DBRS downgraded Banco Espírito Santo (BES) covered bonds from A (low) to BBB (low) yesterday (Tuesday) before discontinuing the rating, with the obrigações hipotecarias (OHs) being transferred to bridge bank Novo Banco and concomitantly assigned a BBB (low) rating.

The rating actions come after the Bank of Portugal on Sunday announced that BES would be turned into a bad bank and its good assets transferred to new entity Novo Banco. (See previous article for more.)

DBRS had downgraded BES from BBB (low) to BB (low) on Friday and yesterday transferred this new rating to Novo Banco. The rating had been under review with negative implications, but this was changed to under review with developing implications, the same status assigned to the covered bonds’ rating.

The rating agency said that the covered bonds’ BBB (low) rating and review thereof are based on: the rating of Novo Banco; a DBRS Legal & Structuring Framework (LSF) assessment of “adequate”; a cover pool credit assessment of BB (high) and issuer voluntary overcollateralisation (OC) of 32%; and the issuer’s capabilities with respect to origination of cover pool assets and servicing. It noted that, as of June 2014, OC stood at 36.13%.

DBRS said that, all else being equal, should the issuer be downgraded by one notch to B (high), the covered bonds would be downgraded by one notch to BB (high).