Moody’s yesterday (Tuesday) downgraded mortgage covered bonds issued by Banco Santander Totta (BST) from Aa3 to A1, and left them on review for downgrade, because the Portuguese issuer has indicated it will not be able to maintain sufficient overcollateralisation to sustain a higher rating.

The rating agency said that it had reassessed the overcollateralisation levels required to maintain the covered bond rating “following the rating migration of BST’s ratings over the last several months”. This had increased the expected loss on the covered bonds, which Moody’s said could be compensated for by an increase in overcollateralisation.

“However,” said the rating agency, “based on feedback from the issuer on the amount and form of overcollateralisation they are able to maintain in the programme, Moody’s expects that the best case rating outcome will be an A1 rating.”

Moody’s downgraded the issuer on 15 July from A3 to Baa1, along with six other Portuguese banks, after a downgrade of Portugal from Baa1 to Ba2 with a negative outlook. Moody’s downgraded seven Portuguese covered bond programmes the same day, but not BST’s because the covered bond rating was not constrained by the downgraded issuer rating under Moody’s methodology.