A UniCredit Italian mortgage covered bond programme could be cut from AA to A after Standard & Poor’s downgraded Italy from BBB to BBB- on Friday, with the maximum rating of mortgage covered bonds from the country expected to fall to A.

According to analysts, S&P only rates two covered bond programmes from the country, the UniCredit mortgage covered bond programme and Mediobanca’s.

Under recent changes to S&P’s methodology, the rating of Italian covered bonds (obbligazioni bancarie garantite, OBGs) can be up to four notches above the rating of the sovereign because they are soft bullets, resulting in a ceiling of A, according to analysts. This is one notch more than the three notches S&P grants for Spanish programmes it rates, which do not have the soft bullet refinancing risk mitigants.

Mediobanca’s covered bonds are rated A, and are therefore expected to stay at that level, said analysts, but UniCredit’s could be cut from AA to A, with both the downgrade of Italy and S&P’s revised methodology being applied for the first time to the covered bonds.

A bank analyst meanwhile said that UniCredit, as well as Intesa Sanpaolo, should be downgraded from BBB to BBB-, based on S&P’s methodology, although a covered bond analyst said that this would not have an impact on the covered bonds’ rating.

Florian Eichert, senior covered bond analyst at Crédit Agricole, noted that a downgrade from AA to A of UniCredit’s OBGs would result in them moving from LCR Level 1B to 2A, their risk weight under a standardised approach rising from 10% to 20%, and the loss of preferential spread capital charge treatment under Solvency II. He noted that the covered bonds are rated A2/AA- by Moody’s and Fitch.

UniCredit last month revealed that it plans to begin issuing publicly off a different mortgage covered bond programme that had previously only been used for retained issuance but was recently converted into a conditional pass-through structure. On 13 November that programme was assigned a AA rating by Fitch.