Standard & Poor’s cut Banco Santander Totta mortgage covered bonds to sub-investment grade yesterday (Wednesday) because of a “substantial” reduction in overcollateralisation following a Eu750m issue on Friday.

The rating agency downgraded the obrigações hipotecarias from BBB to BB+. The outlook is negative, in line with that on the Issuer Credit Rating (ICR) of BB.

The rating action concludes a negative review that S&P initiated on 15 July because of concerns about the Portuguese bank’s willingness to maintain the then prevailing level of overcollateralisation in the programme.

On Friday (26 July), Totta issued Eu750m of covered bonds, which, with only a small increase in the size of the cover pool, meant that overcollateralisation shrunk from 31.37% to 18.62%, according to S&P.

“Following the issuance of series 10, the available credit enhancement in the programme is commensurate with only one notch uplift above the ICR,” said the rating agency.

Totta’s covered bonds are rated by four rating agencies. Fitch cut them from BBB+ to BBB on Friday due to a decline in the OC level the issuer is publicly committing to (see here), while Moody’s rates them Baa3 and DBRS A (Low)

A covered bond analyst suggested that the Eu750m issue of last Friday could be a response to higher haircuts for retained covered bonds that the European Central Bank announced on 18 July.

“For A- and better rated covered bonds, issuers have to accept an additional 8% haircut,” he said. “The Eu750m issue by Totta could very well be exactly the additional central bank collateral to offset the higher haircuts.”

Totta only has one publicly placed benchmark euro covered bond outstanding, according to analysts, a Eu1bn 3.25% deal that matures in October 2014. The balance of its outstanding issuance is Eu6.4bn of covered bonds that have probably been retained, they said.

Totta did not respond to enquiries by the time of publication.