Moody’s raised the Portuguese country ceiling to A3 as part of an upgrade of the sovereign on Friday, a move that analysts expect to lead to an upgrade of Totta covered bonds and one said should support a decoupling from BES in the obrigações hipotecarias spread segment.

Moody’s upgraded Portugal from Ba2 to Ba1, concluding a review for upgrade that was initiated in early May. The rating is on stable outlook. The rating agency also raised the Portuguese sovereign risk ceiling from Baa1 to A3, saying this reflects the country’s reduced economic, legal and political risks.

Covered bond analysts flagged a likely upgrade of Banco Santander Totta mortgage covered bonds as the most direct consequence of the sovereign rating action for Portuguese covered bonds.

Totta’s obrigações hipotecarias (OH) are rated Baa1, the previous Portuguese country ceiling by Moody’s, but could be rated higher based on the combination of the issuer’s senior unsecured rating (Ba1) and a Timely Payment Indicator (TPI) of Improbable, according to analysts. These two elements could allow the covered bonds to be rated up to A3, which is the rating to which analysts expect Totta’s OH to be lifted to.

Upgrades of other Portuguese covered bond programmes are also possible, noted one, but will depend on issuer ratings being lifted. This is a reasonable assumption to make in the case of government-owned Caixa Geral de Depósitos, said the analyst.

Jan King, senior covered bond analyst at Royal Bank of Scotland, flagged the possibility of positive covered bond spread effects from the sovereign upgrade.

“Last Friday’s upgrade should help ease some of the nervousness that was reflected in the spread widening of Portuguese covered bonds over the past two to three weeks as a result of the situation involving BES,” he said, “and it should support a decoupling of OH spreads from BES, although the situation remains uncertain.

“The relatively small size of the Portuguese covered bond segment and consequently the small size of the “exit door” have also increased the susceptibility of Portuguese covered bonds to these distinctive events.”

Uncertainty about the financial position of entities in Grupo Espírito Santo, of which covered bond issuer Banco Espiríto Santo (BES) is a part, has put Portuguese government and bank debt under pressure in recent weeks. Moody’s on Friday said that it does not expect the prevailing uncertainties surrounding BES to have a material impact on the government’s credit profile.

According to King, the sovereign rating action also raises the prospect of Moody’s raising the TPI it assigns Portuguese covered bonds, a move that “seems to be a matter of time”, but not yet imminent.

“The TPI for the Irish Mortgage ACS were raised from Improbable to Probable only after Ireland’s upgrade back into investment-grade territory in January,” he said. “For cédulas, the respective TPI upgrade happened in December last year, after the outlook of the then Baa3 rating was raised from negative to stable. A similar rationale was behind the TPI upgrade of the Italian OBGs to Probable back in February this year.”

However, he said he would not rule out Moody’s accelerating the pace of its positive rating trend and acting on Portuguese covered bonds based on the observed positive dynamics, noting that the sovereign’s profile is only one component of TPIs.