Moody’s downgraded CPT covered bonds of Novo Banco to Baa2 last week, following a downgrade of the issuer relating to a liability management exercise on its senior debt, upon which a planned sale of the Portuguese bank hinges. The covered bonds remain on review for further downgrade.

On Wednesday of last week (April 5), Moody’s downgraded Novo Banco from Caa1 to Caa2 and placed it on review for further downgrade. The rating agency at the same time cut the Portuguese bank’s standalone baseline credit assessment (BCA) from caa2 to ca and its Counterparty Risk (CR) assessment from B2 to B3, also on review for further downgrade.

The rating action came after the Bank of Portugal announced on 31 March that as part of an agreed sale of Novo Banco to private equity firm Lone Star, a liability management exercise on the bank’s senior debt will be held to raise at least Eu500m of Common Equity Tier 1 capital. The completion of the sale is dependent on the completion of the exercise, as well as approval from the ECB and European Commission.

Moody’s considers the swap offer to be a distressed exchange, prompting the downgrade of Novo Banco’s BCA, and the downgrade of the bank’s senior rating to Caa2 reflects its expectation of the losses that senior bondholders are likely to face as part of the exercise.

As a result of the downgrade of the CR assessment, Moody’s downgraded Novo Banco’s conditional pass-through (CPT) obrigações hipotecárias (OH) from Baa1 to Baa2, also on Wednesday of last week. The covered bonds remain on review for further downgrade.

Because of the cut to the CR assessment, the covered bond anchor for the programme is now one notch lower, meaning that the Timely Payment Indicator (TPI) of “probable-high” restricts the covered bond rating at Baa2.

“The review for further downgrade will consider the risk of default of Novo Banco’s senior operating obligations, depending on the implementation of the announced measures,” added Moody’s.

Under a deadline set by the European Commission, the sale of Novo Banco must be completed by August 2017 to avoid the liquidation of the bank.

According to media reports, a group of Novo Banco bondholders filed an injunction on Sunday to block the sale to Lone Star – their objections relating to an earlier transfer of bonds from Novo Banco to the bad bank of Banco Espírito Santo in 2015 – but Portugal’s finance minister said yesterday (Wednesday) that he is confident the sale will go ahead.