OREANDA-NEWS. Fitch Ratings has upgraded AIB Mortgage Bank's (AIBMB) and EBS Mortgage Finance's (EBSMF) mortgage covered securities (MCS) to 'A' from 'A-'. The Outlooks are Positive.

KEY RATING DRIVERS
The upgrades reflect the positive revision of the Discontinuity Cap (D-Cap) to 3 notches (moderate high risk) from 2 notches (high risk) of both programmes, following the revision of the liquidity gap and systemic risk assessment of the Irish mortgages programmes (see 'Fitch: Positive Revision on Liquidity Risk Assessment for Irish Mortgages Covered Bonds' dated 23 September 2015 at www.fitchratings.com).

The MCS rating is based on Allied Irish Banks, plc's (AIB) Long-term IDR of 'BB', an unchanged IDR uplift of 1, a D-Cap of 3 notches and the over-collateralisation (OC) that Fitch considers in its analysis, which provides more protection than the 'A' breakeven OC for AIBMB at 37.0% and for EBSMF at 47.5%. The Positive Outlook on the MCS's rating reflects that on AIB. AIB's IDR is used as reference IDR for both programmes since both issuers are specialised wholly-owned subsidiaries (either directly or indirectly) of AIB.

For both programmes, the respective 'A' breakeven OC support timely payments in a 'BBB+' scenario and a two-notch recovery uplift in a 'A' scenario.

For AIBMB, the 37.0% 'A' breakeven OC is largely driven by the asset disposal loss component of 34.7%, due to large maturity mismatches (the weighted average life or WAL, of assets at 11 years versus bonds' at three years) and the high refinancing spreads (523bps in the BBB+ stress) applied. This is followed by the cover pool's credit loss of 13.6% in a 'A' scenario. The cash flow valuation component (-7.9%) reduces the 'A' breakeven OC due to high excess spread and the longer WAL of the assets versus the liabilities.

Similarly, the 47.5% 'A' breakeven OC in EBSMF is primarily driven by the asset disposal loss component of 43.0%. This is followed by the cover pool's credit loss of 20.2% in a 'A' scenario. The cash flow valuation component (-10.8%) reduces the 'A' breakeven OC due to the excess spread in the programme.

The 'A' credit loss component of EBSMF is higher than AIBMB because of the higher proportion of restructured loans and an underwriting hit applied on EBSMF's cover pool to reflect the historically weaker performance of the issuer's mortgage book than its peers.

Fitch does not give credit to the interest rate swap between AIB and the issuers because AIB is no longer an eligible swap counterparty to support a 'A' covered bond rating according to Fitch's counterparty criteria. According to the swap documents, a replacement should have been appointed upon AIB's downgrade to below investment grade in May 2015. As a result, Fitch disregarded the benefit of the swaps in its cash flows model and the 'A' breakeven OC incorporates the impact of Fitch's interest rate stresses. Any termination payment due to the swap counterparty who is the defaulting party will be subordinated to the MCS holders according to the Asset Covered Securities (ACS) Act.

For the EBSMF programme, no account bank replacement period is in place. The account bank that holds the reserve fund and receives the mortgage payments from the collection bank is BNP Paribas (BNP, A+/Stable). Since BNP's rating is higher than the rating of MCS issued by EBSMF, the account bank's rating is currently not a limiting factor to the MCS's rating. The agency notes that EBSMF has another account bank, KBC Bank (KBC, A-/Stable) and does not intend to place the reserve fund or direct the mortgage payments to KBC. Therefore, KBC's rating is also not a rating constraint. The ACS Act stipulates that deposits with a maturity of not more than 100 days with an eligible financial institution that qualifies at least at credit quality step 2 (i.e. at least A- or above) are eligible substitution assets.

The D-Cap of 3 is due to the weak link of the liquidity risk and systemic risk component that is assessed as moderate high risk. The MCS have a 12-month maturity extension and adequate liquidity reserve coverage for timely interest payment.

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.

Fitch takes into account of the issuers' publicly committed OC of 39.0% for AIBMB and 49.0% for EBSMF.

RATING SENSITIVITIES
For both programmes, the 'A' rating could be upgraded if any of the following occurs: (i) the IDR of AIB is upgraded by one or more notches to 'BB+' 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 MCS's rating at that time

The Fitch breakeven OC for the covered bond rating will be affected, amongst 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.