London, 20 May 2014 -- Moody's Investors Service has today upgraded to Aa2 from A1 the rating
assigned to the public-sector covered bonds issued by EAA Covered
Bond Bank plc (EAA) (long and short-term issuer ratings Aa2/P-1).
Concurrently, the rating agency has upgraded to Aa3 from A1 the
rating assigned to the public-sector covered bonds issued by Depfa
ACS Bank (Depfa) (deposits Baa3/P-3 stable, standalone bank
financial strength rating E/adjusted baseline credit assessment caa2).
RATINGS RATIONALE
Today's rating action follows the change to the Irish country ceiling,
as well as the upgrade of EAA's issuer rating. EAA's
covered bond ratings are positioned one notch above the Irish country
ceiling of Aa3. There is no further uplift over the current issuer
rating. Both issuer and covered bond ratings are constrained from
certain elements of the Aa3 country ceiling for Ireland; in particular
the risk of currency redenomination still applies. This allows
the rating of EAA's covered bonds to pierce the Irish country ceiling
by one notch only.
Moody's says that the upward adjustment of Ireland's local-currency
country ceiling follows Moody's upgrade of Ireland's government
bond rating to Baa1 stable from Baa3, positive, on 16 May,
2014. Please refer to "Moody's upgrades Ireland to Baa1 from
Baa3; outlook stable" published on 16 May 2014: https://www.moodys.com/research/PR_299549.
For Depfa, the covered bond rating upgrade also follows the increase
in the country ceiling, but the Timely Payment Indicator (TPI) Framework
constrains the covered bond rating at Aa3. The TPIs are "Probable-High"
for the covered bonds issued by both EAA and Depfa.
KEY RATING ASSUMPTIONS/FACTORS
Moody's determines covered bond ratings using a two-step process:
an expected loss analysis and a TPI framework analysis.
EXPECTED LOSS: Moody's uses its Covered Bond Model (COBOL) to determine
a rating based on the expected loss on the bond. COBOL determines
expected loss as (1) a function of the issuer's probability of default
(measured by the issuer's covered bond anchor); and (2) the stressed
losses on the cover pool assets following issuer default.
For both programmes below, cover pool losses are an estimate of
the losses Moody's currently models following a CB anchor event.
Moody's splits cover pool losses between market risk and collateral
risk. Market risk measures losses stemming from 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 cover pool assets' credit quality.
Moody's derives collateral risk from the collateral score.
--- DEPFA ACS BANK
The cover pool losses are 13.4%, split between market
risk of 10.2% and collateral risk of 3.2%.
The collateral score for this programme is currently 6.4%.
The over-collateralisation (OC) in this cover pool is 10.5%.
The issuer provides 5% OC on a "committed" basis. The minimum
OC level that is consistent with the Aa3 rating target is 6%.
These numbers show that Moody's is relying on "uncommitted" (voluntary)
OC in its expected loss analysis.
--- EAA COVERED BOND BANK PLC
The cover pool losses are 17.6%, split between market
risk of 8.5% and collateral risk of 9.1%.The
collateral score for this programme is currently 18.2%.
The OC in this cover pool is 26.7%. The issuer provides
5% OC on a "committed" basis. The minimum OC level that
is consistent with the Aa2 rating target is 0%. These numbers
show that Moody's is not relying on "uncommitted" (voluntary) OC in its
expected loss analysis.
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 (except the minimum OC levels consistent with the new rating
levels) are based on the most recent Performance Overview .
TPI FRAMEWORK: Moody's assigns a "timely payment indicator" (TPI),
which indicates the likelihood that the issuer will make timely payments
to covered bondholders if the issuer defaults. The TPI framework
limits the covered bond rating to a certain number of notches above the
issuer's rating.
The TPI assigned to both transactions is "Probable-High".
Moody's TPI framework does constrain the rating for Depfa's covered
bonds, but not for EAA's.
FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING:
The covered bond (CB) anchor is the main determinant of a covered bond
programme's rating robustness. A change in the level of the CB
anchor could lead to an upgrade or downgrade of the covered bonds.
The TPI Leeway measures the number of notches by which Moody's might lower
the CB anchor before the rating agency downgrades the covered bonds because
of TPI framework constraints.
Based on the current TPI of "Probable-High",
the TPI Leeway for EAA's covered bonds is seven notches.
This implies that Moody's might downgrade the covered bonds because
of a TPI cap, if it lowers the CB anchor by eight notches,
all other variables being equal.
Based on the current TPI of "Probable-High",
the TPI Leeway for Depfa's covered bonds is zero notches.
This implies that Moody's might downgrade the covered bonds because
of a TPI cap, if it lowers the CB anchor by one notch, all
other variables being equal.
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 senior unsecured rating and the
TPI; (2) a multiple-notch downgrade of the issuer; or
(3) a material reduction of the value of the cover pool.
RATING METHODOLOGY
The principal methodology used in these ratings was "Moody's Approach
to Rating Covered Bonds", published in March 2014. Please
see the Credit Policy page on www.moodys.com for a copy
of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions of the disclosure form.
Moody's did not use any stress scenario simulations in its analysis.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain 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 certain 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 certain 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Volker Gulde
VP - Senior Credit Officer
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 upgrades Depfa's and EAA's covered bonds
