Moody’s lowered the maximum rating achievable on covered bonds from Italy, Portugal and Spain yesterday (Thursday), resulting in the downgrade of 17 programmes by one or two notches.

The rating agency said the move reflects its assumptions about the uncertain environment bondholders might face following the default of the sovereign in whose jurisdiction the programme is established. The highest achievable covered bond rating has been lowered from Aaa to Aa2 for Italy and Spain, and from A2 to Baa1 for Portugal.

Eight of the 17 covered bonds downgraded are on negative review.

Spanish covered bond programmes affected by the action and cut to the cap of Aa2 were: Banco Santander mortgage covered bond programme, Banco Santander public, BBVA mortgage, BBVA public, CaixaBank mortgage, CaixaBank public, Bankinter mortgage, Banco Popular Mortgage, Banesto mortgage, Banesto public, Unicaja Banco mortgage, and IM Cédulas GBP 1, 3 and 5. The Bankinter, Banco Popular and Unicaja programmes remain on review for downgrade.

Banco Santander Totta’s covered bond programme was the only one affected in Portugal, being cut to Baa1. In Italy, mortgage covered bonds of Intesa Sanpaolo and UniCredit OBGs were lowered to Aa2, with UniCredit’s remaining on review for downgrade.

The lowering of the highest achievable rating followed the downgrade of the sovereigns on 13 February by Moody’s, and a subsequent announcement limiting the highest achievable structured finance ratings possible in the three countries.

While the highest achievable covered bond rating remains several notches above the rating of the sovereign, Moody’s noted, the rating uplift covered bonds may achieve over a sovereign rating may now be curtailed.

“The rating limitations reflect out assumptions regarding the uncertain environment that bondholders might face following the default of the sovereign in whose jurisdiction the covered bond programme is established,” said Moody’s.

It said a simultaneous decline in a government’s fiscal position and in the strength of its banking system can contribute to: significant deterioration in asset performance; increased market value risk; reduced financing ability; and a decrease in the number of viable transaction counterparties in covered bond transactions.

Moody’s exempted Cassa Depositi e Prestiti, which will continue to be rated Aa1 and remain on review for downgrade. During the review of CDP’s programme, Moody’s will assess the rating implications of the existing cash collateralisation mechanism, following the exercise of the voluntary programme termination in November 2011 and the conclusion of the tender offer announced early February 2012.