Moody’s placed six Turkish covered bond programmes on review for downgrade yesterday (Wednesday), reflecting actions on the sovereign and Turkish issuers after Friday’s failed coup, but VakıfBank noted that widening pressure on covered bonds has been relatively contained.

Moody’s on Monday placed its Baa3 rating of Turkey on review for downgrade following the failed military coup last Friday. The rating agency said it needs to assess the medium term impact of the attempted coup on Turkey’s economic growth, policymaking institutions and external buffers.

“Despite the coup’s failure, Moody’s considers its occurrence a reflection of broader political challenges, as associated credit risks remain elevated,” the rating agency said. “These risks and relatedly the country’s slower-than-expected progress in materially advancing planned economic reforms, in the context of both weakening growth and external buffers, had been previously captured in Moody’s negative outlook.

“Accordingly, in Moody’s view, although the coup failed, the event in itself will likely exacerbate challenges in all of these areas.”

Moody’s then on Tuesday placed on review for downgrade the ratings of 17 Turkish banks. The rating agency said it needs to assess the risks for the banks arising from the evolving political and economic situation, in particular on the government’s capacity and willingness to provide support to the banks in case of need, and on the risk of a further deterioration in the domestic operating environment.

The rating agency then on Wednesday placed the covered bond programmes of six Turkish issuers – each of which were included in Tuesday’s rating action – on review for downgrade.

Affected are the mortgage-backed programmes of VakıfBank, Akbank, and Garanti Bank, and the SME programmes of DenizBank, Şekerbank and Yapı Kredi. All of the programmes are rated A3, and are capped Turkey’s A3 country ceiling.

Although Turkey’s country ceilings are as yet unchanged, Moody’s said a downgrade of the sovereign could lead to a lowering of the country ceiling, and subsequently the covered bonds. Furthermore, a downgrade of the respective issuer’s Counterparty Risk (CR) assessment would also negatively affect the covered bonds, Moody’s said, due to the effect on the expected loss method and the maximum rating uplift that covered bonds may achieve over the CR assessment following the application of its Timely Payment Indicator (TPI) framework.

VakıfBank sold the first and to date only euro-denominated mortgage-backed covered bond from Turkey, a Eu500m five year issue, on 26 April.

“Technically, the rating agency will give the final decision within three months’ time,” Mustafa Turan, head of international banking and investor relations at VakıfBank, told The Covered Bond Report. “Due to the state bank nature and sovereign support link, a possible downgrade of the sovereign may end up with a possible downgrade of our bank and our bonds.

“This action has nothing to do with VakıfBank itself nor the programmes or products. The rating of VakıfBank’s covered bonds may change in accordance with the possible change on country’s ceilings.”

Since Friday’s close, the VakıfBank May 2021s have widened by around 110bp, according to bankers close to the deal. However, they said that the widening has been substantially less than that in Turkish senior unsecured and capital spreads, noting that VakifBank’s euro-denominated 2019 senior paper has this week widened by around 190bp and its US dollar senior paper by 125bp-150bp.

“In terms of pricing, since last Friday, we are witnessing that the pressure on covered bonds is more contained,” said Turan. “This shows how covered bonds are defensive and resilient products compared to others.”

Bernd Volk, head of covered bond and SSA research at Deutsche Bank, said that it is likely VakıfBank’s covered bonds will remain investment grade.

“In our view, VakıfBank covered bonds seem formally well protected,” said Volk. “While political and macro uncertainty could feed through to a downgrade of VakıfBank covered bonds by Moody’s in the months to come, a rating below triple-B seems currently unlikely, probably providing some relief for investors.”