Fitch downgrades Bank of Cyprus and Cyprus Popular Bank's covered bond ratings

Fitch ratings agency downgraded on Thursday Bank of Cyprus (BOC) and Cyprus Popular Bank`s (CPB) mortgage covered bonds `B` from `B+` citing uncertainty surrounding the recapitalisation terms of BOC and the transfer of CPB`s cover assets and liabilities to BOC.

Fitch maintained the bank`s covered bonds on Rating Watch negative "as a result of the current banking sector instability, the uncertainty surrounding the recapitalisation terms of BOC and the transfer of CPB`s cover assets and liabilities to BOC."

"The RWN also reflects the negative implications of a potential recession on the domestic economy and on the quality the banks` the residential mortgage portfolios, which would lower the recovery prospects in the event of a covered bonds default.

"Fitch will closely monitor the developments in the recapitalisation and restructuring of the banking sector, and reassess the likely performance of the Cypriot assets securing the covered bonds," the agency concludes.

Under a Eurogroup decision reached last Sunday on a 10 billion financial assistance package for Cyprus, Cyprus Popular Bank will split to a good bank and a bad bank with the good bank folded in Bank of Cyprus which also assumes CPB`s 9 billion ELA loan. Furthermore, Bank of Cyprus will be recapitalised through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders, whereas only uninsured deposits in BoC will remain frozen until recapitalisation has been effected.