Moody’s yesterday (Monday) placed on review for downgrade EAA Covered Bond Bank after on Thursday lowering Ireland’s country ceilings, and will assess the extent to which a cross-border guarantee sufficiently mitigates the country-specific risks to which the Irish issuer is exposed.

Moody’s rates EAA Covered Bond Bank (EAA CBB) plc Aa1, with a Prime-1 short term rating. The rating agency on Thursday lowered Ireland’s country ceiling from Aaa to A3 because it considers there to be an elevated risk of economic and financial dislocation in Ireland and a risk of exit and redenomination in the unlikely event of a default by the sovereign.

It said that the ceiling limits the ratings of issuers that are either exposed to the Irish economy and financial system or which, as in EAA CBB’s case, issue debt out of entities incorporated in Ireland.

“Ratings may only exceed the country ceiling where some form of credit mitigation exists that is not related to the local economy,” said Moody’s.

It noted that EAA CBB benefits from a cross-border guarantee from the bank’s 100% owner Erste Abwicklungsanstalt (EAA), which is the Germany-based wind-down vehicle of the former WestLB (now Portigon AG).

The review of EAA CBB, said Moody’s, will assess whether the terms of this guarantee are sufficient to mitigate the risks, particularly redenomination risk, to which EEA CBB is exposed as an Irish issuer.

“During the review of EAA CBB’s ratings, Moody’s will focus on the degree to which the EAA guarantee mitigates the redenomination risk reflected by the A3 country ceiling,” it said. “Moody’s will assess how the guarantee would operate in a redenomination scenario, including which types of risk are legally covered under (or excluded from) the guaranty that has been provided for the benefit of all investors in the Irish bank by its 100% owner, EAA.”

The rating agency said that if it considers that country-specific risks for Ireland, including redenomination risk, may not be fully covered under the existing guarantee in the context of the lower Irish country ceiling it could downgrade EAA CBB to the country ceiling, implying a maximum cut by five notches from the prevailing Aa1 deposit rating, or by up to one rating level for the Prime-1 short term rating.