Moody’s yesterday (Tuesday) cut from A2 to A3 public sector covered bonds issued by Italy’s Intesa Sanpaolo because it considers overcollateralisation levels to be insufficient to support a higher rating and because the issuer recently lowered rating thresholds of most of the rating triggers in its programme.

Intesa Sanpaolo

The move comes after the issuer in June offered investors an opportunity to exchange its public sector obbligazioni bancarie garantite for new mortgage backed OBGs as it sought an exit from such issuance, prompted by a Moody’s downgrade of the issuer’s public sector OBGs earlier in the year and associated overcollateralisation requirements. As part of the swap the bank made amendments to its public sector programme that, Moody’s previously noted, relaxed certain contractual obligations to mitigate counterparty and other risks, and which were in part made possible by Intesa Sanpaolo increasing its share of its own public sector covered bonds – by around 30% – as a result of the exchange. More generally, the rating agency warned that increased retention of covered bonds by issuers could allow them to outvote investors to weaken protections and damage their interests. (Click here for related coverage.) https://news.coveredbondreport.com/2012/07/moody%E2%80%99s-warns-issuers-could-hurt-investors-as-retention-rises/

Moody’s yesterday said that the level of OC required to maintain an A2 rating of the OBGs is 31%, with the current level standing at 22.6%. Based on feedback from the issuer on the amount of OC it intends to maintain in the programme, said Moody’s, it expects that the covered bonds will be able to achieve a maximum rating of A3.

Intesa Sanpaolo is rated Baa2 by Moody’s, with a Timely Payment Indicator (TPI) of “improbable” assigned to the public sector OBGs.

As regards the programme documentation amendments, Moody’s noted that they consisted of lowering the rating thresholds of most of the rating triggers in the programme to Baa3/Prime 3. According to Moody’s the main consequences of these changes are:

• the postponement of collateral posting (additional collateral to mitigate claw-back, set-off or commingling risk, collateral to be posted under the swap agreement etc.);
• the lowering of the minimum rating requirements for the bank account;
• and the deferral of the servicer substitution to the servicer’s default. However, a back-up servicer must be appointed if the servicer’s rating falls below Baa3; with a fully owned subsidiary of Intesa – Banca Infrastrutture Innovazione e Sviluppo – at present acting as the servicer.