Standard & Poor’s affirmed at A covered bonds issued by Allied Irish Banks Mortgage Bank and removed the rating from CreditWatch negative yesterday (Tuesday), but the outlook is negative. Moody’s confirmed at Ba3 the rating of asset covered securities issued by Anglo Irish Mortgage Bank.

The affirmation of AIB Mortgage Bank’s covered bonds follows an affirmation of the counterparty credit ratings of Allied Irish Bank, the issuer’s parent, which is the swap provider in the programme. The negative outlook on the covered bonds is in line with the negative outlook on AIB. S&P rates Allied Irish Banks BB, negative outlook.

S&P said that AIB is no longer an eligible counterparty under the rating agency’s counterparty criteria and that it therefore reassessed the counterparty risk in AIB Mortgage Bank’s covered bond programme. S&P found that the programme could maintain its A rating given the credit enhancement provided. The credit enhancement level stands at about 58%, according to the rating agency.

It said that a maximum rating of A was achievable on the basis of a programme categorisation of “2” and an asset liability mismatch (ALMM) classification of “low”, which provides for a maximum six notch uplift from the long term rating of AIB (BB).

“The rating on the covered bonds already incorporates the maximum six notch uplift above the long term rating on Allied Irish Banks,” said S&P. “If we lower the counterparty credit rating on Allied Irish Banks, we would subsequently lower the ratings on the covered bonds by the equivalent number of notches.”

Moody’s yesterday confirmed its rating of Anglo Irish Mortgage Bank’s covered bonds at Ba3 after having previously placed them on review for downgrade on 14 February.

The review was initially prompted by a downgrade of the senior unsecured debt of Irish banks on 11 February and a lowering of Anglo Irish’s senior debt rating in June, with Moody’s also cutting Ireland’s sovereign rating to Ba1 on 12 July.

Despite the timely payment indicator (TPI) being “very improbable”, Moody’s noted that the overcollateralisation was enough to maintain the prevailing rating. Anglo Irish has set voluntary minimum overcollateralisation at 32.5%, which is the minimum level needed to maintain a Ba3 rating on the covered bonds under Moody’s methodology.

A multiple notch downgrade of AIB’s covered bonds could occur in the event of a sovereign downgrade negatively affecting the issuer’s senior unsecured rating and the TPI, a multiple notch downgrade of the issuer, or a material reduction of the value of the cover pool.

According to Moody’s, cover pool losses are 42.31%, with market risk of 16.8% and collateral risk of 25.49%. The collateral score is 38%.