Fitch Affirms AIBMB and 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 Allied Irish Banks, plc (AIB) at 'BB+', an unchanged IDR uplift of 1, an unchanged D-Cap of 3 notches and the OC that Fitch considers in its analysis, which provides more protection than the 'A+' BE OC at 29.0% for AIBMB and 40.0% 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.
We have lowered the 'A+' BE OC to 29.0% from 36.0% for AIBMB and to 40.0% from 48.0% for EBSMF. This follows the application of a lower RSL for Irish residential mortgages following the update of the RSL assumptions (see 'Fitch Lowers Mortgage Refinance Spread Assumptions for Ireland' dated 12 February 2016 at www.fitchratings.com). At the tested rating on a probability of default (PD) scenario (A-), the RSL is 421bps for AIBMB and 394bps for EBSMF.
For both programmes, the asset disposal loss component, while lower than the figures published in December 2015, remains the main driver of the 'A+' BE OC. The asset disposal loss component is 26.6% for AIBMB and 35.2% for EBSMF. The higher level for EBSMF reflects the more significant asset and liability mismatches for this programme. The credit loss component for each programme is unchanged at 15.3% and 22.7%, due to stable cover pool compositions. The cash flow valuation component continues to result in a reduction of the 'A+' BE OC by 9.4% and 12.9% respectively in AIBMB and 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 is assessed as Moderate high risk. The CvB has a 12-month maturity extension and both programmes have liquidity reserve coverage for timely interest payment. 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.
EBSMF intends to enter into an account bank agreement in line with Fitch's counterparty criteria within a set timeframe. As a result, account bank risk is not constraining the CvB ratings.
Fitch takes into account of the publicly committed OC of 39.0% by AIBMB and 48.0% by EBSMF.
For both programmes, 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's rating at that time.
Both programmes could be downgraded should (i) AIB 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 of each programme.
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.