Moody’s downgraded covered bonds issued by EFG Eurobank Ergasias programme II from Ba3 to B1, on review for downgrade, on Friday following a downgrade of EFG from B3 to Caa2. EFG’s programme I covered bonds remain on review for downgrade but were not downgraded in Friday’s rating action.

The issuer was downgraded on 23 September as part of a downgrade of eight Greek banks, also including Alpha Bank and National Bank of Greece. Covered bonds issued by Alpha Bank, National Bank of Greece programme II, and NBG programme I were not affected by the rating action due to extension periods in their issuance of at least 10 years for principal repayment and their limited foreign currency exposure.

The rating agency also said that NBG is planning to enhance programme I by committing to a minimum overcollateralisation of 88.7%.

Moody’s cited a material exposure to foreign currency risk due to most of the loans in the cover pool of EFG programme II being foreign currency loans. It limited the rating EFG’s covered bonds could achieve to B1, which Moody’s said is consistent with expected loss modelling based on contractual overcollateralisation of 42%, which Moody’s views as “committed”. Overcollateralisation in the programme is around 105%, according to the rating agency.

Moody’s added that a downgrade of the issuer rating negatively affects the covered bonds through its impact on both the expected loss method and the timely payment indicator (TPI) framework.

Given a Greek sovereign rating of Ca, Moody’s does not assign ratings higher than Ba3 to covered bonds issued by Greek banks, which represents the lowest point in the TPI table.

“A weaker sovereign rating is likely to lead to deterioration of the future asset performance and increases the likelihood of a transaction experiencing event risk,” said Moody’s.

EFG programme II has a TPI of “improbable”, which remains unchanged.

The collateral score for this programme is 26.4%. The cover pool losses of EFG programme II are 49.8%, said Moody’s, with market risk of 32.1% and collateral risk of 17.7%.