Recent issuance of floating rate covered bonds by Italy’s UniCredit reduces interest rate risk in the issuer’s OBG programme, said Moody’s yesterday (Wednesday), also noting that increased OC committed to by Banca Carige in December for its commercial backed OBGs reduces refinancing risk.

On 15 January UniCredit SpA sold a Eu1.5bn dual tranche obbligazioni bancarie garantite (OBG) transaction that included a Eu500m three year floating rate note (FRN). The FRN is thought to be the first publicly sold benchmark-sized covered bond in floating rate format.

Moody’s yesterday said that the OBG FRN improves the natural matching of interest rate cashflows between the cover assets and the covered bonds given that the Italian mortgage market comprises fixed and floating rate loans, with the latter being predominant.

The reduced cash flow mismatch risk in turn reduces the exposure to interest rate swap counterparty risk, according to the rating agency, and with UniCredit itself being the swap counterparty the issuance of floating rate covered bonds will reduce the programme’s credit linkage to the issuer.

However, a material degree of interest rate mismatches remains in UniCredit’s programme, with the recent Eu500m FRN representing 3.4% of overall outstanding covered bond volume, according to Moody’s.

“Because the majority of its covered bonds still have fixed rates, the benefit of floating-rate issuances will depend on UniCredit’s future funding strategy,” it said.

Meanwhile, structural changes made by Banca Carige to its commercial backed OBG programme (Carige 2) in December are credit positive, said Moody’s.

The changes were announced by the issuer on 19 December and include an increase in committed OC from 10.5% to 32%, done to decrease the probability of a breach of the amortisation test and thus avoid an early acceleration of the bonds, according to the rating agency.

“Combined with the existing 30-year maturity extension on the bonds, this measure is credit positive as it reduces the refinancing risk associated with the covered bonds in the event of issuer default and improves the likelihood of timely payments,” said Moody’s.

It raised the Timely Payment Indicator (TPI) assigned to the programme from Improbable to Probable-High. Carige’s commercial backed programme is thought to have been used for retained issuance only.

Moody’s on 12 December downgraded residential mortgage backed OBGs issued by Carige following a cut of the issuer rating the day before. The OBGs were cut from Baa1 to Ba1, with the issuer’s deposit rating having been lowered from B2 to B3. The rating agency at the time left the commercial backed OBG rating on review for downgrade as the issuer was in the process of finalising structural changes to the programme. (See here for previous coverage.)

“We would expect to conclude this review pending the conclusion of our methodology on the anchor point for default probability,” said the rating agency yesterday.

Moody’s has consulted on proposed changes to its covered bond rating methodology to take into account the EU bank bail-in framework, which introduces the possibility of writedowns on senior unsecured debt but exempts covered bonds from bail-in.