OREANDA-NEWS. Fitch Ratings has placed Bank of Cyprus Public Company Ltd's (BoC, CCC/C, Viability Rating: ccc) EUR650m covered bonds' 'B' rating on Rating Watch Positive (RWP).

The rating action follows Fitch's upgrade of the Cypriot sovereign Issuer Default Rating (IDR) to 'B+' from 'B-' and the revision of the Country Ceiling to 'BB+' from 'BB-' (see "Fitch Upgrades Cyprus to 'B+'; Outlook Positive", dated 23 October 2015 at www.fitchratings.com). As a consequence of the upgrade of the sovereign IDR, Fitch will review the base rating spread levels (RSL) for Cypriot residential mortgage loans, which will be applied in the cash flow analysis for BoC covered bond programme.

Fitch expects to resolve the RWP before year end.

KEY RATING DRIVERS
The RWP reflects the potential upside for the covered bond rating that would follow a downward revision of the RSL for pools of Cypriot residential mortgages, which currently stand at 1500bps in a 'B' rating scenario (a full list of RSL is available in a spreadsheet entitled "Fitch's Mortgage Covered Bond Refinancing Stresses", dated 23 September 2015 at www.fitchratings.com).

BoC's covered bonds have a conditional pass-through amortisation profile. Fitch uses the RSL assumptions, added to its interest rate stresses, in addition to other assumptions such as credit losses from the cover pool, to derive the net present value of the cover pool, should the covered bonds default in a 'B' scenario. A reduction of the RSL would be reflected in a higher value of the mortgage cover assets, which would translate into a lower level of breakeven over-collateralisation (OC) for a given rating.

The 'B' rating is currently based on BoC's 'CCC' IDR, an unchanged IDR uplift of 1, an unchanged Discontinuity Cap (D-Cap) of 8 notches (Minimal Discontinuity) and the 47% committed OC, which provides more protection than the 31% 'B' breakeven OC. This breakeven OC tests for recovery given default of at least 71% in a 'B' stress scenario. The OC that the issuer commits to does not sustain timely payments above the 'CCC+' tested rating on a probability of default basis, given by the IDR as adjusted by the IDR uplift, which is also the floor for the covered bonds rating.

RATING SENSITIVITIES
All else being equal, the RWP on the 'B' rating of the covered bonds issued by Bank of Cyprus Public Company Ltd will be resolved with an upgrade if the 47% committed over-collateralisation (OC) would provide enough protection to absorb losses from a stressed valuation of the cover pool under the revised RSL assumptions. Otherwise the 'B' rating will be affirmed.

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.