Moody’s downgraded UniCredit Bank Austria mortgage covered bonds from Aaa to Aa1 yesterday (Tuesday) and placed the public sector covered bonds – rated Aaa – on review for downgrade, after cutting the issuer rating the day before.

A Timely Payment Indicator (TPI) of “probable” and a new issuer rating of Baa1, down from A3, constrain the mortgage covered bonds’ rating at Aa1.

The rating agency placed both covered bond programmes on review for downgrade because of an increased expected loss that has to be compensated with levels of committed overcollateralisation (OC) over and above the statutory levels.

“During the review process Moody’s will assess the level and form of OC that the issuer is willing to commit,” it said.

For the mortgage covered bonds the minimum OC level that is consistent with the Aa1 rating target is 46.5% in present value terms, of which the issuer should provide 39.5% in a committed form, said Moody’s. The nominal OC in the cover pool is 91.2%, of which Bank Austria provides 2% on a committed basis.

“These numbers show that Moody’s is not fully relying on ‘uncommitted’ OC in its expected loss analysis for the Aa1 rating of the mortgage covered bonds,” it said.

With respect to the public sector covered bonds the nominal OC in the cover pool is 34.2%, of which Bank Austria provides 2.0% on a “committed” basis.

The minimum OC level that is consistent with the Aaa rating target is 25.5% in present value terms, it said, of which the issuer should provide 25.5% in a “committed” form.

The TPI assigned to the public sector covered bonds is “high”, which means that there is no buffer for the covered bond ratings if the issuer is downgraded, as is the case for the mortgage covered bonds.