London, 08 November 2012 -- Moody's Investors Service has today downgraded EAA Covered Bond Bank plc's
(EAA CBB) covered bonds to A3 from Aaa (on review for downgrade) and Depfa
ACS Bank's covered bonds to A3 from Aa3 (on review for downgrade).
Both programmes are governed by the Irish Asset Covered Securities Act.
The downgrades conclude Moody's review of these ratings initiated
on 12 September 2012.
RATINGS RATIONALE
The decision to downgrade the covered bonds follows (1) Moody's
adjustment of Ireland's local and foreign-currency bond and deposit
country ceilings to A3 from Aaa; and (2) the downgrade of EAA CBB's
deposit rating to A3 from Aa1 on review for downgrade. For further
information please see "Moody's adjusts Ireland's country
ceiling to A3", published on 6 September 2012 and "Moody's
downgrades EAA CBB's deposit ratings to A3 from Aa1",
published on 31 October 2012.
The lower country ceiling of A3 means that the highest rating that can
be assigned to a domestic issuer in Ireland is now A3. The rating
action on the Irish public sector covered bonds is driven by the risk
of the covered bonds being redenominated. Ireland's new country
ceiling reflects the elevated risk of economic and financial dislocation
in Ireland. The lower country ceiling also reflects the risk of
Ireland's exit from the euro area and currency redenomination in
the unlikely event of a default by the sovereign.
Moody's has taken into account the composition of the cover pools,
which primarily consist of assets that are non-Irish sovereign
risk. However, the redenomination risk, which is reflected
in the country ceiling, affects the covered bonds irrespectively
of the cover pool composition. For further information, please
see Moody's Rating Implementation Guidance "Local Currency
Country Risk Ceiling for Bonds and Other Local Currency Obligations",
published 16 August 2012.
EAA CBB's covered bonds benefit from a guarantee from the bank's
100% owner Erste Abwicklungsanstalt (Aa1, negative/ Prime-1),
which is the Germany-based wind-down agency of the former
WestLB. The downgrade of the covered bonds reflects Moody's
assessment that the guarantee does not cover a redenomination scenario.
The guarantor could consider fully compensating bondholders for any losses
triggered by a redenomination of the currency in the country. However,
the legal terms of the guarantee do not require the guarantor to opt for
this course of action and Moody's believes that this discretionary
compensation is not sufficiently reliable in order to reflect it in EAA
CBB's covered bond ratings.
The ratings assigned by Moody's address the expected loss posed to investors.
Moody's ratings address only the credit risks associated with the transaction.
Other non-credit risks have not been addressed, but may have
a significant effect on yield to investors.
KEY RATING ASSUMPTIONS/FACTORS
Covered bond ratings are determined after applying a two-step process:
an expected loss analysis and a TPI framework analysis.
EXPECTED LOSS: Moody's determines a rating based on the expected
loss on the bond. The primary model used is Moody's Covered
Bond Model (COBOL), which determines expected loss as (1) a function
of the issuer's probability of default (measured by the issuer's
rating); and (2) the stressed losses on the cover pool assets following
issuer default.
The cover pool losses are an estimate of the losses Moody's currently
models if the relevant issuer defaults. Cover pool losses can be
split between market risk and collateral risk. Market risk measures
losses as a result of refinancing risk and risks related to interest-rate
and currency mismatches (these losses may also include certain legal risks).
Collateral risk measures losses resulting directly from the credit quality
of the assets in the cover pool. Collateral risk is derived from
the collateral score.
The cover pool losses of EAA CBB's covered bonds are 18.2%,
with market risk of 11.5% and collateral risk of 6.8%.
The collateral score for this programme is currently 12.3%.
The over-collateralisation in this cover pool is 33.5%,
of which 5.0% is provided on a "committed" basis.
The cover pool losses of Depfa's covered bonds are 13.8%,
with market risk of 10.5% and collateral risk of 3.3%.
The collateral score for this programme is currently 6.6%.
The over-collateralisation in this cover pool is 8.6%,
of which 5.0% is provided on a "committed" basis.
For further details on cover pool losses, collateral risk,
market risk, collateral score and TPI Leeway across covered bond
programmes rated by Moody's please refer to "Moody's EMEA Covered Bonds
Monitoring Overview", published quarterly. All numbers in
this section are based on the most recent Performance Overview report
(based on data as per 30.06.2012).
For both covered bond programmes, the minimum over-collateralisation
level that is consistent with the newly positioned rating is 0%.
Therefore, Moody's is not relying on over- collateralisation
that is "uncommitted" in its expected loss analysis.
TPI FRAMEWORK: Moody's assigns a "timely payment indicator" (TPI),
which indicates the likelihood that timely payment will be made to covered
bondholders following issuer default. The effect of the TPI framework
is to limit the covered bond rating to a certain number of notches above
the issuer's rating.
For EEA CBB's and Depfa's covered bonds, Moody's has
assigned a TPI of Probable-High.
SENSITIVITY ANALYSIS
A multiple-notch downgrade of the covered bonds might occur in
certain limited circumstances, such as (1) a sovereign downgrade
negatively affecting both the issuer's deposit rating and the TPI;
(2) a multiple-notch downgrade of the issuer; or (3) a material
reduction of the value of the cover pool.
On 21 August 2012, Moody's released a Request for Comment seeking
market feedback on proposed adjustments to its modelling assumptions.
These adjustments are designed to account for the impact of rapid and
significant country credit deterioration on structured finance transactions.
If the adjusted approach is implemented as proposed, the rating
of the notes affected by today rating action may be negatively affected.
See "Approach to Assessing the Impact of a Rapid Country Credit Deterioration
on Structured Finance Transactions", (http://www.moodys.com/research/Approach-to-Assessing-the-Impact-of-a-Rapid-Country-Credit--PBS_SF294880)
for further details regarding the implications of the proposed methodology
changes on Moody's ratings.
RATING METHODOLOGY
The principal methodology used in these ratings was "Moody's
Approach to Rating Covered Bonds" published in July 2012.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings have been disclosed to the rated entities or their designated
agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entities or their related third parties within
the two years preceding the credit rating action. Please see the
special report "Ancillary or other permissible services provided
to entities rated by MIS's EU credit rating agencies" on the
ratings disclosure page on our website www.moodys.com for
further information.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Alexander Zeidler
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Juan Pablo Soriano
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades EAA CBB's and Depfa's Irish public-sector covered bonds
