Moody’s yesterday (Monday) placed on review for downgrade its Baa1 rating of Banca MPS mortgage covered bonds, which an analyst said have underperformed other Italian covered bonds over the past two weeks and could widen further in the event of negative rating actions.

Banca MPS's Palazzo Salimbeni

The review for downgrade of the obbligazioni bancarie garantite comes after the rating agency on Wednesday said it may cut the issuer’s rating (Ba2) because of the impact of unapproved legacy structured trades entered into by Banca Monte dei Paschi di Siena’s prior management. These have already led to a request for a Eu500m increase in state aid and could necessitate a restatement of prior financial statements or actions to reduce the negative impact on earnings, according to Moody’s.

MPS covered bonds have been assigned a Timely Payment Indicator (TPI) of “improbable”, which Moody’s said constrains the covered bonds’ rating at the prevailing level. The TPI leeway is limited, it added, meaning that any downgrade of the issuer may lead to a downgrade of the covered bonds.

According to a Moody’s TPI framework table, a one notch downgrade of the issuer to below Ba2 would, in combination with a TPI of “improbable”, imply a covered bond rating of Baa2 or Baa3.

Maureen Schuller, head of covered bond strategy at ING Bank, said that MPS mortgage covered bonds have no TPI leeway left, despite the issuer’s commitment to maintain 20.5% overcollateralisation, exceeding a 12.5% overcollateralisation requirement consistent with a Baa1 covered bond rating at Moody’s.

According to Schuller, MPS’s mortgage OBGs have underperformed the covered bonds of Italian peers by over 20bp after the issuer announced two weeks ago that it might face losses related to hidden structured finance transactions, and that the covered bonds will face more widening pressure in the event of further issuer rating downgrades.

Another analyst said that he is comfortable with the quality of MPS’s cover pool and said that investors should look through ratings, although covered bonds facing sub-investment grade risk may face secondary market spread pressure.