Moody’s downgraded Co-operative Bank’s senior unsecured debt and deposit ratings from Caa1 to Caa2 yesterday (Wednesday), reflecting its view that the bank is less likely than before to receive systemic support from the UK authorities in the event that additional capital is required.

The rating agency has maintained a negative outlook on the ratings and affirmed the bank’s standalone financial strength rating (BFSR) at E, with a stable outlook.

Moody’s said its decision reflects its opinion that there is a “much reduced” likelihood of systemic support from the UK government in the event that additional capital is required for Co-op Bank, as the bank’s ongoing deleveraging process is “leading to a smaller and less systemically important financial institution”. It added that it believes any further capital requirements would need to be raised either from existing shareholders or in the market.

The rating agency considers that the bank continues to face “significant challenges to re-establish a sustainable business” despite plans for an imminent capital raise of £400m (Eu486m) that the bank has announced to maintain its core equity tier 1 ratio above 7%. The standalone ratings assigned to the UK issuer – a BSFR of E and equivalent baseline credit assessment of ca – reflect these challenges, according to Moody’s.

Under its methodology, the issuer’s senior debt and deposit ratings benefit from two notches of uplift from the standalone rating of ca to reflect the cushion for senior creditors provided by the planned additional capital raise and outstanding subordinated bonds. The Caa2 ratings also reflect Moody’s expectation of regulatory forbearance from the Prudential Regulation Authority, giving the bank several years to ensure that it can again meet regulatory capital requirements.

Moody’s currently rates Co-op Bank’s covered bonds at Baa3, and assigns them a Timely Payment Indicator of “probable”.