Moody’s placed its A2 rating of the covered bonds of Banca Monte dei Paschi di Siena (MPS) on review for downgrade yesterday (Monday), following a similar action on the issuer’s CR assessment, although an analyst noted the Italian bank’s CPT covered bonds are unlikely to lose CBPP3 and ECB repo-eligibility.

On 4 July, Banca MPS announced that the European Central Bank is seeking a reduction in its stock of problem loans, and that the Italian bank is required to present by October 3 a plan how it will reduce its non-performing loans (NPL) ratio to 20%. Moody’s estimates that tackling the problem loans could lead to a capital shortfall in the range of Eu2bn-Eu5bn.

The rating agency placed Banca MPS’s B2 Counterparty Risk (CR) assessment – as well as the issuer’s B3 senior unsecured rating – on review for downgrade last Friday, reflecting the rating agency’s belief that it is increasingly likely the Italian bank will require external support. Moody’s also downgraded the standalone baseline credit assessment (BCA) of Banca MPS by two notches, from caa2 to ca.

The rating agency then yesterday (Monday) put its A2 rating on the covered bonds of Banca MPS on review for downgrade. It said that a lower CR assessment would lead to a lower covered bond anchor and would negatively impact the covered bond rating. The covered bond anchor for the programme is the CR assessment plus one notch.

Moody’s added that the Timely Payment Indicator (TPI) assigned to the covered bonds of Banca MPS is “very high” and that the TPI Leeway for the programme is limited, meaning any reduction of the covered bond anchor may lead to a downgrade of the covered bonds.

Bernd Volk, head of covered bond and SSA research at Deutsche Bank, said that as the covered bonds are rated A2 by Moody’s, BBB by Fitch and A (high) by DBRS, they will very likely remain eligible for the ECB’s covered bond purchase programme (CBPP3).

Volk added that even the unlikely scenario of a senior bail-in would not necessarily trigger a maturity extension of the conditional pass-through (CPT) covered bonds.

“With MPS CPT covered bonds very likely staying investment grade by at least one major rating agency, the formal conditions for ECB refinancing will very likely continue to be met,” Volk said. “For example, in the case of Moody’s, a downgrade of the MPS CR assessment by two notches, basically following the two notch downgrade of the BCA on Friday, would still allow Moody’s to rate the covered bonds at Baa3.

“Hence, without even relying on Fitch or DBRS, the Moody’s rating will likely allow the refinancing of a CPT covered bond at initial maturity via ECB repo.”

Banca MPS converted its covered bond programme to a CPT structure in June of last year, in a move that earned upgrades from Fitch and Moody’s.