Fitch downgraded Banco Santander Totta mortgage covered bonds from BBB+ to BBB on Friday because the overcollateralisation level publicly committed to by the issuer decreased from 30% to 15%.

The rating agency said that the breakeven overcollateralisation (OC) level for the BBB rating is 5.26%, which is the legal minimum OC level, and allows for only a one notch uplift to be granted for recoveries achieved in excess of 51%. Totta is rated BBB- by Fitch.

It said that it has disregarded the risk of time subordination in its analysis and considered a high likelihood of the obrigações hipotecarias being accelerated upon an issuer default, because 86% of the covered bonds are retained by Totta.

Under Portugal’s covered bond legal framework, in the event of a winding up and liquidation of the issuer, covered bondholders can opt for the cross-acceleration of the outstanding bonds if approved by two-thirds of the bondholders.

The rating agency said that the liability profile has changed since April as a result of the redemption of Eu1bn of publicly placed covered bonds and issuance of Eu2.25bn of retained covered bonds. It said that it has assumed pro-rata allocation of funds from the cover pool to make payments under the outstanding covered bonds, and that this resulted in a lower level of break-even OC for the rating.

Totta has one benchmark euro covered bond left, according to ING Bank covered bond strategists, a Eu1bn 3.25% trade maturing in October 2014, and Eu6.13bn of retained covered bonds.

Fitch said that if the composition of retained and publicly placed covered bonds changes and the issuer loses its majority vote, the rating agency will review the BBB breakeven OC and rating of the programme.

The bonds are on negative outlook to reflect the negative outlook on Totta’s issuer default rating and that for Portuguese residential mortgage loans.