Moody’s placed mortgage covered bonds issued by Banca Popolare di Milano (BPM) and Banca delle Marche on review for downgrade yesterday (Tuesday), after having put the two Italian banks on review Friday, saying that a downgrade of the issuers would lead to a downgrade of their covered bonds.

BPM’s covered bonds are limited by a Timely Payment Indicator (TPI) of “improbable” to their current A2 rating, given BPM’s Baa3 rating. A downgrade of BPM would therefore lead to a cut in the covered bonds’ rating to A3 or below.

Banca delle Marche’s covered bonds are rated A3, using the maximum uplift possible above the bank’s Ba1 rating, as they also have a TPI of “improbable”. A downgrade of Banca delle Marche by one or more notches would therefore lead to a drop of the covered bonds to Baa1-Baa2 or lower.

Moody’s also said a multiple notch downgrade could occur if a sovereign downgrade negatively affects the issuers’ ratings and the TPI.

According to Moody’s, the assessment of the overcollateralisation (OC) of the cover pools of BPM and Banca delle Marche’s covered bonds remains consistent with their ratings. BPM provides 7.5% of committed OC, overcoming the 6% required for its covered bond to achieve an A2 rating. Banca delle Marche’s cover pool has 27% committed OC, consistent with a minimum of 8% Moody’s requires for a rating of A3.