A sole outstanding covered bond of Cyprus Popular Bank (CPB, or Laiki) is set to be transferred to a “good” bank that will be folded into Bank of Cyprus (BoC), while the two banks’ covered bonds backed by Greek assets have been cancelled.

An official at CPB told The Covered Bond Report that a CPB covered bond backed by Cypriot assets (issued off its Programme II) will be transferred to a new entity created as part of the island’s banking sector restructuring plans.

Bank of Cyprus

On Thursday Fitch said that it does not expect CPB’s Cypriot cover pool to be to be split from the bank estate and be used directly to repay the corresponding covered bonds upon the closure of CPB.

“Instead, the agency understands that CPB’s Programme II’s cover assets and covered bonds will be transferred to BoC, following the agreement between the Eurogroup and the Cypriot authorities to fold CPB’s ‘good’ bank into BoC, while the ‘bad’ bank will be wound down,” said the rating agency. “However, details and timing are not currently available.”

CPB Programme II covered bonds and BoC covered bonds, Cyprus pool, were downgraded by Fitch on Thursday from B+ to B as a result of a lowering from AAA to B of the country ceiling assigned to Cyprus. The new country ceiling caps the ratings of all issuers and transactions domiciled in the country, said the rating agency.

Fitch said that it had previously assigned the euro-zone common Country Ceiling of triple-A to Cyprus, reflecting the prohibition within the currency union on restrictions on cross-border movement of capital.

“However, the closure of all Cypriot banks last week, along with the likely continuation of deposit transfer restrictions this week represents a de facto imposition of capital controls in Cyprus,” said the rating agency in explaining the rationale for the revision of the country ceiling to B.

Fitch also said that although material credit risk for the covered bonds is present, it is unlikely that the bonds would suffer a default in the short term, because there is sufficient capacity in the liquidity reserves accounts held by Bank of New York Mellon to make timely interest payments under both programmes at the bonds’ next interest payment dates falling in April 2013 for CPB and June 2013 for BoC.

“While there is still uncertainty regarding the terms of the recapitalisation of BoC, Fitch does not expect the outstanding covered bonds to participate in the bail-in measures affecting other classes of creditors,” added the rating agency.

Cypriot covered bonds backed by Greek assets have meanwhile been cancelled as a result of the Cypriot banks’ restructurings. The covered bonds were sold to Greek lender Piraeus Bank alongside a wider package, and subsequently cancelled, officials at BoC and CPB told The CBR.

According to the BoC official a single outstanding BoC bond backed by Cypriot assets is retained and therefore has not been cancelled.