Fitch downgrades Cypriot covered bonds

Alan Lawton
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2

Fitch Ratings has downgraded Bank of Cyprus’ (BoC; ‘B’/Negative) and Cyprus Popular Bank’s (CPB; ‘B’/Negative) Cypriot covered bonds, as follows:

  • BoC covered bonds (Greek cover pool): downgraded to ‘B’ from ‘BB-‘; Outlook Negative.
  • BoC covered bonds (Cypriot cover pool): downgraded to ‘B+’ from ‘BB’; Outlook Negative CPB covered bonds (Programme I): downgraded to ‘B’ from ‘BB-‘; Outlook Negative.
  • CPB covered bonds (Programme II): downgraded to ‘B+’ from ‘BB’; Outlook Negative.

The rating actions follow Fitch’s downgrade of Cyprus on 25 January 2013 and the subsequent rating actions on the issuing institutions.

BoC (Greek pool) and CPB (Programme I) are secured by Greek residential mortgages, while BoC (Cypriot pool) and CPB (Programme II) are secured by Cypriot residential mortgages. The four programmes represent €4.55 billion of aggregated rated debt.

In line with Fitch’s covered bonds rating methodology, the banks’ Long-term Issuer Default Ratings (IDR) constitute a floor for the rating of the covered bonds. At the same time, Greece’s Country Ceiling (‘B-‘) applies to programmes secured by Greek assets. As such, the Cypriot covered bonds issued by BoC and CPB and secured by Greek residential mortgage loans have been downgraded to the banks’ IDRs of ‘B’/Negative, and no uplift for recoveries given default can be granted.

Fitch’s unchanged Discontinuity Caps of 0 (full discontinuity) for the programmes containing Cypriot assets continues to reflect the country’s highly stressed economic environment as evidenced by Cyprus’s non-investment grade rating. As a result, the ratings of the BoC (Cypriot Pool) and CPB (Programme II) covered bonds can only exceed the IDRs of the corresponding issuers depending on stressed recoveries from the cover pool in the event of a default.

A one-notch uplift has been applied to the ratings of BoC’s (Cypriot Pool) covered bonds based on the issuer’s unchanged committed asset percentage level of 90%. For CPB (Programme II), Fitch relies on the minimum level of over-collateralisation (OC) required by the Cypriot covered bond law (5%) to grant a one-notch recovery uplift. As such, the ratings of the covered bonds issued under both programmes have been downgraded to ‘B+’; Outlook Negative. The Fitch breakeven OC corresponding to each programme’s rating is equal to the minimum level of 5% required by the Cypriot covered bonds law.

All else being equal, a downgrade of BoC or CPB’s IDR will lead to an equivalent downgrade on their covered bonds, therefore the Negative Outlook on the covered bonds reflects that on the banks’ IDRs.

VAT on property purchases

Nigel Howarth
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2

PWC CYPRUS has recently published the 2013 edition of its Tax, Facts & Figures guide that provides information about the tax system in Cyprus, based on the current tax legislation and practice as at January 2013.

The PwC guide includes a section concerning the VAT (Value Added Tax) concessions for those buying property on the island as their first and primary residence:

Reduced VAT rate of 5 per cent

Imposition of the reduced rate of 5 per cent on the acquisition and/or construction of residences for use as the primary and permanent place of residence.

The reduced rate of 5 per cent applies to contracts that have been concluded from 1 October 2011 onwards provided they relate to the acquisition and/or construction of residences to be used as the primary and permanent place of residence for the next 10 years.

For contracts concluded up to 30 September 2011 for the acquisition and/or construction of residences for use as the primary and permanent place of residence, the eligible person must apply for a grant.

The reduced rate of 5 per cent applies for the first 200 square meters of residences of total covered area of up to 275 square meters. In the case of families with more than 3 children the allowable total covered area increases by 15 square meters per additional child beyond the three children.

The reduced rate is imposed only after obtaining a certified confirmation from the VAT Commissioner.

The eligible person must submit an application on a special form, issued by the VAT Commissioner, which will state that the house will be used as the primary and permanent place of residence. The applicant must attach a number of documents supporting the ownership rights on the property and evidencing the fact that the property will be used as the primary and permanent place of residence.

As from 8 June 2012 eligible persons include residents of non EU Member States, provided that the residence will be used as their primary and permanent place of residence in the Republic.

The documents supporting the ownership of the property must be submitted together with the application. The documents supporting the fact that the residence will be used as the primary and permanent place of residence (copy of telephone, water supply or electricity bill or of municipal taxes) must be submitted within six months from the date on which the eligible person acquires possession of the residence.

A person who ceases to use the residence as his primary and permanent place of residence before the lapse of the 10 year period must notify the VAT Commissioner, within thirty days of ceasing to use the residence, and pay the difference resulting from the application of the reduced and the standard rate of VAT attributable to the remaining period of 10 years for which the property will not be used as the main and primary place of residence.

Persons who make a false statement to benefit from the reduced rate are required by law to pay the difference of the additional VAT due. Furthermore, the legislation provides that such persons are guilty of a criminal offence and, upon conviction, are liable to a fine, not exceeding twice the amount of the VAT due, or imprisonment up to 3 years or may be subject to both sentences.

VAT grant for acquisition of first residence

The grant is given to eligible persons for the construction, or purchase or transfer of a new residence which is used as the main and primary place of residence. The grant applies for contracts concluded up to 30 September 2011.

The application for the grant is submitted to the Ministry of Finance, in relation to residences for which an application has been submitted for the issue of a planning permission after the 1 May 2004. Persons entitled to this grant are individuals who are citizens of the Republic of Cyprus or of any other EU Member State, who reside permanently in the Republic of Cyprus and who have reached the age of 18 at the time of application. The grant is given for residences whose total covered area does not exceed 250 m².

The level of the grant is limited to 130 m² (extended for families with four and more children) and depends on the type of the property and on whether the house was constructed or purchased. The relevant legislation provides that the level of the grant will be adjusted annually for the increase in the Retail Price Index.

Further reading

Tax, Facts & Figures 2013 – Cyprus

First marina apartments delivered

Editorial
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limassol-marina
Photo: http://www.limassolmarina.com

LIMASSOL Marina has welcomed its first residents with the turn of the year. The delivery of the 94 luxury apartments and penthouses at Nereids Residences marks the beginning of the project’s first operational year.

According to a press release, Mr Takis Palekythritis, General Manager of Limassol Marina Ltd, expressed his pride in this important first stage of completion. “We have delivered on time and we feel very proud to be among the best-selling developments in Europe, having achieved sales in excess of €86 million. We are very pleased to have attracted a good balance of high calibre local and international buyers and we are confident of the positive impact this will have on local businesses and the Cyprus economy as a whole.”

A landmark project for Cyprus, Limassol Marina has been changing the face of Limassol town and embarking on a long anticipated transformation of the nearby area. Playing its own part in boosting the economy and image of the island, Limassol Marina is one of the few developments that succeeded in raising awareness and capturing unprecedented interest on a global scale.

With 90 per cent of the project’s marine works and 50 per cent of the residential development and infrastructure already completed, 2013 will mark a new era for Cyprus. Construction of the unique Peninsula and Island Villas, with direct access to the beach or their own private berths, is progressing well.

The first yachts are expected to arrive in March, apartments at Thetis Residences are due for delivery in June and the commercial area will be ready to open its doors to the public this summer.

Property scam leaves families with no home

Editorial
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9

Li,assol property scam leaves families homeless
THIRTEEN Limassol-based families each paid hundreds of thousands of Euros for residential estates in Fasoula but have been left hanging after the contractor and property developer folded without ever building anything, a DISY deputy has said.

“The families bought real estate land in 2007 with [some] companies undertaking to build new residential units within nine months according to the terms of the contract,” said Limassol-based DISY MP Efthimios Diplaros.

But all works were stopped in July 2010, with the companies folding and “leaving these families vulnerable, indebted and without a home, while the bank pushed these people to pay off the companies’ debts to avoid foreclosing on their properties,” he added.

The contractor was not registered and the property developer allegedly pocketed VAT receipts worth over €350,000, Diplaros said.

Diplaros has reported the matter to the attorney-general and said the legal services found grounds for disciplinary action against a land registry official.

The deputy said among the companies’ CEOs and shareholders were a Limassol architect as well as the son and wife of an official with the Limassol land registry.

“The police have also started taking testimonies from witnesses to investigate a criminal case,” Diplaros said.

The families have said they have taken legal action against the contractors and consider the matter to be one of theft.

But he also suggested the (unnamed) bank was also responsible.

“How could the bank not have realised there was a scam and why were the CEOs and shareholders of the contractor not checked or else why did the bank not appoint an independent surveyor to check on the work’s progress?”

Ten of these families, who have young children, have spent their savings to pay off the bank and the property they bought and have been trying for some two and a half years to reach an agreement with lawyers, Diplaros said.

Limassol families left with no home

Indefinite strike by construction workers

Editorial
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CONSTRUCTION workers decided on Thursday to continue their strike indefinitely, while the union patrols became embroiled in a fight in Paphos when a contractor tried to recruit strike-breakers to continue works on a hotel renovation site.

Dozens of unemployed construction workers arrived on the renovation site to protest, while a patrol force by unions SEK, PEO and DEOK were also in place.

But when the jobless construction workers tried to enter the premises, they were prevented by a private security force recruited by the contractor and the hotel management.

There were also strike-breakers in Limassol, SEK’s Yiannakis Ioannou said.

PEO and DEOK said the strike-breakers worked under sub-par conditions compared to the collective agreements, the terms of employment that Cypriot workers agree with their bosses.

Employers “take advantage of thousands of cheap labour hands, trying to set the organised labour movement and the workers back dozens of years,” an announcement by PEO said.

“The real culprits for the sector’s problems and specifically the large unemployment problem are a large part of contractors who fire our peers every day… replacing them with cheap labour force,” the announcement said.

The number of EU workers – now about 10,000 – has not risen over the past few years but at least 6,000 construction workers are now unemployed with limited employment prospects in a sector that was one of the first to enter into recession and is still struggling.

Indefinite strike by construction workers - Cyprus Property News

Fitch cuts Cyprus sovereign credit rating to ‘B’

Alan Lawton
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FITCH RATINGS has cut the Cyprus sovereign credit rating two notches to ‘B’ from ‘BB-minus’ amid concerns that the government’s support for the islands troubled banks could cost more than previously thought.

In a statement issued last evening, Fitch said that “Uncertainty regarding the capital needs of the cooperative banks still remains. Including the latter, the total recapitalization costs of the banking sector could be up to €10 billion, although Fitch anticipates that this figure may include a degree of headroom.”

That would push the size of the rescue package that Cyprus is trying to finalize with the other 16 European Union countries that use the Euro and the International Monetary Fund to over €17 billion.

The credit outlook on the government remains negative. Fitch said this is a reflection of “continued policy uncertainty” over a financial bailout package being prepared with the Eurozone.

According to Fitch, that would drive the country’s debt load to over 140 per cent of its annual gross domestic product, 20 percentage points more than the agency had previously estimated.

Fitch also notes that: “Negotiations between the Troika and the authorities have been protracted and are still on-going, with lingering uncertainty about the timing and details of an EU-IMF rescue programme.”

Outgoing Euro Group President Jean-Claude Juncker has said that a March decision on the bailout is possible.

Government spokesman Stephanos Stephanou said that the new downgrade proves once again that the banks’ recapitalisation is the root of the problems behind the island’s ailing economy.

The draft Memorandum of Understanding between Cyprus and international lenders on the state of the island’s banking sector notes that: “many of the problems for the sector are home-grown and relate to over expansion in the property market as consequence of banks’ poor risk management practices.”

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