Mortgage covered bonds issued by EBS Mortgage Finance were upgraded from A- to A by Fitch yesterday (Thursday) as a result of an upgrade of the issuer’s parent. However, the programme was left on negative outlook alongside Allied Irish Banks’ because of uncertainties over Irish mortgages.

Fitch upgraded EBS’s Issuer Default Rating (IDR) from BBB- to BBB on Monday as a result of its integration with AIB. It is likely that EBS would enjoy the support of AIB and the Irish government, which is AIB’s main shareholder, said Fitch, so EBS’s rating was upgraded to be equalised with AIB’s. This was reflected in an upgrade of EBS’s covered bond issuing arm, EBS Mortgage Finance (EBSMF).

EBSMF’s rating of BBB, combined with an unchanged Discontinuity Cap of 1 assigned to its covered bond programme, resulted in an upgrade to A of EBSMF’s mortgage covered securities (MCS).

The A rating implies an overcollateralisation (OC) breakeven of 77% on a nominal basis—higher than the previous OC requirement of 71.3% as a result of a higher stress scenario used to test the cover pool and of an updated assessment of the maturity profile of the cover pool. Fitch considered 30.5% committed OC on a prudent market value basis provided by EBSMF as equivalent to 78.7% OC on a nominal basis. Such a level of OC is consistent with a BBB+ stress test scenario and allows a two notch recovery uplift, enabling the EBSFM programme to reach a rating of A.

Although the outlook on AIB and EBS was revised from negative to stable following the removal of the negative outlook on Ireland, their covered bonds remain on negative outlook because of concerns regarding the Irish mortgage market. Fitch considered the asset performance of the cover pools as declining.