OREANDA-NEWS. Fitch Ratings has upgraded AIB Mortgage Bank's (AIBMB) and EBS Mortgage Finance's (EBSMF) mortgage covered securities (CvB) to 'A+' from 'A'. The Rating Outlook is Positive for both AIBMB's CvB and EBSMF's CvB.

KEY RATING DRIVERS
The upgrades reflect the upgrade of the Long-term Issuer Default Rating (IDR) of Allied Irish Banks, plc (AIB) to 'BB+'/Positive from 'BB'/Positive (see 'Fitch Upgrades Bank of Ireland and Allied Irish Banks; Outlook Positive' dated 16 December 2015 at www.fitchratings.com). AIB's IDR is used as the reference IDR for both CvB programmes since both issuers are specialised wholly-owned subsidiaries (either directly or indirectly) of AIB.

The CvB ratings are based on AIB's Long-term IDR of 'BB+', an unchanged IDR uplift of 1, an unchanged D-Cap of 3 notches and the over-collateralisation (OC) that Fitch considers in its analysis, which supports the 'A+' breakeven OC for AIBMB at 36.0% and for EBSMF at 48%. The respective 'A+' breakeven OC support timely payments in a 'A-' scenario and a two-notch recovery uplift in a 'A+' scenario. The Positive Outlook on the CvB ratings reflects that of AIB.

For AIBMB, the 36.0% 'A+' breakeven OC is largely driven by an asset disposal loss component of 34.0%, 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 applied. This is followed by the cover pool's credit loss of 15.3% in a 'A+' scenario. A cash flow valuation component of -9.8% reduces the 'A+' breakeven OC due to high excess spread and the longer WAL of the assets versus the liabilities.

Similarly, the 48% 'A+' breakeven OC in EBSMF is primarily driven by an asset disposal loss component of 43.2%. This is followed by the cover pool's credit loss of 22.7% in a 'A+' scenario. A cash flow valuation component of -12.9% reduces the 'A+' breakeven OC.

Following the upgrade of the IDR, AIB and EBS Limited (EBS, BB+/Positive, a subsidiary of AIB) become eligible swap counterparties in AIBMB and EBSMF programmes respectively, taking into account the swap collateral posting mechanism under the interest rate swaps. Fitch thus has modelled the swaps in its cash flows model. This has a beneficial impact on the cash flow valuation.

EBSMF intends to mitigate the risk of the account bank, BNP Paribas (BNP, A+/Stable) in this programme with a rating trigger and remedy in line with Fitch's counterparty criteria within a set time frame. BNP holds a reserve fund to cover timely interest and receives mortgage payments directed from the collection bank. 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, the ratings of BNP and KBC are not constraining the CvB's rating.

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 CvB has a 12-month maturity extension and both programmes have liquidity reserve coverage for timely interest payment, although the rating of EBSMF's CvB is linked to BNP because the account bank risk is not fully mitigated.

The unchanged IDR uplift of 1 reflects the CvB's 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 48.0% for EBSMF.

RATING SENSITIVITIES
For both programmes, the 'A+' rating could be upgraded if (i) the IDR of AIB 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 would 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.