Moody’s yesterday (Wednesday) placed on review for downgrade Aaa rated covered bonds issued by Royal Bank of Scotland (RBS), mirroring a rating action on the issuer.

RBS banking hall, Edinburgh

A recent trading update from the UK bank indicated its end-of-year 2013 results will be affected by additional provisions for pending litigations and conduct-related costs, as a result of which the bank will report a weaker than anticipated regulatory capital position.

This prompted Moody’s to yesterday place RBS’s rating (A3) on review for downgrade.

Moody’s has assigned the bank’s covered bond programme a Timely Payment Indicator (TPI) of “probable”. The TPI leeway is zero.

“Based on the current TPI of ‘probable’, if RBS’s senior unsecured long term rating of A3 is downgraded by one notch, the covered bond ratings would also be downgraded,” said Moody’s.

The overcollateralisation (OC) in the cover pool is 60.9%, 34.5% of which is provided by RBS on a “committed basis”, according to Moody’s. With 33% being the minimum OC level consistent with a Aaa rating, the rating agency is not relying on “uncommitted” OC in its expected loss analysis, it said.

The review of RBS’s covered bond rating will take into account the outcome of the rating agency’s proposal to adjust the anchor point for covered bond ratings given the European Union’s bail-in framework, the Bank Resolution & Recovery Directive (BRRD).