Moody’s downgraded covered bonds issued by Aktia Real Estate Mortgage Bank from Aa1 to Aa3 today (Friday) after the issuer’s owners decided to cease public covered bond issuance through the Finnish entity, although the cut was by less than had been considered possible.

Aktia REMB announced last month that it would cease actively issuing covered bonds, with Aktia Bank plc, its largest owner, planning to issue directly. The move came after Aktia REMB’s owners tried but failed to come to an agreement as to how to support the covered bonds’ rating after Aktia Bank was downgraded from A1 to A3 in February. Aktia REMB is not publicly rated, but has an implied rating three notches lower than the issuer, with market participants having expected a downgrade of the covered bonds to as low as A1.

“Today’s rating action on the covered bonds is prompted by the deterioration of the issuer’s credit strength in combination with its decision to cease public covered bond issuance going forward,” said Moody’s. “During the wind-down period of the portfolio held by the issuer, the issuer and its owners have also decided to trap all cashflows stemming from the two separate covered bond portfolios in the respective cover pools until the redemption of all outstanding covered bonds backed by these portfolios.”

The downgrade was less than some market participants had considered possible after Moody’s gave the programme an improved Timely Payment Indicator (TPI) of “probable-high”, up from “probable”.

“When assessing the TPI of a covered bond programme, Moody’s takes various aspects into account, including refinancing risk and the potential impact of issuer discretion on the programmes,” it said. “The issuer intends to substantially maintain the current cover pool compositions, meaning the cover pools will not be subject to future discretionary alteration which could reduce the overall quality.

“Maintaining this high quality of the assets in the cover pool will have a positive impact on potential refinancing risk, as does the issuer’s intention, as expressed towards Moody’s, to segregate all future cashflows for the benefit of the respective cover pools until the final redemption of all outstanding covered bonds. Whilst not removing refinancing risk, the liquidity situation of the cover pools will significantly improve over time, thereby reducing refinancing risk.”

Moody’s said that the rating of the covered bonds is now constrained at Aa3 under its TPI framework given the “probable-high” TPI.