OREANDA-NEWS. Fitch Ratings is maintaining Banco Popolare's (BP, BB/Stable/B) EUR8.45bn mortgage covered bonds (Obbligazioni Bancarie Garantite, OBG) - rated 'BBB+' - on Rating Watch Negative (RWN). The rating action reflects proposed amendments, among others, to the definition of eligible institution contained in the programme documentation.

The rating action follows the Representative of Bondholders' (RoB) decision to convene an extraordinary meeting of bondholders to give consent to such amendments, which will allow BP to continue to act as account bank for the programme, or to discuss the actions to be undertaken by the RoB.

The 'BBB+' covered bonds rating was originally placed on RWN on 22 May 2015, following the downgrade of BP's Issuer Default Rating (IDR) to 'BB' from 'BBB', to reflect the downgrade risk in the absence of actions to remedy the ineligibility of the account bank (Banco Popolare, London branch) (see "Fitch takes Rating Actions on 9 Italian OBG Programmes" dated 22 May 2015 available at www.fitchratings.com).

Fitch understands from BP that the proposed changes are contingent on investors' approval. Based on the RoB notice, the initial meeting will be held on 29 July 2015 and adjourned, if necessary, to a new date no earlier than 14 days and no later than 42 days after the original date of the meeting. Fitch will resolve the RWN upon conclusion of the process and, in any case, no later than six months after it was first placed on RWN.

KEY RATING DRIVERS
The RWN now takes into account the request of consent submitted to covered bonds holders. If the amendment to the definition of eligible institution is approved, the rating of BP as account bank would limit the covered bonds rating at the 'BB' rating category. The covered bonds rating would be floored at 'BB+', which is equivalent to BP's IDR of 'BB' as adjusted by the IDR uplift of one. If the covered bonds holders choose not to give consent to this proposed amendment, Fitch understands from the notice that the RoB will act in accordance with bondholders' instructions to put in place remedies.

The other proposed amendments, if passed, would lead Fitch to re-assess the alternative management and the asset segregation components of the Discontinuity Cap (D-Cap) assigned to the programme. However, they are unlikely to affect the covered bonds' rating, which is constrained by the enhancement provided through the programme's asset percentage (AP). The further proposed amendments include a change of trigger for the back-up servicer appointment, for the repayment of the subordinated loan, together with the trigger for delivering certain solvency certificates.

The current 'BBB+' rating of the OBG is based on BP's IDR of 'BB', an unchanged IDR uplift of 1, an unchanged D-Cap of 2 and the 80.7% AP the issuer undertakes to apply in the quarterly test performance report, which provides more protection than the unchanged 93% 'BBB+' breakeven AP.

RATING SENSITIVITIES
The rating of the covered bonds is subject to the outcome of bondholders meeting: if Banco Popolare continues to act as account bank, the rating of the covered bonds is likely to be downgraded to 'BB+', in line with Fitch's counterparty criteria.

The 'BBB+' rating is likely to be affirmed if the account bank is replaced by a bank rated at least 'BBB-'.

The Fitch breakeven asset percentage for the covered bond rating will be affected, amongst others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven asset percentage to maintain the covered bond rating cannot be assumed to remain stable over time.