Bank of Cyprus and Cyprus Popular Bank covered bonds were put on review for downgrade by Moody’s yesterday (Tuesday), raising the prospect of their ratings being lowered to below single-B.

The banks’ covered bonds backed by Cypriot collateral are rated B2 and those backed by Greek collateral, B3.

The rating action is due to Moody’s having placed the issuers’ ratings on review for downgrade on Monday, alongside that of Hellenic Bank.

The rating agency noted that Cypriot covered bonds backed by Cypriot assets are rated two notches above the respective issuers’ senior unsecured ratings (Caa1) and those backed by Greek assets one notch above.

The Timely Payment Indicators (TPIs) assigned to the programmes, featuring Cypriot and Greek residential mortgage loans as collateral, are “very improbable”, which Moody’s said does not constrain the covered bond ratings. However, the TPI leeway is limited, as a result of which any downgrade of the issuers’ ratings may lead to a downgrade of the covered bonds, said the rating agency.

Moody’s review of the banks’ issuer ratings was triggered by the rating agency’s review of Cyprus’s government bond ratings on Friday. This, according to the rating agency, was in turn due, among other factors, to a delay and uncertainty surrounding the Cypriot authorities’ negotiations with the European Commission, European Central Bank and International Monetary Fund (the Troika) to secure a support programme, which would finance bank capitalisations.