Moody’s downgrades Bank of Cyprus’ senior unsecured note program 

Moody`s Investors Service has affirmed the deposit ratings of Bank of Cyprus Public Company Ltd, while it has downgraded its Senior Unsecured Medium-Term Note Program to (P)Caa2, from (P)Caa1.

The rating action reflects the implementation in Cyprus of a new legal framework, which establishes full depositor preference over senior unsecured debt instruments in the event of a bank resolution. The outlook on the long-term deposit ratings remains positive.

On 29 May 2019, the government of Cyprus (Ba2 stable) published a law transposing the European Union`s (EU) Directive 2017/2399 into Cypriot law. The new law provides for preference to all bank deposits – including “junior” corporate and institutional deposits – relative to senior unsecured creditors, establishing full depositor preference – in insolvency and by extension in resolution – over senior unsecured debt instruments, rather than “junior” deposits ranking pari passu with senior unsecured claims.

The framework increases the protection from which “junior” deposits benefit reducing expected loss-given-failure for rated deposits. However, there is no impact on the deposit ratings of the bank, which have been affirmed, because the volume of more junior instruments is currently limited, as there is no senior unsecured debt and a limited volume of more junior instruments currently issued by the bank.

The downgrade of Bank of Cyprus` Senior Unsecured Medium-Term Note Program reflects Moody`s assessment that senior unsecured bondholders are negatively affected by this legislation as they no longer rank pari passu with “junior” depositors such as pension funds, financial institutions, public authorities and large corporates. The lack of loss-sharing with “junior” deposits means that the volume of loss-absorbing liabilities that would rank alongside senior unsecured debt is reduced and therefore the loss rates for senior creditors in the event of failure would therefore increase.

According to Moody’s a material reduction of problem loans and improvement in the provisioning levels, while maintaining strong capital buffers, will be required for the bank to achieve a higher rating. The ratings could also be upgraded following changes to the bank`s liability structure or more clarity on potential issuances under MREL, which would result in a larger loss absorption cushion for depositors and creditors, and a further improvement in the operating environment.

Bank of Cyprus` ratings could experience downward pressure if the bank`s asset quality and capital weaken, possibly as a consequence of higher problem loans or weaker than anticipated recoveries on existing problem loans.

CNA