Fitch has put Banca Monte dei Paschi di Siena covered bonds on Rating Watch Positive because the Italian bank is seeking to convert its soft bullet obbligazioni bancarie garantite to a conditional pass-through structure, but said that the OBGs would probably not be rated above BBB+.

The Italian bank said on Wednesday that it is seeking bondholder approval to change the terms and conditions of its obbligazioni bancarie garantite (OBGs) to implement a conditional pass-through structure. A first bondholder meeting is due on 25 June and, unlike ABN Amro and Credit Suisse moves to convert outstanding covered bonds from hard to soft bullets, approval must be granted by covered bondholders overall so that the whole programme can be converted rather than being on an issue by issue basis.

MPS’s plan came amid rating pressure on the bank and its covered bonds. Fitch on 22 May cut the OBGs from A to BBB-, although they avoided being lowered to sub-investment grade after the rating agency improved the Discontinuity Cap (D-Cap) of the programme.

Fitch said yesterday that, although the switch is yet to be approved, it is the reason for the new rating action.

“The RWP reflects the upside scenario for the BBB- rating should BMPS restructure the OBG redemption profile to CPT,” it said. “In Fitch’s view, the proposed restructuring would reduce liquidity gaps and mitigate payment interruption risk for the OBG once recourse against the cover pool is enforced, as would be reflected in the minimal discontinuity assessment for liquidity gaps and systemic risk.”

However, while analysts had noted last week that Fitch granted as much as seven notches of uplift when UniCredit converted an OBG programme to conditional pass-through, the improvement in the rating of MPS’s OBGs will likely be limited to two notches, according to the rating agency.

“Fitch’s criteria allow for the agency to still apply a ‘weak-link’ analysis between its Discontinuity Cap components if the assessment of another component raises particular risk,” it said. “Fitch deems that some of the amendments to the programme documentation could limit the full rating uplift for a CPT structure and a D-Cap of 8 (minimal discontinuity risk) would be unlikely.

“In the agency’s opinion, the removal of certain guarantee enforcement events (i.e. breach of obligations and cessation of business) and a longer test grace period (five months from one month) result in a strong reliance on the issuer’s ability to make timely payments on the OBG until the recourse to the cover assets is enforced, as would be reflected in the alternative management component.”

Fitch said that while the OBGs’ rating will be upgraded from BBB-, “it is likely that the covered bonds would remain in the ‘BBB’ rating category due to the weakening of guarantee enforcement events and test grace period”.

It said that the BBB- rating will be affirmed should the amendments not be implemented.

Moody’s responded to the proposed conversion by saying that it will upgrade the OBGs from Baa3 on review for downgrade to Baa1 on review for upgrade, while DBRS has said it will assign the covered bonds an A (high) rating.