Ratings agency Moody’s this week upgraded the rating of the Bank of Cyprus’ covered bonds to Aaa from Aa2.
This follows a revision of Cyprus’ local-currency bond ceiling to Aaa and an upgrade of the country’s sovereign rating to A3 with a stable outlook on November 22, 2024.
“The rating of Bank of Cyprus – Mortgage Covered Bonds (Cypriot Pool) is no longer constrained by the country ceiling,” Moody’s announced.
According to the announcement, the decision reflects the high quality of the cover pool assets and effective servicing mechanisms.
Moody’s highlighted several structural features of the Bank of Cyprus’ programme that mitigate risks and reduce refinancing challenges.
These include the conversion of covered bonds into pass-through structures with an extended maturity date of up to 2080 under certain conditions.
“The programme’s structural features substantially reduce refinancing risk following an event of issuer default to the level typical of a securitisation transaction,” Moody’s explained.
The design also limits the issuer’s ability to alter the credit risk significantly or impact the bonds in the event of a default.
Additionally, the high level of over-collateralisation (OC) in the cover pool was cited as a strength.
“The over-collateralisation in the cover pool is 59.4 per cent, of which 47 per cent is on a committed basis,” Moody’s said.
It should be noted that this is well above the 12 per cent minimum OC required for the Aaa rating.
What is more, the upgrade aligns with broader improvements in Cyprus’ financial environment.
“Our increase of Cyprus’ local-currency bond ceiling to Aaa follows the upgrade of the government of Cyprus’ sovereign rating to A3,” Moody’s stated.
Moody’s also pointed to the importance of aligning covered bonds with European regulatory and market standards.
“These bonds are structured to meet rigorous criteria, making them a robust instrument in the European financial market,” the agency said.
Moody’s also identified potential risks that could affect the rating in the future.
These include a “multiple-notch downgrade of the CB anchor”, as well as a “material reduction of the value of the cover pool.”
However, the agency pointed out that the current structure significantly mitigates such risks.
The agency also clarified its methodology, stating that it determines covered bonds rating using a two-step process involving an expected loss analysis and a TPI framework analysis.
Finally, the agency said the TPI framework does not apply to this programme due to its unique structural features.
