Montepio is seeking consent from investors to convert two soft bullet covered bonds to conditional pass-throughs (CPTs), in a move that could result in an upgrade of the Portuguese bank’s issuance, which is now triple-B, although the exercise will unusually offer no fee to bondholders.

Caixa Económica Montepio Geral noted its intention to convert its covered bonds to a CPT structure when announcing its results on 18 March.

On Wednesday it announced bondholder meetings for the holders of the two outstanding obrigações hipotecárias (OH), which are FRNs, to seek approval for their conversion from soft bullets to a CPT structure. As of the end of April, Montepio had one other OH outstanding, which is listed as a private placement by the issuer.

The Portuguese issuer added it has discussed the proposed changes with Fitch, Moody’s and DBRS.

“It is the issuer’s expectation, based on the issuer’s understanding of the relevant criteria published by the rating agencies, that the proposed changes will be ratings positive,” it said.

The bonds targeted in the consent solicitation are an Eu1bn December 2016 issue (PTCMKTOE0007) and a Eu500m May 2017 (PTCMGXOE0015).

The meetings will be held on 1 July, with a quorum of 50% of the outstanding principal amount. If the first meetings are not quorate, adjourned meetings will be held on 18 July. The quorum for the second meetings will be one or more persons representing any amount.

Similar consent solicitations have typically offered fees for bondholders that vote in favour of proposed changes, but no fees are offered to participating Montepio bondholders.

“That is unusual,” said a market participant. “This is the first exercise like this without a fee that I have seen.”

He noted that the two bonds targeted in the exercise were not initially placed publicly, and suggested that they were retained before being sold on the secondary market.

“If there were 80 or so investors holding these bond then they probably have to offer some kind of fee,” he said. “But if they sold off only a smaller amount to a few investors, maybe they figure they can just have discussions directly with them.

“But either way, from a ratings perspective the conversion would be positive for investors, so there is something in it for them, and if Montepio are looking to market these bonds at a later date then they will have a better chance with a single A-rating.”

He added that when Banca Monte dei Paschi di Siena (Banca MPS) converted its OBGs to CPTs last year, the switch had a positive impact on the market value of the bonds.

“The only caveat is under what circumstances it can extend,” he added, “and how much of an option there is for Montepio to extend – or whether they include some kind of structural feature that gives investors comfort that they won’t have that option.”

Fitch on 17 May placed its BBB- rating of Montepio’s OHs on Rating Watch Evolving, with no direction indicated. Fitch said the rating action follows a downgrade of the bank from B+ to B on 12 May, but that the review will take into account the issuer’s announcement that it intends to convert its covered bonds to CPT structures.

“At execution of the restructuring, Fitch would review its Discontinuity Cap (D-Cap) assessment,” the rating agency said. “If the liquidity gap and systemic risk is appropriately mitigated and Fitch does not identify issues on the other structural features proposed by the issuer, the agency would likely upgrade the OH to a rating up to the A+ Country Ceiling.”

Fitch had in January upgraded Montepio’s OH from BB+ to BBB-, after the Bank of Portugal identified the issuer as being systemically important at a domestic level. The designation meant that Fitch raised the IDR uplift for the programme from 0 to 1.

Moody’s in June 2015 also upgraded Montepio’s OHs to investment grade, lifting them three notches from Ba1 to Baa1, after assigning the issuer a Counterparty Risk assessment.

DBRS rates the OHs A.

If the proposed changes are implemented, Montepio will become the second Portuguese issuer with a CPT covered bond programme, following Novo Banco, which has not yet used its programme for public issuance.

RBS is the arranger.