Moody’s downgraded the covered bonds of six Turkish banks from single-A to triple-B late yesterday (Monday), on the back of a cut to Turkey’s local currency ceiling, and the maiden euro benchmark of VakıfBank remains on review for downgrade given an increase in “committed” OC required by the rating agency.

On Friday Moody’s downgraded Turkey’s local currency bond ceiling from A3 to Baa1, in conjunction with a downgrade of the Turkish sovereign resulting from an increase in risks related to the country’s sizeable external funding requirements and a weakening in credit fundamentals. Moody’s ratings of Turkish covered bonds are now capped at the Baa1 ceiling.

The rating agency therefore yesterday (Monday) downgraded mortgage-backed covered bonds of VakıfBank, Akbank, and Garanti Bank, and the SME programmes of DenizBank, Şekerbank and Yapı Kredi, all by one notch, from A3 to Baa1.

Moody’s had placed the six Turkish programmes on review for downgrade in July, reflecting a similar rating action on the sovereign following an attempted coup in the country.

The rating on VakıfBank’s covered bonds remains on review for downgrade due to increased overcollateralisation (OC) needed to maintain the Baa1 rating, which has risen to 22.5% from 20% in a committed form.

Moody’s said VakıfBank has the ability but not an obligation to commit further OC. VakıfBank currently holds 88.5% OC in the programme, 20% of which in a committed form, according to the rating agency.

“If the entity increases the committed OC to 22.5%, we will confirm the rating at the current Baa1, all other things being equal,” said Moody’s.

VakıfBank issued the first and to date only euro-denominated mortgage-backed covered bond, a Eu500m five year issue, in April.

Moody’s noted that the covered bond is denominated in foreign currency, while all cover assets are in Turkish lira. It said the rating pierces Turkey’s foreign currency bond ceiling thanks to a currency hedge and ring-fencing of the swap payments in euros from Turkey through an offshore-bank construction.

“The rating relies on the swap transaction surviving a covered bond anchor event to the extent there is sufficient OC to absorb potential losses that will lower the probability of a failure to pay under the swap agreement,” Moody’s said. “Therefore a high certainty on the OC level at the time of a covered bond anchor event is required.”

Analysts at Société Générale said the downgrade is likely to reduce the liquidity of VakıfBank’s deal, but said they do not foresee forced selling, given that the bond is still rated investment-grade and it still qualifies for inclusion in indices.

“Looking at the cover pool of VakıfBank covered bonds, the credit metrics remain sound,” said Cristina Costa, senior covered bond analyst at SG. “However, we warn against future spread volatility – linked to movements by the sovereign.”

Following the downgrade of Turkey’s sovereign rating, Moody’s also yesterday lowered the Counterparty Risk (CR) assessments of some Turkish covered bond issuers.

The CR assessments of VakıfBank and Akbank were lowered from Baa3 to Ba1, and Şekerbank’s was lowered from Ba2 to Ba3. The CR assessments of Garanti Bank and Yapı Kredi were maintained at Baa3, and DenizBank’s was maintained at Ba1.