DBRS has for the first time decoupled the covered bond attachment point (CBAP) of a covered bond it rates from the senior unsecured rating of the respective issuer, on Friday confirming the ratings of Novo Banco CPT and soft bullet programmes after having cut the Portuguese bank from B to CCC (high).

The rating agency finalised an update to its European covered bond rating methodology in September by allowing covered bond attachments points (CBAP) to be notched up from senior unsecured ratings of issuers to reflect the introduction of the Bank Recovery & Resolution Directive (BRRD) in the EU. It noted that around the time of resolution the CBAP could decouple from the issuer rating.

Novo Banco is the “good bank” created in August 2014 out of Banco Espírito Santo (BES). On 29 December the Bank of Portugal announced a decision to transfer five senior bonds totalling Eu1.9bn from Novo Banco to the leftovers of BES, prompting several rating actions including that of DBRS.

DBRS on Friday affirmed the BBB rating of Novo Banco’s soft bullet covered bonds and the A rating of its conditional pass-through (CPT) programme, with a CBAP of BB (low).

“The downgrade of the long term rating of the issuer reflects DBRS’s view that the Bank of Portugal’s decision to transfer some of the issuer’s senior debt instruments to Banco Espírito Santo could have a further impact on investor sentiment and confidence in Novo Banco, as well as increasing reputational risk,” the rating agency said. “DBRS considers this could negatively affect the issuer’s senior debt and its probability of bearing losses.

“However, it is the opinion of DBRS that, due to the functions the issuer fulfils in the Portuguese economy, there is a greater probability that the covered bonds will remain in a going concern entity. Consequently the CBAP remains unchanged.”

Vito Natale, head of European covered bonds and surveillance at DBRS, said that this is the first instance of DBRS decoupling the CBAP.

DBRS is in the process of introducing new Preferential Obligations Ratings (PORs) for instruments that will apply to certain obligations and exposures of banks during bail-in, and it expects to use these as the basis for CBAPs.