Fitch downgrades Cypriot covered bonds

Fitch Ratings has downgraded Bank of Cyprus’ (BoC; ‘B’/Negative) and Cyprus Popular Bank’s (CPB; ‘B’/Negative) Cypriot covered bonds, as follows:

• BoC covered bonds (Greek cover pool): downgraded to ‘B’ from ‘BB-‘; Outlook Negative.

• BoC covered bonds (Cypriot cover pool): downgraded to ‘B+’ from ‘BB’; Outlook Negative CPB covered bonds (Programme I): downgraded to ‘B’ from ‘BB-‘; Outlook Negative.

• CPB covered bonds (Programme II): downgraded to ‘B+’ from ‘BB’; Outlook Negative.

The rating actions follow Fitch’s downgrade of Cyprus on 25 January 2013 and the subsequent rating actions on the issuing institutions.

BoC (Greek pool) and CPB (Programme I) are secured by Greek residential mortgages, while BoC (Cypriot pool) and CPB (Programme II) are secured by Cypriot residential mortgages. The four programmes represent €4.55 billion of aggregated rated debt.

In line with Fitch’s covered bonds rating methodology, the banks’ Long-term Issuer Default Ratings (IDR) constitute a floor for the rating of the covered bonds. At the same time, Greece’s Country Ceiling (‘B-‘) applies to programmes secured by Greek assets. As such, the Cypriot covered bonds issued by BoC and CPB and secured by Greek residential mortgage loans have been downgraded to the banks’ IDRs of ‘B’/Negative, and no uplift for recoveries given default can be granted.

Fitch’s unchanged Discontinuity Caps of 0 (full discontinuity) for the programmes containing Cypriot assets continues to reflect the country’s highly stressed economic environment as evidenced by Cyprus’s non-investment grade rating. As a result, the ratings of the BoC (Cypriot Pool) and CPB (Programme II) covered bonds can only exceed the IDRs of the corresponding issuers depending on stressed recoveries from the cover pool in the event of a default.

A one-notch uplift has been applied to the ratings of BoC’s (Cypriot Pool) covered bonds based on the issuer’s unchanged committed asset percentage level of 90%. For CPB (Programme II), Fitch relies on the minimum level of over-collateralisation (OC) required by the Cypriot covered bond law (5%) to grant a one-notch recovery uplift. As such, the ratings of the covered bonds issued under both programmes have been downgraded to ‘B+’; Outlook Negative. The Fitch breakeven OC corresponding to each programme’s rating is equal to the minimum level of 5% required by the Cypriot covered bonds law.

All else being equal, a downgrade of BoC or CPB’s IDR will lead to an equivalent downgrade on their covered bonds, therefore the Negative Outlook on the covered bonds reflects that on the banks’ IDRs.