Moody’s cut guaranteed public sector covered bonds issued by Austria’s Hypo Alpe Adria from Aa2 to A1 yesterday (Tuesday) after downgrading the nationalised bank’s rating to sub-investment grade to reflect the rating agency’s view of a higher risk of losses being imposed on senior unsecured bondholders.

The rating agency downgraded Hypo Alpe Adria (HAA) Bank International’s senior unsecured rating from Baa2 to Ba1 on Friday, reflecting its belief that there is a “heightened risk to all bondholders arising from the Austrian government’s apparent willingness to impose losses on creditors notwithstanding the existence of a statutory guarantee”. The Austrian government has stated that it will require subordinated debt holders to participate in the cost of winding down the bank, which has a deficiency guarantee from the state of Carinthia.

“If losses were to be imposed on guaranteed subordinated debt, this would set a precedent that would significantly diminish the value of the guarantee for senior debt,” said Moody’s.

Under Moody’s methodology, the anchor point for rating Hypo Alpe Adria’s guaranteed covered bonds is the bank’s guaranteed senior unsecured rating. The rating agency assigns a Timely Payment Indicator (TPI) of “high” to Hypo Alpe Adria. As a result there is limited TPI leeway for the covered bonds, which means that any downgrade of the covered bond anchor point may lead to a downgrade of the covered bond rating.

Bernd Volk, head of covered bond research at Deutsche Bank, said that the downgrade of the covered bonds is “purely technical”, the result of the rating action on the senior unsecured rating, which in his view appears harsh.

“Given that there was no discussion regarding burden-sharing of unsecured grandfathered bondholders, the downgrade of unsecured bonds to sub-investment grade was extremely aggressive, even before yesterday’s statement of the Austrian finance ministry that there will be no bail-in of unsecured creditors,” he said.

A finance ministry official is reported to have yesterday confirmed plans to impose losses on subordinated debt holders but not on unsecured bondholders.

Unguaranteed public sector covered bonds issued by Hypo Alpe Adria remain rated A3, on review direction uncertain. Moody’s believes that the covered bonds will form part of the wind-down entity for Hypo Alpe Adria, but said that the A3 rating also reflects “the implied risk to bondholders if alternative solutions are explored”.