Moody’s reviews covered bonds of Cypriot issuers for rating cut

LONDON

Global rating agency Moody’s today placed on review for downgrade the covered bonds of several Cypriot banks, prompted by rating actions on the respective issuers. The B2 ratings assigned to the covered bonds backed by Cypriot residential mortgage loans, issued by Bank of Cyprus Public Company Limited (BoC) and Cyprus Popular Bank (CPB) respectively, have been placed on review for downgrade. Furthermore, the B3 ratings of the covered bonds issued by BoC and CPB, which are backed by Greek residential mortgage loans, have also been placed on review for downgrade.

Cypriot covered bonds backed by Cypriot assets are currently rated two notches above the respective issuers’ senior unsecured ratings. Those backed by Greek assets are rated one notch above the respective issuers’ ratings.

The TPIs assigned to these transaction is Very Improbable. Moody’s TPI framework does not currently constrain the ratings. The ratings assigned by Moody’s address the expected loss posed to investors. Moody’s ratings address only the credit risks associated with the transactions. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors.

Covered bond ratings are determined after applying a twostep process: an expected loss analysis and a TPI framework analysis. Moody’s determines a rating based on the expected loss on the bond. The primary model used is Moody’s Covered Bond Model (COBOL), which determines expected loss as (1) a function of the issuer’s probability of default (measured by the issuer’s rating); and (2) the stressed losses on the cover pool assets following issuer default.