Five covered bond issuers in Italy were among 13 of the country’s financial institutions cut by Moody’s yesterday (Monday) evening in a follow-up to its downgrading of the sovereign on Friday, raising the prospect of respective OBG ratings falling into triple-B territory.

Moody’s cut the long term debt and deposit ratings of 10 Italian financial institutions by one to two notches and the issuer ratings of three, to reflect a weakening of the sovereign’s creditworthiness as captured by a lowering of Italy’s government bond ratings from A3 to Baa2 on Friday.

Five covered bond issuers were affected by Moody’s rating actions on Italian banks yesterday. Intesa Sanpaolo, UniCredit and Cassa Depositi e Prestiti were cut by two notches, from A3 to Baa2, while Banca Carige and Credito Emiliano were downgraded by one notch, from Baa2 to Baa3. The ratings remain on negative outlook.

Moody’s downgrade of the Italian sovereign already prompted cuts to eight Italian covered bond ratings, to A2, the new country debt ceiling, while all OBG programmes rated by Moody’s are on review for downgrade.

Leef Dierks, head of covered bond strategy at Morgan Stanley, said that yesterday’s cuts to Italian OBG issuers are likely to affect their covered bonds’ ratings. In the case of Intesa Sanpaolo and UniCredit, the covered bonds could become subject to a downgrade of up to two notches, potentially to Baa1, he said, while Banca Carige OBGs could be cut by up to three notches, to Baa2, given the issuer’s new long term rating of Baa3.

“Considering the current state of the Italian covered bond market, we do not expect a possible downgrade to have an overly pronounced impact on spreads as this news did not come unexpected,” he added. “With a potential downgrade having largely been priced in, the probability of any forced selling will be rather low – for as long as the papers remain investment grade rated.”

Moody’s assigns Italian covered bonds a Timely Payment Indicator (TPI) of “improbable”, but the rating agency on Friday said it will reassess the rating caps under its TPI framework following the downgrade of the sovereign.