DBRS downgraded Banca Carige’s first covered bond programme to BBB yesterday (Thursday), following a downgrade of the Italian sovereign, although the issuer recently established a third, higher-rated CPT programme that could be used for public or private issuance going forward.

Last Friday, DBRS downgraded Italy from A (low) to BBB (high), citing continuing weakness in the banking system and uncertainty over attempts at structural reform in the wake of the country’s institutional referendum, among other factors.

DBRS then downgraded Carige’s first obbligazioni bancarie garantite (OBG) programme from BBB (high) to BBB yesterday. The programme had previously been under review with negative implications.

The first programme, which has a soft bullet format, is rated Ba1 by Moody’s and BBB+ by Fitch.

The Eu5bn programme has in the past been used for Carige’s public covered bond issuance, with Eu3.09bn of covered bonds outstanding across 20 series, according to DBRS. The issuer has used a second Eu5bn soft bullet OBG programme, rated Baa2 by Moody’s, for repo purposes.

In December, Carige established a new, Eu3bn conditional pass-through covered bond programme. Whereas the first programme is backed by a mix of residential and commercial collateral and the second by commercial loans, the new programme is backed purely by residential mortgage loans.

Moody’s on 29 December assigned the third programme an A3 rating, noting “the conditional pass-through nature significantly reduces the covered bonds’ default probability in case the issuer ceases to make payments to covered bond holders”.

The rating agency cited as being among factors considered in its analysis a collateral score for the cover pool of 7.5%, a 10.3% exposure to market risk, and overcollateralisation of 45% – of which 20.5% is provided on a “committed” basis. These figures are based upon data as per 30 June, when the cover pool totalled just Eu138m, according to Moody’s.

The Timely Payment Indicator (TPI) assigned to the programme is “very high”. The TPI framework does not constrain the rating at its current level.

Market participants expect the third programme to eventually replace Carige’s first in terms of public issuance, given its higher rating. Carige’s last benchmark issue from the first programme came in October 2015.

“Given the greater collateral efficiency, it seems likely that Carige will only use the second and/or the third covered bond programme going forward, with the third probably being most efficient, particularly for ECB or private repo funding,” said Bernd Volk, head of covered bond and SSA research at Deutsche Bank.

Prior to the downgrade, analysts had said Carige’s covered bonds should be the only OBGs at risk of a downgrade by DBRS following the cut to Italy.