Fitch cut the ratings of five Italian mortgage covered bond programmes yesterday (Wednesday), taking by surprise analysts who had expected only a limited impact on OBGs after Italy was downgraded to BBB+ on 8 March.

The rating agency also affirmed three programmes, including UniCredit’s, which had been singled out by covered bond analysts as that most likely to be lowered.

The ratings of obbligazioni bancarie garantite (OBGs) issued by the following Italian issuers were downgraded by one notch.

• Banca Carige, from A- to BBB+,
• Banca Monte Paschi di Siena, from A+ to A,
• Banca Popolare di Milano, from A to A-,
• Credito Emiliano, from AA- to A+,
• UBI Banca, from AA- to A+.

Only limited impact on Italian covered bond ratings was forecast by analysts after Fitch cut Italy’s sovereign rating from A- to BBB+ on 8 March, and Intesa Sanpaolo and UniCredit were downgraded by one notch from A- to BBB+ on Monday (see separate coverage here).

The driver of the OBG downgrades was the lowering of the D-Cap of Italian covered bond programmes, which was cut from 2 (high risk) to 1 (very high risk), said Fitch.

Jan King, non-independent desk strategist at RBS, said that Fitch had mentioned in its 2013 Outlook the possibility that a downgrade of the sovereign rating to triple-B territory would lead to a lowering of the Discontinuity Cap (D-Cap) assigned to covered bond programmes.

Florian Eichert, senior covered bond analyst at Crédit Agricole said that under Fitch’s methodology D-Cap scores indicate how many notches above an issuer rating covered bonds can be rated, with a D-Cap of 2 allowing for four notches of uplift over the issuer rating and a D-Cap of 1 allowing three notches of uplift.

“So while Fitch left the issuer ratings untouched, it has lowered the maximum uplift after the sovereign downgrade, and this led to the OBGs downgrades,” he said.

According to Fitch, the lowering of the D-Cap was due to an increase in its liquidity and systemic risk component from “high” to “very high” after Italy’s sovereign rating was downgraded.

“The rationale is that in a systemic crisis, Fitch expects that a deterioration of the sovereign’s creditworthiness would be associated with diminishing interbank liquidity,” it said.

“The very high risk assessment for the liquidity gaps and systemic risk component also reflects Fitch’s view that the extendible maturity feature of up to 15 months would not be sufficient to bridge maturity mismatches in a stress scenarios exceeding the issuers’ rating by more than one notch.”

The ratings of covered bonds issued by Banco Popolare and UniCredit were confirmed, at BBB+ and A, respectively, as they incorporate a sufficient buffer against a change in D-Cap, said Fitch.

UniCredit’s programme also incorporated sufficient buffer against a downgrade of the issuer, said the rating agency. UniCredit was downgraded by Fitch from A- to BBB+ alongside seven other Italian banks on 18 March following the downgrade of the sovereign.

Fitch noted that in assessing UniCredit OBG’s overcollateralisation levels (which it refers to in terms of Asset Percentage, or AP) it had given credit to the evolution of the level of OC observed over the last 12 months (March 2012-March 2013), instead of the lowest OC observed in December 2011.

“This is justified by the trend that the level of UniCredit’s AP has shown since the first quarter of 2012, following a Eu5.1bn transfer of assets in March 2012,” said Fitch.

An analyst, who like others had expected a UniCredit OBG downgrade, noted that before the issuer downgrade UniCredit’s OBG rating was lower than Fitch’s methodology could have allowed for because the lowest OC level observed in December 2011 prevented the covered bonds from achieving a full rating uplift over the issuer rating.

But since that lowest OC level is now older than 12 months, it has ceased to be a drag on UniCredit’s OBG ratings, so the bank’s OBG rating was maintained without the issuer making any changes in its OC commitments.

Fitch also affirmed the BBB+ rating of OBGs issued by Credito Emiliano that are guaranteed by Canossa CB as they are rated at the same level as the issuer rating and are therefore unaffected by the change in the D-Cap, said the rating agency.