Fitch downgraded obrigações hipotecárias issued by Banco Santander Totta from A to BBB+ on Friday, after lowering the rating of the Portuguese bank’s parent, Banco Santander, to A on the back of a Spain downgrade.

After the downgrade of Santander, Santander Totta was cut to BBB.

The rating agency noted that the Discontinuity Factor (D-Factor) of the programme remains at 100%, meaning that the rating of the OHs on a probability of default (PD) basis is equalised with the issuer’s rating (BBB).

Under Fitch’s methodology, issuers can achieve a covered bond rating one or two notches higher than the PD rating if recoveries are outstanding in the case of a default of the OHs. In Santander Totta’s case, it does not consider stressed recoveries in a BBB+ scenario sufficient to ensure 100% recoveries for all covered bonds, but does believe they can sustain recoveries in excess of 51%, and has therefore awarded a one notch uplift.

As Totta’s shorter term rating is below F2, and absent any contractual or public commitment on the part of the issuer, Fitch only gives credit to the minimum level of OC required by Portuguese legislation, 5.26%.

“Totta’s OH programme benefits from both asset and liability swaps with an internal non-eligible counterparty,” said the rating agency. “Hence, Fitch has modelled the worst of swapped and unswapped cashflows. The mark-to-market of the swap is in favour of the cover pool, therefore the potential pari passu termination payments currently have no effect on the OC supporting the OH rating.

“Fitch believes that Portuguese covered bonds programmes are exposed to the risk of time subordination post issuer default,” it added.

The rating agency said that all else being equal, a downgrade of Santander Totta would result in an equivalent downgrade of its OHs. obrigações hipotecárias