S&P has cut covered bonds issued by Luxembourg-based Dexia LdG Banque from AA to A- yesterday (Tuesday) to reflect a lower maximum potential rating under the rating agency’s counterparty criteria and an action plan aimed at avoiding a possible further cut.

Standard & Poor’s also downgraded the public sector lettre de gage programme’s short term ratings from A-1+ to A-2.

The downgrade of the long term rating reflects S&P’s weak link and counterparty criteria, which constrain the maximum potential rating to a level lower than AA, according to the rating agency.

“We have therefore lowered our long term ratings on DLG’s public-sector covered bond programme and related series to the maximum potential rating, A-,” said S&P. “This reflects the updated criteria and DLG’s action plan, which is to be put in place by the transition date of January 11, 2013.”

When S&P announced its final revised counterparty criteria at the end of May it said that issuers could avoid their programmes being placed on CreditWatch when the criteria enter into effect – on 12 July – by submitting action plans that enable the programmes to meet the rating requirements within the subsequent six months, i.e. by 11 January 2013.

Dexia LdG Banque’s programme was originally placed on CreditWatch with negative implications in December due to uncertainties about the outcome of the restructuring of Dexia group. The ratings remained on CreditWatch negative after a downgrade from AAA to AA in May. This was for reasons of issuer creditworthiness and overcollateralisation levels in the covered bond programme, with implementation of S&P’s counterparty criteria as of July becoming an additional element of the negative review.

S&P has again kept the covered bond ratings on CreditWatch negative pending conclusion of its assessment of the counterparty risks related to the programme. It said that if Dexia LdG Banque does not fully implement the action plan by the transition date it might lower further the long term rating of the covered bonds, toward the issuer credit rating (ICR) of Dexia Crédit Local, which is rated BBB, on CreditWatch negative.