Moody’s downgraded The Co-Operative Bank covered bonds from Baa1 to Baa3 yesterday (Thursday), but a surprise improvement in the Moorland programme’s TPI staved off an expected fall to junk. Fitch could be next to move after it downgraded the UK bank.

A downgrade into sub-investment grade by Moody’s had been forecast by some analysts on Tuesday when Co-Op was cut from Ba3 to Caa1, with a programme Timely Payment Indicator (TPI) of “probable” and the new lower rating implying a covered bond rating in the low Ba or single-B area, according to RBS analysts.

However, Moody’s raised the programme’s TPI from “probable” to “probable-high”, resulting in the Baa3 covered bond rating. The rating agency cited three factors in the change of TPI: the high credit strength indicated by its expected loss analysis, consistent with a single-A rating; a high level of overcollateralisation, with 29% committed OC and total OC of over 180% at the last reporting date; and the time remaining until the next principal payment – Moody’s said it understands this to be eight years away and Co-Op to have no plans to issue further covered bonds in the near term.

RBS analysts said that the TPI move was unexpected.

“We were surprised that the TPI was raised one level against the backdrop of a deterioration at the bank level (as evidenced by the senior unsecured rating downgrade) and no observable changes in the structure of the cover pool or the outstanding covered bonds respectively since the last rating decision in May,” they said.

Fitch downgraded the issuer from BBB- to BB- yesterday and is now expected to downgrade Co-Op’s covered bonds. According to the RBS analysts, all else remaining equal, the covered bonds should be lowered three notches, too.

“Fitch currently rates the covered bonds at AA- with a negative outlook and takes into account publicly or contractually committed overcollateralisation as opposed to voluntary OC for issuers rated F2 or higher,” they said.