Fitch downgrades Cypriot covered bonds

FITCH Ratings has taken various rating actions on Bank of Cyprus’ (BoC; ‘BB-‘/Negative) and Cyprus Popular Bank’s (CPB; ‘BB-‘/Negative) Cypriot covered bonds, as follows:

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

• BoC covered bonds (Cypriot cover pool): downgraded to ‘BB’/Negative from ‘BBB-‘/Negative;

• CPB covered bonds (Programme I): downgraded to ‘BB-‘/Negative from ‘BB’/Negative;

• CPB covered bonds (Programme II): downgraded to ‘BB’/Negative, from ‘BBB-‘/Negative.

The rating actions follow Fitch’s downgrade of Cyprus to ‘BB-‘/Negative/’B’ from ‘BB+’/Negative/’B’ on 21 November 2012 and the subsequent rating actions on the issuing institutions. In addition, Fitch’s updated refinance cost assumptions for Cyprus have been incorporated in the analysis following the publication of the agency’s assumptions as regards liquidity gap risks in mortgage covered bond programmes.

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 Long-term Issuer Default Rating (IDR) constitutes 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 CPB and BoC and secured by Greek residential mortgage loans have been downgraded to the bank’s respective IDRs of ‘BB-/Negative’, and no uplift for recoveries given default can be granted.

Fitch has assigned D-Caps of 0 for the programmes containing Cypriot assets reflecting the highly stressed economic environment of the country as evidenced by Cyprus’ non-investment grade rating. As a result, the ratings of 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 assigned 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 overcollateralisation 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 are downgraded to ‘BB’/Negative.

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