Banca Popolare di Milano mortgage covered bonds were cut from AA to A by Fitch yesterday (Thursday), but the downgrade was smaller than the original rating committee outcome after the Italian bank appealed and pledged to publicly commit to a lower asset percentage.

BPM’s covered bonds had been on Rating Watch Negative (RWN) alongside six other mortgage OBG programmes as Fitch implemented revised refinancing spread assumptions. The rating agency announced the conclusion to the corresponding RWNs on the other six banks on Tuesday.

Yesterday Fitch downgraded the rating of BPM’s OBGs as a result of the revised refinancing spread assumptions from AA to A.

It said that with an issuer default rating of BBB and a Discontinuity Factor (D-Factor) of 29%, the covered bonds could be rated as high as A+ on a pure probability of default (PD) basis and up to AA when giving credit for recoveries on an assumed OBG default provided sufficient overcollateralisation is available. Fitch said that in BPM’s case, with a publicly committed asset percentage (AP) of 71.5%, the covered bonds can be rated as high as BBB on a PD basis and A- taking into account recoveries.

However, according to Fitch, BPM has pledged to commit publicly, within a few weeks, to an AP of 71%, which would allow the OBGs to be rated BBB+ on a PD basis and A taking into account recoveries.

“In accordance with Fitch’s policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome,” it said.

The covered bonds remain on RWN. Fitch said that BPM has communicated that in the next few weeks the guarantor will purchase substitute eligible assets using the proceeds of a subordinated loan from BPM and that these additional substitute assets will then allow the issuer to commit to an AP of 71%.

“The RWN is driven by the uncertainties and possible delays concerning the process the issuer will carry out to commit to such AP level,” said the rating agency. “Fitch will monitor the evolution of the issuer’s action and resolve the RWN during the next few weeks.”