Moody’s downgraded Banco Santander Totta covered bonds from Baa1 to Baa3 yesterday (Thursday) after having lowered the country risk ceiling of Portugal to that level on Wednesday.

The rating agency said that the lowering of the country risk ceiling prompted a fall in the maximum achievable Portuguese covered bond rating to Baa3.

“Moody’s decision to adjust Portugal’s country ceiling is based on the rating agency’s assessment of the risks of economic and financial instability in the country and the likely impact this would have on all other borrowers and structured finance instruments in Portugal, as income and access to liquidity and funding could be significantly curtailed under stressed conditions,” said Moody’s. “The ceiling also reflects the risk of exit and redenomination in the unlikely event of a default by the sovereign.

“At the same time, the three notch gap between the government debt rating of Ba3 and the ceiling of Baa3 provides room for higher ratings for some asset classes with stronger intrinsic credit characteristics and with the capacity to absorb the economic and financial pressures that could stem from a sovereign default.”

Moody’s said that if Portugal is downgraded below Ba3 it will probably reassess the country ceiling, and would do likewise if the sovereign is upgraded.

Santander Totta’s covered bonds remain on review for downgrade because the issuer’s Ba1 rating is on negative review, said Moody’s, and pending a determination of the overcollateralisation level that would be consistent with any lower issuer rating in conjunction with Santander Totta’s willingness to provide further OC, if necessary.