Fitch Ratings has on Wednesday revised Bank of Cyprus Public Company Limited’s (BoC, B-/Positive/B) conditional pass-through (CPT) mortgage covered bonds’ outlook to positive from stable and affirmed the rating at ‘A’.
The rating action follows the outlook revision to positive on Cyprus’s Long-Term Foreign-Currency Issuer Default Rating (IDR) dated October 11, 2019.
According to Fitch, the positive outlook mirrors that on Cyprus’ IDR. It also takes into account the unused notches in terms of uplift factors applicable to the programme rating and reflects Fitch’s expectations that the relied-upon overcollateralisation (OC) would be sufficient to withstand stresses associated with higher rating scenarios should the Country Ceiling be upgraded.
The ‘A’ rating is based on BoC’s Long-Term ‘B-‘ IDR, the various uplifts above the IDR granted to the programme and the publicly committed OC relied upon by Fitch. The covered bonds are rated 10 notches above the bank’s IDR as the Country Ceiling constraints the rating at ‘A’. This is out of a maximum achievable uplift of 12 notches, consisting of an IDR uplift of two notches, a payment continuity uplift (PCU) of eight notches and a recovery uplift of two notches.
In its analysis, Fitch relies on the publicly committed OC of 47% disclosed in the investor report as at September 2019, which provides more protection than the unchanged `A` breakeven OC of 33.5%.
The 47% OC supports timely payments at the ‘BBB+’ tested rating on a probability of default (PD) basis and allows a two-notch recovery uplift up to the covered bonds’ ‘A’ rating. The greatest contributor to the `A` breakeven OC remains the ALM (asset and liability mismatch) loss (25.8%) followed by the credit loss (7.8%).
Fitch said that the rating of the covered bonds would be upgraded, if Cyprus’ Country Ceiling is upgraded, provided sufficient OC is available to sustain stresses in rating scenario higher than the ‘A’ rating level. All else being equal, an upgrade of the bank’s IDR would have no impact on the covered bonds’ rating.
The covered bonds would be vulnerable to downgrade if the programme’s overcollateralisation (OC) commitment decreases below Fitch’s 33.5% ‘A’ breakeven OC, Fitch noted.