Standard & Poor’s downgraded public sector covered bonds issued by Portugal’s Banco BPI from BBB to BBB- on Wednesday and kept the rating on negative review.

The rating action followed a downgrade of the issuer’s rating from BBB- to BB+ on 16 December.

Under S&P’s covered bond rating methodology, Banco BPI’s public sector covered bond programme is considered a Category 2 programme and assessed as having a “low” asset liability mismatch (ALMM). This means that the covered bonds can be rated up to six notches above the issuer’s rating.

The rating agency said that it assigns the first notch of uplift above the issuer credit rating (ICR) if it considers that the programme’s available credit enhancement covers the risks related to the default of the cover pool assets, including interest rate risk and foreign exchange rate risk, but excluding market value risk arising from ongoing ALMM.

“Based on our most recent analysis of the programme’s credit quality and cashflow structure (as of June 2011), the programme’s available credit enhancement is commensurate with only this first notch of uplift,” it said.

The new, lower rating of BBB- assigned to the covered bonds reflects this maximum uplift.

Separate criteria for rating non-sovereign issuers and structured finance transactions, including covered bonds, would have limited the covered bonds’ rating to BBB because under these criteria S&P considers public sector covered bond programmes to have a “high” sensitivity to sovereign risk and therefore typically only allows for a one notch uplift above the rating of the country in which the cover pool assets are located.