Fitch downgraded four Italian mortgage covered bond programmes yesterday (Tuesday), and left one of these on Rating Watch Negative, after reassessing them using revised refinancing spread assumptions that are wider on the back of the sovereign debt crisis.

The following OBGs were cut: Banca Carige’s, from AA to A-; Banco Popolare’s, from AA to BBB+; Credito Emiliano’s, from AA+ to AA-; and UniCredit’s, from AA+ to A. Those of Banca Monte dei Paschi di Siena and Unione Banche Italiane (UBI Banca) were affirmed at AA and AA+, respectively, and removed from Rating Watch Negative (RWN).

“The rating actions follow the revision of Fitch’s refinancing spreads assumptions, which are used to estimate the stressed sale price for the portion of the cover pool that an alternative manager would attempt to liquidate in the aftermath of an issuer default,” said Fitch. “The net present value (NPV) of cover pools is determined discounting the value of the assets at a rate in line with the revised refinancing spreads.

“The NPV of the assets is now lower as refinancing spreads have widened on the back of sovereign debt crises.”

The rating agency analysed the asset percentage (AP) resulting from the higher refinancing spread assumptions and compared this with either the highest AP of the past 12 months or the AP committed to by the issuer. For issuers with a short term issuer default rating (IDR) below F2, Fitch only gives credit to AP above that required by law if there is a contractual or public commitment to a higher level.

Bernd Volk, head of covered bond research at Deutsche Bank, noted that Fitch’s ratings of Italian mortgage covered bonds now range from AA+ to BBB+.

“The significant rating differences – e.g. between Monte dei Paschi’s AA and Banco Popolare’s BBB+ – seem mainly driven by differences in publicly committed OC of 47.7% and 24%, respectively,” he said. “While market impact is likely limited, the fact that besides Banco Popolare all Italian covered bonds stayed above triple-B territory confirms our view regarding the relative strengths of Italian covered bonds compared with Spanish cédulas (which are overwhelmingly rated in triple-B territory).”

Fitch removed the downgraded covered bonds from RWN, with the exception of Banco Popolare’s.

“The rating of BP’s OBGs have been maintained on RWN due to the timing of the monthly report related to the portfolio composition used to determine the swap collateral amount, which is not fully in line with Fitch’s criteria,” said the rating agency. “During the annual review, the materiality of the deviation will be taken into account with possible adjustments in the level of AP supporting the given rating and/or the D-Factor.”