Moody’s cut three Cypriot covered bond programmes from Baa1 to Baa3 yesterday (Thursday) following downgrades of Cyprus and the respective banks. However, they retain one to two notches of TPI leeway, a factor the issuers highlighted to The Covered Bond Report alongside ECB eligibility.

Covered bonds issued off Bank of Cyprus’s Greek mortgage backed programme and Marfin Popular Bank’s Greek and Cypriot mortgage backed programmes were downgraded after Cyprus was downgraded from A2 to Baa1, on negative outlook, on 27 July, and the issuers’ ratings were downgraded on 28 July. The issuer downgrades affected the covered bonds through the rating agency’s expected loss analysis and Timely Payment Indicator (TPI) framework.

Bank of Cyprus’s covered bonds and Marfin Popular Bank’s Greek pool covered bonds have remained at a TPI of “very improbable”, which restricts the ratings to a maximum of Baa3.

“These TPIs are in line with similar transactions backed by Greek residential mortgage loans,” said Moody’s.

Marfin Popular Bank’s Cypriot cover pool covered bonds had their TPI lowered to “very improbable” by the rating agency because of the downgrade of the Cypriot sovereign rating.

The TPI leeways are two notches for covered bonds issued by Bank of Cyprus, and one notch for Marfin Popular Bank’s programmes.

The rating agency noted that it viewed 5% overcollateralisation on a Net Present Value (NPV) basis, as required by Cypriot covered bond legislation, as “committed” and sufficient to achieve a Baa3 rating.

The Bank of Cyprus issued a Eu700m three year covered bond on 19 July, the first deal off a Eu5bn programme. The issue is being retained on the bank’s books in the event it is needed for repo purposes.

“As we said on issuance,” said a representative from the Bank of Cyprus, “these bonds are issued for contingency purposes only.

“Further to that, Moody’s has not requested any change or restructuring,” he added. “Thus at the moment no change or further action from us, given also that the Baa3 rating gives us a two notch leeway.”

A representative from Marfin Popular Bank said it is not yet looking to restructure its covered bonds, for similar reasons to Bank of Cyprus.

“Should further negative rating actions follow in the future,” she added, “we will follow suit like the Greek banks and restructure these covered bonds to maintain their ECB eligibility.

“For the avoidance of doubt, we don’t believe that this will be required in the very near future.”