Fitch downgraded covered bonds issued by The Co-operative Bank from A+ to A today (Wednesday), and left them on Rating Watch Evolving, after cutting the UK issuer from B to B- yesterday, saying that a failure of the bank “appears probable”.

The Co-op on 13 February announced that it was seeking a buyer and considering other ways to strengthen its capitalisation, including a potential liability management exercise of its public debt.

Fitch cut the issuer’s rating from B to B-, on Rating Watch Evolving, and its viability rating (VR) from ‘b’ to ‘cc’ yesterday (Tuesday).

“The downgrade of the VR reflects Fitch’s view that a failure of the bank appears probable as it likely needs to obtain new equity capital to restore viability,” the rating agency said. “Fitch believes there is a very high risk that this will include a restructuring of its subordinated debt that we are likely to consider a distressed debt exchange, which would result in a failure according to our definitions.”

The new, A, covered bond rating is based on the B- issuer rating, an IDR uplift of two notches, a payment continuity uplift (PCU) of six notches, and an asset percentage (AP) that Fitch relies on of 77.5%. It said the covered bonds’ 92.5% breakeven AP supports timely payment in a stress scenario equivalent to BBB+ and allows for a two notch recovery uplift to A.

Fitch noted the two notches of IDR uplift are supported by the programme’s exemption from bail-in in the UK, a low risk of under-collateralisation, and its view that a resolution of The Co-op is not likely to result in direct enforcement of the recourse against the cover pool. The rating agency also noted that the PCU is mainly driven by liquidity protection in the form of a 12 month extendible maturity on the covered bonds and a liquidity reserve to mitigate short term payment interruption risk. It said the AP of 77.5% used in the programme’s asset coverage test provides a “substantial cushion” compared with the A breakeven AP of 92.5%, which is equivalent to the minimum regulatory level of 8% overcollateralisation for UK covered bonds.

Moody’s cut The Co-op’s covered bonds to Baa3 last Thursday.