Moody’s cut the rating of Cypriot covered bond programmes on Friday as a result of a new Caa1 country ceiling, doing so after downgrades of their issuers that followed a downgrade of the sovereign.

Covered bonds backed by Cypriot mortgages issued by Bank of Cyprus (BoC) and Cyprus Popular Bank (CPB) were cut from B2 to Caa1, and covered bonds backed by Greek mortgages issued by the two banks were cut from B3 to Caa1.

The rating actions followed the lowering of Cyprus’s sovereign rating from B3 to Caa3 on 10 January. Moody’s said that the key driver of the rating action against the sovereign was a rise in the Cypriot government’s debt burden resulting from the increased recapitalisation needs of its banking system that followed distressed exchanges on Greek government debt and rising delinquencies on loans to Greek and Cypriot creditors.

As consequences, Moody’s cut the ratings of three Cypriot banks, including covered bond issuers BoC and CPB to Caa2, as the rating agency said that the sovereign downgrade led to uncertainties regarding the timing and conditions of an International Monetary Fund, European Union and European Central Bank move to finance bank recapitalisation and that the banks had a significant exposure to the sovereign debt.

Moody’s noted that its Timely Payment Indicator framework does not constrain the covered bond ratings. The TPIs assigned to the affected covered bond transactions are “very improbable”.