Moody's Investors Service has upgraded to Baa1 from Baa3 the ratings assigned to covered bonds issued by Bank of Cyprus Public Company Limited ("BoC" or the issuer, CR
Assessment Ba3(cr)) under its mortgage covered Bonds programme.
According to a statement, the upgrade of the covered bond ratings follows (1) the rating upgrade of the sovereign to Ba1 from Ba2; (2) the rating upgrade on the issuers CR assessment to Ba3(cr) from B1(cr) and; (3) the positive developments of the Cypriot housing market in the past few years.
Although Cyprus' local- and foreign-currency bond ceilings were raised to A1, Moody's considers that at present, the covered bonds cannot achieve the same rating level as the country ceiling because of (1) the high correlation of risks within the banking system, given the small number of players and their large size relative to the size of the economy; (2) the still high number of nonperforming loans in the banking sector and (3)the challenging operating conditions of the economy following the coronavirus pandemic.
In a hypothetical scenario where the sovereign were to default and a covered bond anchor event were to occur for the Bank of Cyprus, a disruption of servicing may result in a weakening of collections activities, leading to increased delinquencies, lower recoveries, and ultimately higher losses on the cover pool.
Moody's considers that the effective servicing of the cover pool and the likely recoveries from the assets are commensurate with a Baa1 rating.