Fitch Affirms EBSMF Mortgage Covered Bonds at 'A+'; Outlook Positive
KEY RATING DRIVERS
The CvB rating is based on the Long-Term Issuer Default Rating (IDR) of EBSMF's parent, Allied Irish Banks, plc (AIB) of 'BB+', an unchanged IDR uplift of 1, an unchanged D-Cap of 3 notches and the 40.0% OC publicly committed by EBSMF, which provides more protection than the 'A+' BE OC at 32.0% for EBSMF. The 'A+' breakeven OC supports timely payments in a 'A-' scenario and a two-notch recovery uplift in a 'A+' scenario. The Positive Outlook on the CvB reflects that on AIB.
Fitch has lowered the 'A+' BE OC to 32.0% from 40.0% as the maturity mismatches between the cover assets and CvB have decreased. The 'A+' BE-OC is mainly driven by the assets disposal loss component at 21.2%, followed by the credit loss component at 20.9%. The cash flow valuation component reduces the BE OC by 5.1%.
The assets disposal loss has decreased by 14.0% due to a lower maturity mismatch between assets and liabilities (weighted average life (WAL) of assets of 11.7 years, reduced from 12.1 years, and WAL of bonds of 3.9 years, increased from 2.8 years). The WAL of the bonds has increased as a result of the issuance of series 16 in June 2016 for EUR500m, maturing in 2023. Two bonds maturing in 2016 were also redeemed early in February 2016 and May 2016, for a total EUR650m.
The credit loss component has decreased to 20.9% from 22.7%. This is a result of the removal of a significant portion of restructured loans which receive higher foreclosure frequency under Fitch's mortgage loss criteria. On the recoveries side, the higher 'A+' weighted average recovery rate is due to the lower indexed CLTV stemming from increasing house prices in Ireland.
The cash flow valuation component leads to a reduction of the 'A+' BE OC by 5.1% for EBSMF, reflecting the available excess spread.
The D-Cap of 3 notches is due to the weak link of the liquidity risk and systemic risk component that we assess as moderate high risk. The CvB have a 12-month maturity extension and the programme has liquidity reserve coverage for six months of interest payments. Consistent with Fitch's Covered Bonds Rating Criteria, the liquidity risk and systemic risk component for mortgages with a sovereign rated in the 'A' rating category is unlikely to achieve an assessment better than moderate high risk (3 notches).
The unchanged IDR uplift of 1 reflects the covered bonds exemption from bail-in, and that AIB is one of two pillar banks in Ireland. Fitch considers resolution of AIB by other means than liquidation as likely due to AIB's systemic importance in its domestic market.
The 'A+' rating could be upgraded if (i) AIB's IDR is upgraded by one or more notches to 'BBB-' or higher; or (ii) the number of notches represented by the IDR uplift and the D-Cap is increased to five or more; and (iii) the OC that Fitch considers in its analysis is higher than Fitch's breakeven OC given the CvB rating at that time.
The rating could be downgraded should (i) AIB's IDR be downgraded by one notch; or (ii) the sum of the IDR uplift and the D-Cap is revised downwards; or (iii) the OC that Fitch gives credit to is below the breakeven OC for the rating.
The Fitch breakeven OC for the covered bond rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven OC to maintain the covered bond rating cannot be assumed to remain stable over time.