Moody’s yesterday (Tuesday) downgraded mortgage covered bonds issued by Italy’s Banca Popolare di Milano from Aaa to A1 following a downgrade of the issuer on Friday from A3 to Baa3.

A Timely Payment Indicator (TPI) of “probable” limits the covered bond rating to A1 when combined with the issuer’s long term rating. There is no TPI leeway for the programme, meaning that the covered bonds might be immediately downgraded as a result of a TPI cap if the issuer rating is further downgraded, all other variables being equal.

Moody’s noted that the covered bond programme benefits from swap agreements entered into with BPM to mitigate interest-rate risk stemming from different payment promises from the assets and liabilities. It said the issuer no longer qualifies as an eligible swap counterparty under the swap documentation following its downgrade.

“Moody’s assumes that, as per the swap documentation, an eligible entity will either guarantee or replace the issuer in its capacity as swap counterparty,” it said.

The rating agency said if this does not occur, the ratings could be further negatively affected.