Moody’s cut its bank deposit rating of EAA Covered Bond Bank from Aa1 to A3 yesterday (Wednesday) after having lowered Ireland’s country ceiling for local and foreign currency bonds and deposits from Aaa to A3 on 6 September.

EAA CBB (formerly WestLB Covered Bond Bank) benefits from a guarantee from 100% owner Erste Abwicklungsanstalt (EAA), the wind-down agency of the former WestLB (now Portigon), according to the rating agency. EAA is rated Aa1 by Moody’s.

“Whilst EAA CBB’s deposit ratings qualify for credit substitution based on the guarantee, the lower ceiling means that in principle, the highest rating that can be assigned to a domestic issuer in Ireland is now A3,” it said.

The rating agency said that the downgrade reflects its assessment that the guarantee of EAA does not cover a redenomination scenario and that EAA CBB’s deposits would be governed and enforced under Irish law, with the deposits then being subject to redenomination and currency controls.

“Furthermore, the rating agency has taken into account the composition of the entity’s assets, which primarily consist of US dollar and euro-denominated, non-Irish sovereign risk,” said Moody’s. “These assets display a high degree of correlation to potential redenomination risk in other euro area countries, potentially adversely affecting those assets’ quality and recovery potential.

“The guarantor could consider fully compensating depositors for any losses triggered by a redenomination of the currency in the country. However, the legal terms of the guarantee do not require EAA to opt for this course of action and Moody’s believes that this discretionary compensation is not sufficiently reliable in order to reflect it in EAA CBB’s deposit ratings.”