Fitch yesterday (Tuesday) downgraded to BB+ and placed on Rating Watch Negative (RWN) covered bonds issued by Cyprus Popular Bank, formerly Marfin Popular, and Bank of Cyprus that are backed by Greek residential mortgage loans, and placed on RWN covered bonds, rated BBB-, secured by Cypriot residential mortgages.

The covered bonds backed by Greek residential mortgage loans were downgraded from BBB- to BB+, and Fitch said that the cuts were due to a downgrade of Greece’s sovereign rating from B- to CCC and a revision of the country ceiling from AAA to B-, both carried out on Thursday.

“With exit from EMU a material and rising risk, Fitch has revised the Country Ceiling to ‘B-’ for Greece, which effectively imposes a cap on the ratings of all issuers and transactions domiciled in Greece,” it said.

It added that in line with Fitch’s covered bonds rating methodology, the long term issuer default rating (IDR) constitutes a floor for the rating of the covered bonds and that as such, the Cypriot covered bonds issued by Cyprus Popular Bank and Bank of Cyprus and secured by Greek residential mortgage loans have been downgraded to their respective IDRs of BB+, and no uplift for recoveries can be granted.

The covered bonds have been placed on RWN to reflect the status of the issuer’s long term default ratings.

The placement on RWN of the covered bonds secured by Cypriot residential mortgage loans (rated BBB-) came after Fitch on Monday placed the IDRs on RWN.

“Notably, for both programmes the probability of default (PD) rating of the covered bonds is equalised with the IDR due to overcollateralisation between the cover pool and covered bonds being insufficient to allow for any uplift on a PD basis from the IDR of each bank,” said Fitch. “As a consequence, any downgrade of the IDR would result in a corresponding downgrade of the rating of the associated covered bonds, all else being equal.”