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Rating Action:

Moody's upgrades Depfa's and EAA's covered bonds to A1

Global Credit Research - 24 Jan 2014

London, 24 January 2014 -- Moody's Investors Service has today upgraded by two notches to A1 from A3 the ratings assigned to the public-sector covered bonds issued by Depfa ACS Bank (Baa3 stable, BFSR E/BCA caa2 stable) and EAA Covered Bond Bank plc(A1/Prime-1).

Today's rating action follows the change of the Irish country ceiling -- following Moody's rating action on the Irish government -- as well as the upgrade of EAA's issuer rating to A1. Refer to "Moody's upgrades Ireland's sovereign ratings to Baa3/P-3: outlook changed to positive", 17 January 2014 and "Moody's upgrades EAA CBB's ratings to A1/Prime-1 from A3/Prime-2", 21 January 2014.

RATINGS RATIONALE

Both covered bond ratings are positioned one notch above the Irish country ceiling of A2. In the case of EAA Covered Bond Bank plc, there is no further uplift over the current issuer rating. In the case of Depfa, various adverse elements expressed by the A2 country ceiling do not apply, or may apply only to a lesser extent, whilst the rating constraints from certain elements of the A2 country ceiling for Ireland, in particular the risk of currency redenomination, still apply. This allows the ratings of Depfa ACS Bank Covered Bonds to exceed the Irish country ceiling by one notch.

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 rating); 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 if the issuer defaults. 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 the cover pool assets' credit quality. Moody's derives collateral risk from the collateral score.

--- DEPFA ACS BANK

The cover pool losses for this programme are 13.5%, with market risk of 10% and collateral risk of 3.5%. The collateral score for this programme is currently 7%.

The OC in this cover pool is 11.8%. The issuer provides 5% OC on a "committed" basis. The minimum OC level that is consistent with the A1 rating target is 3%. These numbers show that Moody's is not relying on "uncommitted" (voluntary) OC in its expected loss analysis.

--- EAA COVERED BOND BANK PLC

The cover pool losses for this programme are 19.4%, with market risk of 10.5% and collateral risk of 8.9%. The collateral score for this programme is currently 17.8%.

The OC in this cover pool is 28.4%. The issuer provides 5% OC on a "committed" basis. The minimum OC level that is consistent with the A1 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 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 not constrain the ratings.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

The issuer's credit strength is the main determinant of a covered bond rating's robustness. The TPI Leeway measures the number of notches by which Moody's might downgrade the issuer's rating before the rating agency downgrades the covered bonds because of TPI framework constraints. Currently, the TPI Leeway of Depfa ACS Bank Covered Bonds is one notch, whilst the TPI Leeway of EAA Covered Bond Bank plc Covered Bonds is six notches.

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 July 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Moody's notes that on 19 September 2013 it released a Request for Comment (RFC). In the RFC, the rating agency proposes an adjustment to the anchor point it uses in its covered bond analysis. If the revised Credit Rating Methodology is implemented as proposed, the Credit Ratings of the covered bonds may be affected. Please refer to Moody's Request for Comment, titled "Approach to Determining the Issuer Anchor Point for Covered Bonds" for further details regarding the implications of the proposed Credit Rating Methodology changes on Moody's Credit Ratings https://www.moodys.com/research/Approach-to-Determining-the-Issuer-Anchor-Point-for-Covered-Bonds--PBS_SF342448.

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 to A1
No Related Data.

 

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