Fitch upgraded Banco Montepio covered bonds by two notches to AA- yesterday (Monday) after the Portuguese issuer tweaked its conditional pass-through (CPT) programme to ensure more timely access to a liquidity reserve if necessary.

The obrigações hipotecárias (OHs) of Caixa Económica Montepio Geral (Banco Montepio) had been downgraded from AA- to A in July, following a cut in its issuer default rating from B+ to B-.

Yesterday’s upgrade back from A to AA- is the result an improvement in the payment continuity uplift (PCU) under Fitch’s methodology from six to eight notches, which in turn reflects amendments to the covered bonds’ liquidity reserve and their CPT amortisation profile.

Previously, the alternative manager, who would be responsible for managing payments upon maturity extension, would only call upon the account bank holding the liquidity reserve for payment after a five day grace period and the triggering of a pass-through event – which occurs upon an issuer insolvency or non-payment of interest or principal. The timeline for receiving the funds was also not determined.

Following the programme amendments, drawings from the liquidity reserve are requested immediately after an issuer event or missed payment, and available one business day after a pass-through event is determined upon the end of the grace period.

The reserve is held by Elavon Financial Services DAC, rated AA-/F1+, on negative outlook.

The improvement in Banco Montepio’s PCU from six to eight notches brings it into line with the PCU typically assigned by Fitch to other CPT programmes.

The new rating is also based on a committed overcollateralisation (OC) level of 18%, which provides more protection than the breakeven OC level of 8% for the new, higher AA- rating (the breakeven OC for the previous A rating was 5%).

The prospectus containing the programme amendments was published on 4 December.

The covered bond rating is on negative outlook, alongside the issuer’s rating.