Banca MPS will become the first issuer to convert outstanding benchmark covered bonds to conditional pass-throughs (CPTs) after gaining consent for the switch from 97.53% of bondholders at a meeting yesterday (Thursday), in a move expected to earn two-notch rating upgrades.

Banca Monte dei Paschi di Siena (Banca MPS) launched the exercise to convert its outstanding covered bonds from soft bullets to CPTs on 3 June, with JP Morgan, RBS and UniCredit as solicitation agents.

The switch was yesterday approved at the first bondholder meeting after the 66% quorum level was met and 97.53% of bondholders gave their consent.

Unlike in similar moves by ABN Amro and Credit Suisse to convert outstanding covered bonds from hard to soft bullets, Banca MPS required approval from bondholders overall so the whole programme could be converted, rather than being converted on an issue by issue basis.

The issuer said the implementation date for the proposed changes will be as soon as practicably possible and that relevant consent fees will be paid on or before 9 July.

Banca MPS announced its plan after its obbligazioni bancarie garantite (OBGs) were on 22 May downgraded from A to BBB-, only being spared an expected cut to sub-investment grade by Fitch after the rating agency improved Italian Discontinuity Caps.

Banca MPS said the conversion would allow it to obtain a covered bond rating from DBRS, which assigned a provisional rating of A (high) for a conditional pass-through structure, and would “allow for the reduction of market risk effect on the collateral and a corresponding improvement on the assessment of the de-linkage of the rating of the covered bonds to the rating of the issuer”.

Moody’s said on 3 June that the covered bonds’ rating could be upgraded from Baa3 on review for downgrade to Baa1 on review for upgrade as the conversion would lead it to raise its Timely Payment Indicator (TPI) assessment for the programme from “probable” to “very high”. The rating agency said the review for upgrade was due to the pending assignment of a Counterparty Risk (CR) assessment to the issuer, which would likely raise its covered bond anchor. After assigning a CR assessment of B2 on Tuesday, raising the anchor by two notches, Moody’s said it would only reflect on the impact of the conversion after it has become effective.

Fitch meanwhile put Banca MPS OBGs on Rating Watch Positive after the proposal was announced. Although some analysts had highlighted that Fitch granted UniCredit several notches of extra uplift when it converted a programme to a CPT structure, the rating agency said an upgrade relating to Banca MPS’s conversion would likely be at most two notches, citing the weakening of guarantee enforcement events and a longer test grace period in the terms of the conversion as limiting the potential upgrade.