Banca MPS is seeking consent from investors to convert its covered bonds from soft bullets to conditional pass-throughs (CPTs), in a move aimed at bolstering the ratings of the OBGs – which recently came close to being junked – that bankers said benefits both issuer and investors.

Announcing the move yesterday (Wednesday), Banca Monte dei Paschi di Siena (Banca MPS) said the conversion would allow it to obtain a rating of its OBGs (obbligazioni bancarie garantite) from DBRS, with the rating agency having yesterday assigned a provisional rating of A (high) based on a conditional pass-through structure. The OBGs have ratings from Moody’s and Fitch of Baa3 on review for downgrade and BBB-, respectively, with the latter having been cut from A on 22 May but avoided being lowered to sub-investment grade thanks to an improvement in its Discontinuity Cap (D-Cap).

MPS also said the implementation of the CPT mechanism, “in accordance with the most recent criteria of the rating agencies (including DBRS), 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”.

Assigning the provisional A (high) rating, under review with negative implications, DBRS said that this takes into account a LSF (legal and structuring framework) assessment of the programme of “very strong”. The rating agency said this reflects, among other factors, its view of “the conditional pass-through nature of the structure whereby, following a guarantor enforcement notice, the series which have not been repaid on their expected maturity date become pass through with (a) the maturity extended to a date which, in DBRS’s stressed simulations, allow all loans in the cover pool to amortise fully and related recoveries to be collected and (b) proceeds from the cover pool allocated pro rata and pari passu to the series of OBG which are pass-through”.

Moody’s yesterday said the conversion would lead it to raise its Timely Payment Indicator (TPI) assessment from “probable” to “very high”, meaning the covered bonds’ rating could be upgraded from Baa3 on review for downgrade to Baa1 on review for upgrade.

Fitch has not commented on the proposals, but Florian Eichert, heard of covered bond and SSA research at Crédit Agricole, said the rating agency is one of the most positive on CPT structures, giving, for example, a UniCredit CPT programme seven notches of uplift compared with its soft bullet programme.

“From the issuer’s standpoint, this is a very good move,” said an analyst. “If they get approval for this they can remain ECB eligible, meaning they can issue with much better spreads, and move a few notches further from non-investment grade.”

The first bondholder meeting will be held at the issuer’s offices on 25 June. If a quorum of 66% is not present, a second meeting will be held on 10 July. The pass rate for the meetings is understood to be 75%.

Bondholders that submit their votes by an early consent fee deadline of 16 June will receive a consent fee of 10bp, while votes received later but before an expiration deadline of 23 June will receive a consent fee of 5bp.

Bankers said they expect Banca MPS to receive sufficient support for the proposed changes.

“From the investor’s standpoint, the loss of the investment grade would hurt them on the index side, and also threaten the bonds’ ECB eligibility,” said one. “That, coupled with the 10bp fee on offer, should prove a sufficient incentive.”

The banker noted that in consent consultations held by ABN Amro and Credit Suisse, to convert hard bullet structures to soft bullets, investors had been supportive.

“Here you essentially have the same thing,” he said. “You’re talking about a much longer extension period, but fundamentally it’s a question of what would you like to happen if the bank defaults. Would you like the collateral be sold as soon as possible, or sold for a price that doesn’t result in you losing money?”

An analyst agreed, arguing that the case was more convincing for investors in Banca MPS OBGs to accept the proposals than in previous consultations.

“We had ABN and Credit Suisse go from hard bullet to soft bullet when you can argue that the added benefit for investors in both conversions was next to non-existent, and still they passed,” he said.

“Experience of these cases tells you that issuers get their way, and here it is beneficial for both parties. I’m pretty sure it will go through.”

If the proposed conversion is carried out, Banca MPS would become the first issuer to convert outstanding benchmark covered bonds to the CPT structure.

RBS, JP Morgan and UniCredit are the solicitation agents.