Moody’s downgraded Clydesdale Bank Regulated Covered Bonds from Aaa to Aa1 yesterday (Tuesday), following a review that was initiated after the rating agency downgraded the UK bank’s deposit rating in August.

Clydesdale Bank, which is a subsidiary of National Bank of Australia, has two covered bond programmes, one that is registered under the UK Regulated Covered Bond (RCB) framework and one that is used for retained issuance. Both programmes were placed on review for downgrade in September after Moody’s had downgraded the bank’s deposit rating from A2 to Baa2.

The rating agency at that time stated that it would take into account structural changes proposed by Clydesdale Bank. However, Moody’s said yesterday that the proposed changes are not sufficient to mitigate the higher probability that Clydesdale will cease making payments under the RCB programme.

The rating agency announced an update to its methodology on 12 March, which takes into consideration bank bail-in. Under this new methodology, the anchor point for RCBs issued by Clydesdale is the deposit rating plus one notch, with this one notch of uplift given because Clydesdale has between 5% and 10% of bail-in-able debt.

The RCBs are assigned a Timely Payment Indicator (TPI) of “probable”.

“Given the deposit rating at Baa2, the covered bond anchor point at deposit rating plus one notch, and the TPI assigned to this programme, Moody’s TPI framework constrains the ratings of Clydesdale’s covered bonds at Aa1,” the rating agency said.