Moody’s downgraded three Greek banks’ covered bonds yesterday (Thursday) after lowering their country ceiling to Caa2 to reflect the heightened risk of Greece leaving the euro area, and downgraded to B2 Cyprus Popular Bank covered bonds backed by Greek residential mortgages.

Mortgage covered bonds issued under Alpha Bank AE’s direct issuance programme and covered bonds issued off two National Bank of Greece programmes were downgraded from B1. Covered bonds issued off one EFG Eurobank programme were cut from B1 and off another from B2.

The Cyprus Popular Bank covered bonds were lowered from B2.

“Today’s downgrades reflect Moody’s lowering to Caa2 of its assessment of the highest rating that can be assigned for debt obligations issued by domestic Greek issuers, or where cashflows used to repay debt obligations are sourced from domestic Greek assets,” said the rating agency. “This level reflects the increasing risk of Greece’s exit from the euro area, and the near-automatic effect of currency redenomination on default of those obligations.

“Therefore, the maximum achievable rating applies to all forms of ratings in Greece, including covered bond ratings.”

The rating agency said that transactions backed by Greek local assets are significantly exposed to a scenario where Greece exits the euro, irrespective of the jurisdiction in which the debt obligations are issued and the governing law.

“Most structured finance securities benefit from diversification of revenue sources and are issued under UK law,” said Moody’s, “however, (i) collateral assets are governed under Greek law and are therefore all exposed to redenomination risk; and (ii) underlying obligors are all similarly affected by macroeconomic distress.

“Covered bond transactions also rely on the issuers to provide servicing functions and other financial roles (such as account banks, swap counterparties, and cash managers). The affected covered bonds are therefore vulnerable to the degree of banking sector distress that would be generated by Greece exiting the euro area.”