Moody’s has upgraded Bank of Ireland Mortgage Bank covered bonds from Baa3 to Baa2 because of a “substantial” increase in OC. It also lifted the Timely Payment Indicator for non-issuer specific reasons, which an analyst said would allow an upgrade of AIB Mortgage Bank ACS.

The rating agency yesterday (Tuesday) said that the increase in overcollateralisation (OC) drove the upgrade, as it brings the expected loss analysis of Bank of Ireland Mortgage Bank covered bonds in line with a Baa2 rating.

According to Moody’s the OC in the cover pool backing the Asset Covered Securities (ACS) is 74.2% on a nominal basis and 37% on a Prudent Market Value (PMV) basis. The issuer provides 5% PMV OC on what the rating agency considers to be a committed basis, which Moody’s considers to be the minimum OC in that form that the issuer should provide for a Baa2 ACS rating. The minimum overall PMV OC level that is consistent with that rating is 8.5%.

Moody’s previously assigned a Timely Payment Indicator (TPI) of Very Improbable to Bank of Ireland’s covered bonds, but lifted this to Improbable because it believes there are signs that house price depreciation in Ireland is bottoming out.

The TPI was also revised to reflect Moody’s view of the PMV concept under the Irish ACS law, under which issuers increased nominal OC levels over time, protecting covered bondholders.

Moody’s commented on the PMV concept in June, saying that it substantially mitigated the negative impact of the worst falls in residential house prices in Europe. (See here for previous coverage.)

The rating of Bank of Ireland’s ACS is not constrained under the TPI framework, according to Moody’s. Bank of Ireland is rated Ba2 by Moody’s – the Mortgage Bank’s rating is not published.

Florian Eichert, senior covered bond analyst at Crédit Agricole, said that the Bank of Ireland ACS appear “firmly anchored” at investment grade.

He would expect Moody’s to change the TPI assigned to AIB Mortgage Bank covered bonds as well, he added. These are rated Baa3, and Allied Irish Banks’, Ba3. AIB Mortgage Bank’s rating is not published.

Changing the TPI from Very Improbable to Improbable would allow the rating agency to upgrade the AIB ACS to Baa2 under its TPI framework, according to Eichert.