Fitch and Moody’s upgraded the mortgage covered bonds of Banca MPS yesterday (Wednesday), completing a series of rating actions that had been expected after the issuer gained bondholders’ consent to convert its outstanding benchmarks to conditional pass-throughs (CPTs).

Banca Monte dei Paschi di Siena (Banca MPS) received 97.53% approval to switch its outstanding covered bonds to CPT format at a bondholder meeting on 25 June.

When announcing the plan, Banca MPS said the conversion would enable it to obtain a covered bond rating from DBRS, which had assigned a provisional rating of A (high) for a CPT structure, and would allow for an improvement to the delinkage of the rating of the covered bonds to the rating of the issuer. This came after the programme was spared a cut to sub-investment grade by Fitch only after the rating agency improved Italian Discontinuity Caps (D-Caps).

Having placed the obbligazioni bancarie garantites (OBGs) on Rating Watch Positive upon Banca MPS’s solicitation of consent, and stating that the rating would likely be lifted by up to two notches, Fitch yesterday upgraded the bonds by one notch from BBB- to BBB because of a lowering of the D-Cap.

Fitch revised from high to minimal discontinuity the discontinuity risk assessment related to the liquidity gap and systemic risk component, which previously constituted the weak link for the programme’s D-Cap.

A new D-Cap of 3 (“moderate high”) from 2 (“high”) reflects Fitch’s “moderate high” risk assessment related to the systemic alternative management component, the rating agency said, as this now constitutes the weak link among the discontinuity risk components analysed.

“The agency believes that the removal of certain guarantee enforcement events and a longer five month test grace period result in a strong reliance on the issuer’s ability to service payments due on the OBG and could pose risks on a timely enforcement of the cover pool as a source of payments,” Fitch said.

Moody’s later yesterday raised its rating on the OBGs by four notches from Baa3 to A2. The rating agency said the CPT feature significantly reduces the covered bonds’ default probability, leading it to raise the programme’s Timely Payment Indicator (TPI) from “probable” to “very high”.

The TPI had previously constrained the programme’s rating at Baa3, with the “very high” TPI now raising the cap to A2. Based on 20.5% of committed overcollateralisation in the programme, the expected loss analysis does not further restrict the rating beyond the A2 level, Moody’s said.

DBRS finalised its provisional rating of A (high), under review with negative implications, on Tuesday. It said the rating reflected a LSF (legal and structuring framework) assessment of the programme of “very strong”.

DBRS said the rating is under review with negative implications because the issuer’s rating of BBB (low) is also under review with negative implications.

“Together with the DBRS rating of A (high), the OBGs can now be LCR Level 2A assets and have a risk weight of 20%,” said Florian Eichert, senior covered bond and SSA analyst at Crédit Agricole, after Moody’s upgrade. “Fitch’s BBB is the lowest rating, but not relevant for regulatory purposes.”