Fitch yesterday (Thursday) changed from “very high risk” to “high risk” the Discontinuity Caps (D-Caps) for the mortgage covered bond programmes of AIB Mortgage Bank and AIB subsidiary EBS Mortgage Finance to reflect improvements in Ireland, but the A ratings remain on negative outlook in an exception to Fitch’s criteria.

The change to the D-Caps – from 1 to 2 – results from Fitch having reassessed its liquidity gap and systemic assessment of the two programmes and changed this from “very high” to “high”. The move follows an upgrade of Ireland to A- on 15 August and the rating agency said that the new D-Caps are in line with an A category sovereign rating.

“It reflects the improvement in the liquidity of the Irish interbank market, with lower reliance on ECB funding facilities and the greater feasibility of mortgage portfolios sales,” added Fitch. “However, it also considers the vulnerability and contraction of the Irish banking system since the banking crisis.”

However, Fitch noted that in an exception to its covered bond criteria it is not upgrading the Irish covered bonds (mortgage covered securities, or MCS) because of the negative outlook on the BBB issuer default rating (IDR) of Allied Irish Banks plc (AIB), which is the reference IDR for the programmes.

“The potential for a covered bonds downgrade due to an IDR downgrade will not be sufficiently compensated by the buffer provided by the new D-Cap,” the rating agency said. “This is the same treatment as the IDR uplift of 1 which was assigned in April 2014, pending Fitch’s assessment of banks’ IDRs for weakening sovereign support, which is expected to conclude in 1H15.

“The A MCS rating remains on Negative Outlook, as the rating of the bonds could not sustain a potential downgrade of AIB’s IDR to its current Viability Rating of b+.”

Fitch added that the sovereign upgrade has also resulted in an adjustment to mortgage refinancing stresses it applies when testing cashflows for Irish programmes. Base case spread levels have remained unchanged at 425bp and 575bp for loans secured by owner-occupied and buy-to-let properties, respectively, but the A rating spreads have increased marginally from 510bp and 691bp to 516bp and 698bp, said the rating agency.

“This has no impact on the breakeven overcollateralisation (OC) for AIB Mortgage Bank and EBS Mortgage Finance MCS in a A rating scenario,” it added.

Publicly committed OC considered by the rating agency in its analysis provides for more protection than A breakeven levels of 40% and 61% for AIB Mortgage Bank’s and EBS Mortgage Finance’s programmes, respectively, said Fitch.

Photo: AIB headquarters, Dublin