Moody’s upgraded public sector covered bonds issued by Depfa ACS Bank and EAA Covered Bond Bank from A1 to Aa3 and Aa2, respectively, yesterday (Tuesday) after it raised the Irish country ceiling on Friday and also then upgraded EAA.

Covered bonds issued by Depfa ACS were upgraded from A1 to Aa3, and EAA covered bonds were upgraded from A1 to Aa2 due to a two notch upgrade of the Irish sovereign ceiling from A2 to Aa3, which came alongside an upgrade of the sovereign from Baa3 to Baa1. In addition, EAA Covered Bond Bank was upgraded from A1 to Aa2 yesterday, and the outlook on its rating was changed from positive to stable.

EAA’s covered bond ratings are constrained by certain elements of the Aa3 Irish country ceiling, according to Moody’s, with the risk of currency redomination for example allowing the rating to only exceed the sovereign ceiling by one notch. Depfa ACS covered bonds are constrained at the Aa3 rating under Moody’s Timely Payment Indicator (TPI) framework.

Moody’s assigns Depfa ACS and EAA covered bonds a TPI of “probable-high”.

Jan King, senior covered bond analyst at RBS, said that EAA has no euro benchmark covered bonds outstanding, having paid off its last, a Eu1.5bn issue, in March.

HRE and the German government, the Depfa group’s ultimate owner last Tuesday (13 May) announced that the group will be wound down rather than sold, as was initially planned, but yesterday’s upgrade of the Depfa ACS is not linked to this. In a comment yesterday Moody’s said that the decision to unwind Depfa group is credit positive for senior bond holders, but that subordinated and hybrid investors face high risks.

Covered bond analysts had expected the upgrade of the Irish public sector covered bonds following the rating action on the sovereign. One noted that mortgage Asset Covered Securities were not automatically upgraded because they were not constrained by the former country ceiling.

The upgrade of the Irish sovereign and the higher country ceiling reflect Moody’s belief that momentum in Ireland’s economic growth has been increasing, which it said will speed up ongoing fiscal consolidation, and as such, accelerate government repayment of debt.

In addition, the rating agency said that the country has sharply reduced its off-balance sheet exposures, and improved its credit position relative to other peripheral countries that Moody’s rates.