased from 15.5% to 29.2%, OBG’s maximum achievable rating on a PD basis from AA to A+
• Banca Popolare di Milano, D-Factor increased from 16.5% to 26.6%, OBG’s maximum achievable rating on a PD basis from AA- to A+
• Banco Popolare, D-Factor increased from 17% to 27.1%, OBG’s maximum achievable rating on a PD basis from AA to A+
• Credito Emiliano, D-Factor increased from 15.8% to 25.9%, OBG’s maximum achievable rating on a PD basis from AA to AA-
• UBI Banca, D-Factor increased from 21.2% to 31.2%, OBG’s maximum achievable rating on a PD basis from AA to AA-
• UniCredit, D-Factor increased from 22.1% to 32.1%, OBG’s maximum achievable rating on a PD basis from AA to AA-

Fitch noted that the D-Factor of Banca Carige reflected, among other things, an external swap counterparty replacing Carige under the cover pool and the covered bonds swaps. It added that the D-Factors of Banca Popolare di Milano, Banco Popolare and Credito Emiliano’s covered bonds did not incorporate the implementation of the covered bonds counterparty criteria published in March 2011.

All programmes remain on Rating Watch Negative (RWN).

The RWN will be resolved based mainly upon the recalculation of the level of overcollateralisation supporting the rating of each programme as well as evaluation of the liquidity mitigants, if any, put in place by the issuers. In the case of UniCredit’s covered bonds, the RWN also takes into account the netting of mark-to-market exposures between asset and covered bond swaps when determining the collateral amount posted by the swap counterparty.