OREANDA-NEWS. Fitch Ratings has affirmed AIB Mortgage Bank's (AIBMB) EUR8.165bn mortgage covered securities at 'A+'. The Outlook is Positive.

KEY RATING DRIVERS

The covered bond rating is based on Allied Irish Banks, plc's (AIB) Long-Term Issuer Default Rating (IDR) of 'BB+', an unchanged IDR uplift of 1, an unchanged D-Cap of 3 notches and the publicly committed OC of 39.0% by AIBMB, which provides more protection than the 'A+' breakeven (BE) OC of 32.0%. The 'A+' BE OC supports timely payments in a 'A-' scenario and a two-notch recovery uplift in a 'A+' scenario. The Positive Outlook on the covered bonds reflects that on AIB.

The 'A+' BE OC has increased to 32.0% from 29.0%, a result of the modelling of the cash flow without giving benefit to the interest rate swap between AIBMB and AIB. This is because although the standby account bank agreement has been activated, the cash collateral posted under the swap has remained with AIB. The agency believes that the cash may not be available when needed for swap novation as AIB does not have an eligible account bank rating to support a 'A+' rating on the bonds.

The main driver of the 'A+' BE OC continues to be the asset disposal loss component at 27.0%. This is followed by the credit loss component at 14.5%. The cash flow valuation component continues to result in a reduction of the 'A+' BE OC by 6.1%, although to a lesser extent than February 2016 since no credit is given to the swap.

The D-Cap of 3 notches is due to the weak link of the liquidity risk and systemic risk component that Fitch assesses as moderate high risk. The programme has a 12-month maturity extension for the soft bullet bonds and has liquidity reserve coverage for timely interest payment. AIB has also confirmed that it will cash collateralise two hard bullet bonds (EUR65m) 12 months in advance of their maturity date in September 2019. Given this mitigating plan and the fact that the hard bullets represent less than 1% of total covered bonds, there is no impact on the liquidity risk and systemic risk component.

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.

RATING SENSITIVITIES

The covered bonds' '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 covered bond rating at that time.

The rating 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 'A+' breakeven OC.

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.