Moody’s has cut public sector covered bonds issued by Italy’s Intesa Sanpaolo from Aa3 to A1 because overcollateralisation levels are insufficient to support the higher rating.

The rating agency yesterday (Wednesday) said that the level of overcollateralisation required to maintain the Aa3 rating is 39.5% and that the current level of overcollateralisation is 22.6%.

“Based on feedback from the issuer on the amount of overcollateralisation it intends to maintain in the programme, Moody’s expects that the maximum ratings the covered bonds can achieve will be A1,” said the rating agency.

Moody’s assigns a Timely Payment Indicator (TPI) of “improbable” to the covered bonds, but this does not constrain the rating under Moody’s TPI framework. Intesa Sanpaolo is rated A3 by Moody’s.

Based on this and the TPI, the TPI Leeway for the programme is two notches, meaning that the covered bonds could be downgraded as a result of a TPI cap once the issuer rating is downgraded below Baa2, all else being equal.

Moody’s estimates that cover pool losses in the event of a default would amount to 50%, split between market risk of 39.7% and collateral risk of 10.3%. The latter is derived from a collateral score, which stands at 20.7% for the programme, said Moody’s.