Moody’s downgraded mortgage covered bonds issued by Banca Monte dei Paschi di Siena to below investment grade yesterday (Thursday), lowering their rating from Baa1 to Ba1 following a downgrade of the issuer.

Banca MPS's Palazzo Salimbeni

Banca Monte dei Paschi di Siena (MPS) was downgraded from Ba2 to B2 yesterday. In combination with a Timely Payment Indicator of “improbable”, this constrains the covered bonds’ rating at Ba1 under Moody’s methodology.

Analysts said that MPS covered bonds’ spreads are likely to widen as a result of the downgrade, but highlight that MPS OBGs are still rated A by Fitch, meaning that the bonds are still eligible for ECB repo and the iBoxx index.

The driver of the issuer downgrade was a lowering of MPS’s standalone credit profile from caa1 to a caa3 that reflected increasing pressure on the bank’s profitability – as MPS reported a net loss of Eu3.2bn in 2012 –asset quality and capitalisation, said the rating agency.

The downgrade of MPS was also caused by a lowering of the uplift over the issuer’s standalone profile for external support from five notches to four. Moody’s said that the likelihood of external support being available for the bank has decreased given Italy’s increasing debt-to-GDP ratio and growing political pressure.

Moody’s also put MPS’s new rating of B2 on negative outlook. Analysts noted that as there is no Timely Payment Indicator Leeway between the issuer rating and the covered bond rating, any further action on the issuer would have an impact on the OBGs rating.