New counterparty risk assessment affects the covered bond anchors
London, 21 May 2015 -- Moody's Investors Service has today upgraded the ratings of the mortgage
covered bonds across three Irish covered bond programmes.
--- to Aa2 from A3, on review for upgrade,
the ratings on the covered bonds issued under the Mortgage Bank Covered
Bond Programme of Allied Irish Banks, p.l.c.
(AIB; deposits Ba1 stable, adjusted baseline credit assessment
(BCA) b1, counterparty risk assessment Baa3(cr))
--- to Aa2 from A3, on review for upgrade,
the ratings on the covered bonds issued under the Mortgage Finance Covered
Bond Programme of EBS (deposits Ba1 stable, adjusted baseline credit
assessment (BCA) b1, counterparty risk assessment Baa3(cr))
--- to Aa1 from A1, on review for upgrade,
the ratings of the covered bonds issued under the Mortgage Bank Covered
Bond Programme of Bank of Ireland (deposits Baa2 stable, adjusted
baseline credit assessment (BCA) ba2, counterparty risk assessment
Baa1(cr))
These rating actions conclude Moody's review of the three Irish covered
bonds programmes mentioned above.
RATINGS RATIONALE
Today's rating action on the covered bonds follows Moody's conclusion
of the ongoing review of the deposit ratings and the assignment of new
CR Assessments of the underlying institution supporting the covered bonds:
Allied Irish Banks, p.l.c., EBS Ltd and
Bank of Ireland.
Please refer to "Moody's takes rating action on Irish Banks" published
on 20 May 2015: https://www.moodys.com/research/Moodys-takes-rating-action-on-Irish-Banks--PR_324675
The TPIs assigned to all three transactions are "Probable".
The ratings of AIB Mortgage Bank's and EBS Mortgage Finance's
covered bonds are constrained by the TPI framework, but it does
not constrain the rating of Bank of Ireland Mortgage Bank's covered
bonds. Instead, Ireland's local-currency bond
ceiling constrains the ratings of Bank of Ireland Mortgage Bank's
covered bonds at Aa1.
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 probability that the
issuer will cease making payments under the covered bonds (a CB anchor
event); and (2) the stressed losses on the cover pool assets following
a CB anchor event.
The CB anchor for the programmes is the CR assessment plus one notch.
The CR assessment reflects an issuer's ability to avoid defaulting
on certain senior bank operating obligations and contractual commitments,
including covered bonds. Moody's may use a CB anchor of the
CR assessment plus one notch in the European Union or otherwise where
an operational resolution regime is particularly likely to ensure continuity
of covered bond payments.
For all of the three programmes, 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.
--- AIB Mortgage Bank covered bonds
The cover pool losses for this programme are 18.4%,
with market risk of 14.7%, and collateral risk of
3.7%, and the collateral score is currently 5.5%.
The over-collateralisation (OC) in this cover pool is 96.6%
on a nominal basis and 72.3% on a Prudent Market Value (PMV)
basis. The minimum PMV OC level that is consistent with the Aa2
rating target is 8.0% , of which the issuer,
provides 5.0% on a "committed" basis. These numbers
show that Moody's is relying on "uncommitted" OC in its expected loss
analysis.
--- EBS Mortgage Finance covered bonds
The cover pool losses for this programme are 15.1%,
with market risk of 11.4%, and collateral risk of
3.7%, and the collateral score is currently 5.5%.
The OC in this cover pool is 155.7% on a nominal basis and
112.6% on a PMV basis. The minimum PMV OC level that
is consistent with the Aa2 rating target is 7.5% ,
of which the issuer, provides 5.0% on a "committed"
basis. These numbers show that Moody's is relying on "uncommitted"
OC in its expected loss analysis.
--- Bank of Ireland Mortgage Bank covered bonds
The cover pool losses for this programme are 20.6%,
with market risk of 11.7%, and collateral risk of
8.9%, and the collateral score is currently 13.3%.
The OC in this cover pool is 53.7% on a nominal basis and
32% on a PMV basis. The minimum PMV OC level that is consistent
with the Aa1 rating target is 13.5%, of which the
issuer, provides 5.0% on a "committed" basis.
These numbers show that Moody's is relying on "uncommitted" 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 Global Covered Bonds
Monitoring Overview", published quarterly. All numbers in
this section are based on the most recent Performance Overviews and Moody's
most recent modelling based on data, as of 31 December 2014.
The PMV OC numbers are based on the relevant issuer's investor reports
as of 31 December 2014.
TPI FRAMEWORK: Moody's assigns a "timely payment indicator"
(TPI), which measures the likelihood of timely payments to covered
bondholders following a CB anchor event. The TPI framework limits
the covered bond rating to a certain number of notches above the CB anchor.
Factors that would lead to an upgrade or downgrade of the rating:
The 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.
The TPIs for all three programmes are "Probable". The
TPI Leeways for AIB Mortgage Bank and EBS Mortgage Finance covered bond
programmes are zero notches. Thus, any reduction of the CB
anchor may lead to a downgrade of the covered bonds in both programmes.
The TPI Leeway for the Bank of Ireland Mortgage Bank Covered Bond Programme
is one notch. This implies that if Moody's lowers the CB anchor
by two notches, the rating agency might also downgrade the covered
bonds because of a TPI cap, all other variables being equal.
A multiple-notch downgrade of the covered bonds might occur in
certain circumstances, such as (1) a country ceiling or sovereign
downgrade capping a covered bond rating or negatively affecting the CB
Anchor and the TPI; (2) a multiple-notch downgrade of the
CB Anchor; 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 2015.
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.
Julie Ng
Asst Vice President - 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 upgrades several Irish mortgage covered bond ratings; actions conclude review
