A Standard & Poor’s upgrade of Ireland from BBB+ to A- on Friday is unlikely to result directly in an upgrade of Irish covered bonds rated by S&P, according to an analyst.

The rating agency rates covered bonds issued by AIB Mortgage Bank and Depfa ACS Bank A and BBB, respectively.

According to Jan King, senior covered bond analyst at RBS, Friday’s rating action will have little to no impact on Irish covered bonds rated by S&P as, under the rating agency’s methodology, these covered bonds are constrained by the issuer ratings and not by the current sovereign ceiling.

“An upgrade of covered bonds issued by AIB would first require an issuer upgrade as AIB mortgage-backed covered bonds are at the maximum six notches of uplift,” he said. “Considering that AIB Mortgage Bank is on negative outlook, an issuer upgrade would be a surprise.”

A possible sale of Depfa Bank, including its covered bond issuing subsidiary Depfa ACS Bank, as part of a state aid agreement with the European Commission failed to materialise and a decision was taken in May for the bank to be wound down. This led S&P to remove its rating of Depfa ACS Bank from CreditWatch negative on 19 May.

King said that, as with AIB Mortgage Bank, Depfa ACS Bank covered bonds are constrained by the issuer, adding that an issuer upgrade would be more reliant on the new risk profile and support Depfa ACS Bank will be provided during wind-down.

The upgrade of the Irish sovereign reflects S&P’s view of improving economic growth in Ireland, with the rating agency noting its expectations for a sustained recovery of the domestic economy and high inflows of foreign direct investment. The rating is on positive outlook.