Fitch downgraded Banco Popolare mortgage covered bonds from BBB+ to BB+ yesterday (Tuesday) in a move that was expected after the Italian issuer gained approval to make amendments to the programme that it proposed after being downgraded by the rating agency in May.

Fitch put the obbligazioni bancarie garantite on Rating Watch Negative after cutting Banco Popolare from BBB to BB and maintained the RWN after the amendments were proposed. These relate to provisions applicable to the account bank and back-up servicer appointment, the repayment of a subordinated loan, and a trigger for delivering certain solvency certificates, the rating agency noted yesterday, after the amendments were made on Friday.

It said that an asset percentage of 80.7% theoretically allows the covered bonds to achieve a rating of BBB+, but that in its view provisions that apply to Banco Popolare as Italian account bank combined with the magnitude of exposure towards this counterparty (Eu1.2bn as of end-August) prevent a recovery uplift above the BB+ covered bond rating floor as represented by the BB issuer rating adjusted by an IDR uplift of 1 under Fitch’s methodology.

The rating agency also revised the systemic alternative management component of the programme’s Discontinuity Cap (D-Cap) from “moderate high” to “high”.

Given that the downgrade was expected to occur on the back of Banco Popolare’s plans, market participants were surprised that the Italian bank gained approval for the move.