Fitch downgraded Bank of Cyprus covered bonds from B to CCC on Friday after switching the starting point for the credit risk analysis from the bank’s Issuer Default Rating (IDR), which is set at Restricted Default, to its Viability Rating (VR).

The rating action applies to Eu1bn of outstanding residential mortgage covered bonds, which were placed on Rating Watch Negative in March 2013. The rating agency said that the downgrade is “a consequence of the linkage of the covered bonds’ rating to BOC’s VR”.

This is instead of using the bank’s IDR, which is on Restricted Default, as the starting point for the credit risk analysis. The VR is “cc”.

“Fitch believes that the VR is a good proxy to measure the bank’s ability to serve its covered bond obligations as it reflects the intrinsic creditworthiness of the bank,” said the rating agency.

It is thought to be the first time that Fitch uses a Viability Rating instead of an IDR as the departure point for rating an issuer’s covered bonds.

The rating agency noted that expected portfolio losses have increased after a review of mortgage loss assumptions for Cypriot loans, but that this was not a driver for the downgrade.

Bank of Cyprus’s covered bond rating is based on the issuer’s VR, an IDR uplift of 1, a Discontinuity Cap (D-Cap) of 0 to reflect full discontinuity, and a programme asset percentage of 95.24%.