Moody’s yesterday (Tuesday) downgraded to sub-investment grade all the Turkish covered bonds it rates, including VakıfBank’s euro benchmark, after lowering the country’s local currency bond ceiling from Baa2 to Ba1 as it cut the sovereign from Ba2 to Ba3 two weeks ago.

The rating agency downgraded Turkey on 17 August citing the continuing weakening of Turkey’s public institutions and a related reduction in the predictability of Turkish policy-making.

“As a result, Turkish covered bonds’ ratings are currently capped at Turkey’s local currency bond ceiling of Ba1 because ceilings generally act as the maximum ratings that can be assigned to a domestic issuer in Turkey, including covered bonds backed by Turkish receivables,” Moody’s said yesterday.

The covered bonds that have been downgraded from Baa2 to Ba1 are those issued off the mortgage-backed programmes of Akbank, Garanti, VakıfBank and Yapı Kredi, plus SME-backed covered bonds issued by Şekerbank. A provisional rating of an İşbank mortgage-backed programme was also lowered from Baa2 to Ba1.

Moody’s earlier yesterday lowered the Counterparty Risk (CR) Assessments of all the aforementioned banks except VakıfBank, with İşbank’s being lowered two notches and the others’ by one notch.

“As a result of the lowering of the CR Assessments, Moody’s assesses a higher probability that these issuers would cease making payments under the covered bonds, which the rating agency factors into its methodology,” it said.

The lowering of the CR Assessments came amid downgrades affecting 20 Turkish banks and finance companies.

VakıfBank issued the only Turkish euro benchmark covered bond in April 2016, a EUR500m five year.