Moody’s today (Tuesday) placed on review for downgrade Aaa mortgage covered bonds issued by Co-operative Bank under its Moorland programme after yesterday placing the bank’s rating on review for downgrade because of its plans to acquire around £24bn of assets and liabilities from Lloyds Banking Group.

The rating agency said that the “transformational” deal would significantly alter Co-op Bank’s risk profile.

Moody’s review of the covered bonds will take into account any increased expected losses as a result of a downgrade of the issuer and the impact of any cut on the covered bond ratings under the rating agency’s Timely Payment Indicator (TPI) framework.

The TPI assigned to the Moorland covered bonds is “probable”, with any downgrade of the Co-op Bank’s senior unsecured long term rating, currently A3, leading to a cut of the covered bond ratings, according to Moody’s.

The rating agency has assessed the market risk in the Moorland cover pool to stand at 18% and the collateral risk at 3.9%. Overcollateralisation is 229.2%, according to Moody’s, of which it considers 29% to be committed. The minimum OC level consistent with a Aaa rating target is 25%, it added.

Moody’s noted that The Co-operative Group, the ultimate parent of the Co-operative Bank, has announced that it had agreed non-binding terms with Lloyds Banking Group for the Co-operative Banking Group to acquire the assets and liabilities (known as Verde) that Lloyds has been required by the European Commission to sell, and that this prompted the review for downgrade.

“If the deal proceeds as announced, the acquisition of Verde would be a transformational deal for the Co-operative Bank, potentially resulting in a significant change in the risk profile,” said Moody’s. “This reflects the size of the acquisition, which accelerates the already substantial growth of the bank following its 2009 acquisition of Britannia Building Society.”

The rating agency said that Co-operative Bank at completion expects the Verde balance sheet to be around £24bn, which would take the bank’s total balance sheet towards £75bn at the end of 2013, an increase of around 50% compared with the balance sheet size of the Co-operative Bank at the end of 2011.

Moody’s said that its review will consider:

• the steps that the Co-operative Bank would take to ensure the smooth integration of Verde;
• the composition and quality of the loan assets that would be acquired;
• the bank’s exposure to any further deterioration in the challenging UK economy, especially given its exposure to commercial property and its relatively high level of impaired loans;
• the impact that the acquisition could have on the bank’s profitability, which is currently subdued;
• the anticipated impact on the bank’s capitalisation under stress; and
• the anticipated development of the bank’s liquidity and funding profile.

However, Moody’s noted that the acquisition would substantially strengthen the Co-operative Bank’s franchise, and that the bank estimates that its market share of current accounts would rise to a level approaching 7%.

The rating agency said that although the acquisition of Verde would improve the position of the Co-operative Bank within the UK market, Moody’s would not expect to change its systemic support assumptions.