As goes the sovereign rating . . .
London, 13 July 2010 — Moody’s Investors Service has today downgraded Portugal’s government bond ratings to A1 from Aa2.
So go the bank ratings . . .
Madrid, July 14, 2010 — Moody’s Investors Service has today downgraded the long-term debt and deposit ratings of eight Portuguese banks
And the covered bond ratings . . .
London, 20 July 2010 — Moody’s Investors Service has taken the following [negative] rating actions on covered bonds issued by Portuguese banks:
The Tuesday downgrade of four Portuguese-issued covered bond (CB) programmes, Moody’s says, was prompted by both its sovereign and bank actions. What’s more, those two things have together impacted the bonds through the Expected Loss model and something the agency calls Timely Payment Indicators (TPI). Those have been ominously lowered to “improbable” from “probable.”
A quick explanation here. In basic terms, Moody’s TPIs are meant to reflect the probability that a CB facing refinancing risk would receive full and timely payment following a default of the issuer. It also limits the CB’s rating to a certain number of notches above the issuer rating.
And the importance of Moody’s TPI structure has been growing.
Earlier this year, the agency said:
The large majority of ratings are at present determined solely by Moody’s [Expected Loss] Model because for most programmes, the rating on the covered bonds is currently not restricted by the TPI. However, the relevance of Moody’s TPI framework is increasing. At the start of 2009, the covered bonds of 13 programmes would have been subject to a rating downgrade if the issuer rating fell by a single notch. By the end of 2009, this number had increased to 34 (18% of total rated).
And not just at Moody’s — Standard & Poor’s also recently revised its CB ratings methods.
The difficulty is that even with a very strong legal framework to back CBs up, investors can’t escape the refinancing risk-gauge embedded in the rating agencies’ models. That risk is basically the possibility that the cover pool’s assets might have to be liquidated, or refinanced, to raise money and make payments on the bonds amidst “harsh or illiquid market conditions.”
And every sovereign and bank downgrade seems to up this risk for covered bonds.
According to Deutsche Bank, for “probable” TPIs, issuers need to be rated at least A3 to have even a chance of staying Aaa. Portugal is now rated A1, so the TPI switch to improbable and subsequent covered bond downgrades should come as no surprise. For reference, there appears to be no single-A country with Aaa-rated covered bonds at Moody’s.
Anyway, the point we are driving at is that there’s an inexorable connection between sovereigns, their banks and their securitisations — and it is intensifying. As Deutsche puts it:
Although the legal framework for covered bonds in Portugal can be regarded as strong, this is very likely not sufficient to overcome the challenges of refinancing covered bonds following issuer default in an environment where the sovereign has defaulted, or the banking system is affected. The likelihood of sovereign and banking crises occurring is obviously linked to the sovereign rating (usually not more than one or two notches above sovereign) . . . Lower bank and cover bond rating puts again more pressure on banks, the economy and the sovereign.
And this is the other point.
On Tuesday, Fitch said it had capped ratings on Greek RMBS securitisations and covered bond programmes at AA. Moody’s on Monday downgraded a slew of Greek RMBS to the A2 and Baa1 range.
As Structured Finance News notes, this means that a number of Greek ABS deals are likely to (finally) become ineligible for European Central Bank (ECB) repo funding under current rules.
Greek banks will still have recourse to the Bank of Greece, which accepts individual loans as collateral. But they may have to unwind deals to get at those loans. Which also means more funding pressure:
Greek banks, used the ECB window as of the end of 2009 for about 10% to 20% of total funding. It’s likely that this ratio is higher currently, RBS analysts said. If retained ABS assets become ineligible, there are fears that banks might force these securitizations into the capital markets as a means of tapping liquidity or funding.
“We cannot see how the €33 billion of retained Greek ABS could possibly be placed in the securitization capital market, and would therefore argue that any such fallout is not an ABS market problem per se, but will instead pose a deeper funding issue for the domestic banking system,” they said.
Sovereigns –> Banks –> Securitisations –> Banks –> Sovereigns
Repeat?
Related links:
Threat to Greek bank securitisation agreements – FT
Next up for Europe, covered bond catastrophe? – FT Alphaville
Peripheral Pfandbriefe – FT Alphaville
Covered bond bailouts – FT Alphaville