Fitch upgraded mortgage covered bonds issued by Portugal’s BPI and Montepio yesterday (Wednesday) after a full review of the programmes, and notably a reduction in breakeven OC levels due to lower refinancing spread assumptions for Portuguese residential mortgages.

The rating agency upgraded the ratings of BPI’s obrigações hipotecarias (OHs) from BBB to BBB+ and those of Caixa Económica Montepio Geral from BBB- to BBB. It also affirmed the ratings of OHs issued by Banco Comercial Português (BCP) and Caixa Geral de Depósitos, at BBB- and BBB, respectively. Fitch separately affirmed the rating of Banco Santander Totta OHs, at BBB.

The covered bond ratings are all on negative outlook to reflect the status of the issuer ratings and a negative outlook on the Portuguese residential mortgage market.

“The rating actions follow a full review of the programmes, and notably the revision of the breakeven level of overcollateralisation (OC) for a given rating, applying the agency’s updated covered bond master criteria and assumptions for assessing credit risk of Portuguese residential mortgage loans pools,” said Fitch. “In particular, Fitch has modelled recovery prospects for covered bonds subject to time subordination and to full discontinuity risk upon an issuer’s event of default.”

Fitch lowered the stressed refinancing spread assumptions used to calculate the net present value of future cashflows from Portuguese residential mortgages.

“The revised assumptions reflect the declining trend observed on spreads from secondary market Portuguese residential mortgage-backed securities and government bonds over the past three to five years,” it said, “but also takes into account the political instability and macroeconomic uncertainties surrounding the Portuguese economy.”

The upgrade of BPI’s OHs takes into account a reduction in the breakeven OC level in a BBB+ stress scenario from 35% to 32.5%, while in the case of Montepio the relevant breakeven OC decreased from 35% to 26% for a BBB scenario.