Banco Popolare (BPIM) covered bonds are expected to be cut into junk territory by Fitch after the issuer yesterday (Thursday) gained approval to amend documentation so it can remain as account bank in a result that left many market participants confused given the downside for investors.

On 3 July BNP Paribas Securities Services (Milan Branch), the representative of the covered bondholders for Banco Popolare Società Cooperativa’s obbligazioni bancarie garantite (OBG) programme, announced that the Italian bank was proposing amendments to the documentation whereby eligibility criteria for certain roles in the programme would be amended, including that of account bank from requiring a minimum Fitch rating of BBB- to BB-. On 19 May Fitch had cut the issuer’s rating from BBB to BB and the proposed changes would allow Banco Popolare to continue as account bank for the programme, which would not have been possible under the existing documentation.

On 6 July, after the proposals were announced, Fitch said that its BBB+ rating of the OBGs would remain on Rating Watch Negative in light of the proposal to change the documentation and that if Banco Popolare continued to act as account bank the rating of the covered bonds would likely be downgraded to BB+, in line with Fitch’s counterparty criteria.

It was announced today (Friday) that, at an adjourned meeting yesterday – after a quorum was not reached at an initial meeting on 29 July – the proposed amendments were approved by covered bondholders representing 97.16% of votes cast. Eight covered bonds totalling Eu8.45bn were listed in the documentation, four of these having been benchmarks.

While the quorum for the initial meeting was 50%, it is understood from the programme prospectus that there was no minimum attendance threshold for the adjourned meeting. The required rate for approval was 75%.

Many market participants were taken aback by the approval of the amendments, arguing that the proposal offered no benefits to investors and that there was no fee on offer for approval, and they struggled to understand who might have voted in favour.

“I haven’t spoken to a single investor that was in favour of it,” said a covered bond analyst, who was echoed by others. “There is no positive in it at all.

“All your bonds are junk and you haven’t been paid for it, either. Everyone has been left scratching their heads.”

According to Michael Spies, covered bond and SSA strategist at Citi, the representative of the covered bondholders said that the 97.16% approval was achieved without Banco Popolare joining the quorum as holder of its own covered bonds, apparently ruling out one possible explanation that had been floated for how the necessary votes in favour were achieved. Another market participant said he had been told that participation in the adjourned meeting was “very low”. Banco Popolare did not respond to enquiries from The CBR.

Banco Popolare OBGs are rated A2 by Moody’s.

“As many investors have to rely on the lower of two ratings in case of a split rating, we expect BPIM covered bond spreads to swaps to widen due to forced selling, while a downgrade would also have negative effects on the risk weight and the LCR categorisation,” said Spies. “It should, however, be noted that the ECB will continue to buy BPIM covered bonds, given the Eurosystem’s best rating approach.

“In time we believe investors that are allowed to hold sub-investment grade covered bonds should consider BPIM covered bonds,” he added, “as the overall credit quality of the covered bond programme is unchanged.”

Several market participants said that while proper processes had been followed, the exercise felt unsatisfactory, with many analysts and investors not having been aware of it at first and also found it difficult to source information.

“It was one of the least transparent processes I’ve come across in a long time,” said one covered bond analyst.

Another said that the exercise should prove a lesson for investors.

“One could argue that it is not completely the issuer’s fault,” he said. “Investors had three weeks before the first meeting and another two before the adjourned meeting to study the proposals and vote.

“My conclusion would be: investors cannot afford to be sedated by ECB purchases.”

He also noted that it is an “interesting reminder” that investors should check what the terms of such programme amendment processes are – in terms of quorums and approval rates required – before buying into covered bond issues in the first place.