DBRS, Moody’s and S&P took negative rating actions on Portugal’s Banco Espírito Santo on Friday, with Moody’s and S&P cutting the bank to B3 and B+, respectively, and DBRS placing the issuer on negative review. Analysts expect a Moody’s downgrade of BES’s covered bonds to sub-investment grade.

Banco Espírito Santo mortgage covered bonds are rated by DBRS, A (low), and Moody’s, Baa2, on review for downgrade. The issuer is said to have one obrigações hipotecarias (OH) benchmark outstanding, a February 2015 issue.

Uncertainty about the financial position of entities within the Espírito Santo Group has led rating agencies to take negative rating actions on BES, most recently on Friday. Standard & Poor’s downgraded the issuer from BB- to B+ and placed the rating on CreditWatch negative, DBRS placed BBB (low) ratings of BES under review with negative implications, and Moody’s cut BES by three notches, from Ba3 to B3.

Moody’s rating action on the issuer reflects the rating agency’s concerns about BES’s creditworthiness, which it said “are heightened by the lack of transparency on the ring-fencing of BES against any troubles emerging from its holding company Espírito Santo Financial Group (EFSG) or any other group entity”.

Moody’s assigns BES covered bonds a Timely Payment Indicator (TPI) of “improbable” and does not grant any uplift from the bank’s senior unsecured rating for the covered bond anchor. There was zero TPI leeway at the previous Ba3 issuer rating, and analysts expect a downgrade of the covered bonds to below investment grade. One said they could be cut to between Ba2 and B1, while another said they will probably be downgraded to Ba2 but that there is a chance of a Ba1 rating if Moody’s decides to use the deposit rating of BES instead of its senior unsecured rating, as it has done with the mortgage Asset Covered Security (ACS) programme of Bank of Ireland. Moody’s downgraded BES’s deposit rating to B2 on Friday, on review for downgrade.

“Either way, we are very likely talking about non-investment grade ratings going forward,” said the analyst.

The regulatory impact of such a downgrade would be relatively minor given that BES’s covered bonds were already at a low rating by Moody’s and/or have a higher rating from DBRS, according to the analyst. However, a cut of the covered bonds to sub-investment grade would lead to an increase in their risk weight from 20% to 50% in the standardised approach.