Covered bonds issued off Co-operative Bank’s Moorland programme were cut from Aaa to Baa1 today  (Friday) in one of the worst ever downgrades in the asset class, after Moody’s slashed the  bank’s rating from A3 to Ba3 late yesterday, with a £600m Co-op issue widening today.

Downgrading the issuer yesterday (Thursday), Moody’s cited potential further substantial losses, particularly from Co-op’s commercial real estate exposure, which could exert pressure on capital ratios that are already relatively low, as well as vulnerability to losses heightened by low levels of provisions, and slow progress in realising benefits related to its merger with Britannia. Co-op’s ratings and its covered bonds remain on review for downgrade.

The Co-operative Banking Group’s chief executive, Barry Tootell, resigned this (Friday) morning in the wake of the downgrade of Co-operative Bank plc. The group said that it was disappointed by Moody’s downgrade of the bank.

“We have a strong funding profile and high levels of liquidity, which are significantly above the regulatory requirements,” it said. “We do acknowledge, like the rest of our banking sector peers, the need to strengthen our capital position in light of the broader economic downturn and the pending introduction of enhanced regulatory requirements, and we have a clear plan to drive this forward throughout the coming months.”

The Co-operative Bank has only one benchmark covered bond outstanding, a £600m November 2021 issue launched in November 2011. According to a banker this had widened some 35bp to around 160bp over swaps after the issuer rating cut yesterday but before the covered bonds were downgraded late this morning.

The covered bonds were downgraded to Baa1 because the combination of the new Ba3 issuer rating and a programme Timely Payment Indicator of “probable” constrain the rating at that level. A covered bond analyst had suggested that under Moody’s methodology they could have been cut as low as Baa3.

Jan King, senior covered bond analyst at RBS, said that the downgrade of seven notches is one of the sharpest ever in covered bonds, with the covered bonds’ fate made even more exceptional by the issuance falling from a triple-A rating.

Another covered bond analyst said that he expected the levels of covered bonds of other UK issuers – which also have deals in euros – to be unaffected by Co-op’s problems, and that there is little risk of any others falling to even single-A in the medium term.

“Once more, the downgrade is mainly driven by the unsecured rating,” he added. “The cover pool quality hardly makes a difference.”