Bank of Ireland Mortgage Bank mortgage covered bonds have been rated A (low) by DBRS, marking the first time the rating agency has rated a European programme outside Portugal.

DBRS rated its first European covered bonds (after having been active in its country of origin, Canada) in December, when it rated Caixa Económica Montepio Geral’s programme, with ratings of covered bonds from four other Portuguese issuers following. DBRS has rated Bank of Ireland since 2005, a spokesperson for the rating agency told The Covered Bond Report.

DBRS said that the A (low) rating of the Bank of Ireland Mortgage Bank (BOIMB) programme was based on these factors (in the rating agency’s words):

1. The Mortgage Covered Securities direct, unconditional and senior obligations of Bank of Ireland Mortgage Bank (BOIMB), a wholly owned subsidiary of the Governor & Company of the Bank of Ireland (Bank of Ireland), which is rated BBB (high) with a Negative trend by DBRS.
2. Irish Asset Covered Securities (ACS) Act 2001 (as amended), which provides, among other things, ACS holders statutory preference to the Cover Assets.
3. DBRS Legal and Structuring Framework Assessment of “Strong”.
4. Contractual Overcollateralisation (OC) level of 5% based on the prudent market value of the mortgage assets and substitution assets.
5. BOIMB’s capabilities with respect to origination of cover pool assets and servicing of the cover pool.
6. The credit quality of the collateral and structural features of the Programme (Extendable Maturity, collateral eligibility criteria, and prudent market value of mortgages for asset coverage).

The rating agency said that it expects a continued decrease in Irish home prices and increases in mortgage arrears to stress the cover pool and challenge BOIMB to maintain the current legislative OC level of 8%, which is above the 5% contractual OC level. According to DBRS, as of 10 April, 18.1% of the outstanding value of securities consisted of substitution assets (deposits with the Bank of Ireland), above a 15% threshold for purposes of calculating the legislative OC level.

The rating agency noted that the counterparty for asset and liability swaps that are included in the cover pool to hedge interest rate risk is Bank of Ireland.

“Bank of Ireland’s non-guaranteed long term rating is currently below the First Rating Threshold of ‘A’,” said DBRS, “which mitigates the counterparty risk in the short term. Although Bank of Ireland is currently posting collateral consistent with the DBRS criteria, there is concern regarding the ability of Bank of Ireland to find a guarantor or replacement in case of a downgrade below the Second Rating Threshold of BBB in which case the counterparty risk may not be mitigated.

“As such, DBRS did not give credit for the cashflows generated by the derivatives in scenarios where it was assumed that the issuer was in default.”

Bank of Ireland terminated a UK covered bond programme upon the redemption of six outstanding covered bonds on Monday. The covered bond programme was not a Regulated Covered Bond programme under the UK’s framework.