Fitch Affirms Bank of Cyprus's Covered Bonds at 'CCC'

Mon Jul 7, 2014 12:16pm EDT

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(The following statement was released by the rating agency) MILAN/LONDON, July 07 (Fitch) Fitch Ratings has affirmed the rating of the Bank of Cyprus Public Company Ltd's (BoC, CC/C, Viability Rating (VR): cc) EUR1bn outstanding residential mortgage covered bonds at 'CCC'. KEY RATING DRIVERS The rating action follows the upgrade of BoC's Long-term (LT) Issuer Default Rating (IDR) to 'CC' from 'RD' (Restricted Default) following the lifting of capital controls in Cyprus (see "Fitch Upgrades Bank of Cyprus to 'CC' and Hellenic Bank to 'CCC'" dated 4 July 2014). As a result of the upgrade of BoC's rating, Fitch no longer makes an exception to its covered bonds rating criteria and uses the LT IDR, instead of the VR, as a starting point for its credit risk analysis. The covered bonds' rating is based on BOC's 'CC' LT IDR, an IDR uplift of 1, a Discontinuity Cap (D-Cap) of 0 (full discontinuity) and the programme's asset percentage (AP) of 95.24%, which provides at least 51% recoveries on the bonds assumed to be in default in a 'CCC' rating scenario and allows a one-notch uplift above the 'CCC-' rating on a probability of default basis. Fitch's view on the use of resolution methods other than liquidation contributes to the IDR uplift of '1' for BoC's covered bond programme. This is based on BoC's large size in its domestic market and its interconnectedness with the Cypriot economy. Fitch's D-Cap of 0 (full discontinuity) is driven by the liquidity gaps and systemic risk component. In Fitch's view the programme's extendible maturity of 12 months would not be sufficient to successfully refinance the cover assets when the source of payments for the covered bonds switches from the issuer to the cover pool. The 95.24% AP which Fitch relies upon in its analysis is the maximum level allowed by the Cypriot covered bond law and equals to Fitch's calculated breakeven AP for the 'CCC' rating. Fitch has not assigned an Outlook to the covered bonds in line with its rating definition, under which Outlooks are applied selectively to ratings in the 'CCC', 'CC' and 'C' categories. RATING SENSITIVITIES All else being equal, the covered bonds' 'CCC' rating would be sensitive to movements of BOC's IDR. The covered bonds' rating would also be vulnerable to a deterioration of the performance of the residential mortgage portfolio of more severe magnitude than currently foreseen. The Fitch breakeven AP for the covered bond rating will be affected, among 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 AP to maintain the covered bond rating cannot be assumed to remain stable over time. Contact: Primary Analyst Paolo Sala Associate Director +39 02 87 90 87 292 Fitch Italia S.p.A. Via Privata Maria Teresa, 8 Milan 20123 Secondary Analyst Roberto Del Ragno Analyst +39 02 87 90 87 206 Committee Chairperson Federica Fabrizi Senior Director +39 02 87 90 87 232 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Covered Bonds Rating Criteria', dated 10 March 2014, 'Covered Bonds Rating Criteria - Mortgage Liquidity & Refinance Stress Addendum', dated 4 February 2014, 'EMEA RMBS Master Rating Criteria', dated 28 May 2014, 'EMEA Residential Mortgage Loss Criteria', dated 28 May 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds', dated 14 May 2014, 'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum', dated 14 May 2014, 'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds' dated 23 January 2014 are available at www.fitchratings.com. Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Covered Bonds Rating Criteria – Mortgage Liquidity and Refinancing Stress Addendum here EMEA RMBS Master Rating Criteria here EMEA Residential Mortgage Loss Criteria here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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