Fitch today (Monday) upgraded the obrigações hipotecárias programme of Caixa Económica Montepio Geral from BBB- to A-, as had been expected, after the Portuguese issuer converted the covered bonds to a conditional pass-through (CPT) structure.

Montepio on 1 July gained bondholders’ consent to convert two outstanding covered bonds from soft bullets to CPTs, in a move the issuer expected to result in upgrades of its covered bond ratings from Moody’s, Fitch and DBRS.

Fitch had on 17 May placed its BBB- rating of Montepio’s OHs on Rating Watch Evolving. Fitch said the rating action followed a downgrade of the bank from B+ to B on 12 May, but that the review would also take into account the issuer’s plans regarding the CPT restructuring.

The rating agency this morning upgraded the BBB- rating to A-, on stable outlook.

Fitch said the A- rating is now based on a Discontinuity Cap (D-Cap) revised from zero notches (full discontinuity) to six notches (very low), as well as Montepio’s Issuer Default Rating (IDR) of B, an unchanged IDR uplift of 1, and 18% contractual overcollateralisation (OC), which provides more protection than the 17.5% breakeven OC required for the A- rating.

Fitch said the D-Cap of six notches reflects its very low risk assessment related to the liquidity gap and systemic risk component, which is now driving the D-Cap for the programme.

“The agency revised this component from full discontinuity as it recognises the restructuring removes the need to refinance assets in order to meet timely payments on covered bonds, should the recourse switch to the cover pool,” it said.

Fitch added that the programme also benefits from a rolling three month liquidity reserve to cover interest payments on the covered bonds, held by Elavon Financial Services Limited, which Fitch rates AA.

“According to the programme documents, it is made available upon an issuer event or if triggered by a missed payment of interest, only after the five business day grace period has elapsed,” said the rating agency. “Fitch has taken this into account in its discontinuity assessment, as reflected by the ‘very low’ liquidity gap and systemic risk, instead of minimal discontinuity, which is typically assigned to CPT programmes with liquidity coverage.”