OREANDA-NEWS. Fitch Ratings has affirmed Bank of Cyprus Public Company Ltd's (BoC; B-/Stable/B) EUR650m conditional pass-through covered bonds at 'BB+'. The Outlook is Stable.

The rating action follows the upgrade of the bank's Issuer Default Rating (IDR) to 'B-' from 'CCC' (see Fitch Upgrades Bank of Cyprus to 'B-' and Hellenic Bank to 'B' dated 25 April 2016 at www.fitchratings.com).

The upgrade of the bank's IDR has not led to an upgrade of the covered bonds' rating because they are already rated at their current maximum achievable rating of 'BB+', which is also the country ceiling for Cyprus. The covered bonds' rating floor is now 'B', reflecting the 'B-' IDR adjusted by the IDR uplift of 1 notch.

KEY RATING DRIVERS
The 'BB+' rating is based on BoC's Long-term Issuer Default Rating (IDR) of 'B-', an unchanged IDR uplift of 1, an unchanged Discontinuity Cap (D-Cap) of 8 notches (minimal discontinuity risk), and the 47% committed OC that Fitch takes into account in its analysis, which provides more protection than the unchanged 41.8% 'BB+' breakeven OC.

The 47% committed OC is enough to make timely payments in a 'B+' scenario, which is the tested rating on a probability of default basis, and allows a three-notch uplift for recoveries given default of at least 91% in a 'BB+' scenario. The Stable Outlook on the covered bond rating reflects that on the bank's IDR.

The unchanged D-Cap of 8 notches (minimal discontinuity risk assessment) reflects the conditional pass-through structure together with the mandatory principal coverage and the six-month interest provisions, which mitigate the refinancing and liquidity risk in a scenario where the cover pool is enforced as a source of payments for the covered bondholders.

The unchanged IDR uplift of 1 notch reflects the bail-in exemption for fully collateralised covered bonds and the domestically systemic importance of the issuer, which means that Fitch believes resolution methods other than liquidation are more likely to preserve important banking operations, including covered bonds.

RATING SENSITIVITIES
A negative rating action on the covered bonds issued by Bank of Cyprus Public Company Ltd (BoC) would be triggered by (i) a downward revision of the 'BB+' country ceiling; (ii) a reduction of the total number of notches given by the IDR uplift and the D-Cap to one notch; and/or (iii) a decrease in the programme overcollateralisation (OC) below Fitch's 41.8% breakeven OC.

All else being equal, it is unlikely that the 'BB+' covered bond rating would be affected by a one-to-three notches change to BoC's IDR. An upward movement of the country ceiling would only lead to an upgrade of the programme's rating if sufficient OC would be available to withstand assumptions for rating scenarios higher than 'BB+'.

The Fitch breakeven OC for the covered bond rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven OC to maintain the covered bond rating cannot be assumed to remain stable over time.