DBRS Confirms Ratings and Maintains UR-D Status on Bank of Ireland Mortgage Bank Mortgage Covered Securities

DBRS Ratings Limited (DBRS) has today confirmed its “A” rating and maintained the Under Review with Developing Implications status on the outstanding Mortgage Covered Securities in the Bank of Ireland Mortgage Bank Mortgage Covered Securities Programme (the Programme). The rating actions follow the completion of a full review of the programme.

The rating actions are based on the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of BBB (high), Under Review with Negative Implications, being the Issuer rating of the Governor and Company of the Bank of Ireland (BOI). The Programme’s issuer, Bank of Ireland Mortgage Bank, is a wholly owned subsidiary of BOI.
-- A legal and structuring framework (LSF) assessment of Adequate assigned to the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BB (high), being the minimum CPCA given the CBAP and the rating achievable on the covered bonds (CB).
-- An LSF-implied likelihood (LSF-L) of A (low).
-- A one-notch uplift from the recovery prospect.
-- A level of overcollateralisation (OC) of 22.41% that DBRS gives credit to, being the lowest observed OC level during the past 12 months adjusted by a scaling factor of 90%.
-- The Issuer’s capabilities with respect to origination of the cover pool (CP) and servicing of the CP.

DBRS published its updated “Rating European Covered Bonds Methodology” on 8 September 2015 (please see the DBRS website under Methodologies). The updated methodology redefines the analysis for deriving the CBAP of a European Programme with a Reference Entity (RE), subject to the Bank Recovery and Resolution Directive (BRRD), and may give up to two notches of uplift from the RE’s senior unsecured rating.

The programme’s RE is Bank of Ireland Mortgage Bank. The current Issuer rating of the RE’s parent company, BOI, incorporates a notching benefit from the sovereign support and is currently under review. DBRS will not be able to take conclusive rating actions on the Programme before, at a minimum, the review of the parent company’s rating is concluded. The under review status on BOI follows DBRS’s review of implications from the recent developments in European regulation and legislation regarding the BRRD.

At the same time, DBRS published a press release announcing its intention to introduce a Preferred Obligations Rating for European banks that it rates (please refer to the DBRS website under Commentaries). DBRS considers the approach for the Preferred Obligations Rating similar to that for the determination of CBAP. To the extent that the Preferred Obligations are introduced, they will likely provide the starting point for the CB. Should the intention to introduce Preferred Obligation Ratings eventually materialise, the conclusion of the review on the CB ratings may be further delayed.

DBRS has assessed the LSF related to the BOIMB Programme as Adequate, according to its rating methodology. For more information, please refer to DBRS commentaries “DBRS Assigns LSF Assessment to Irish Covered Bonds” and “Irish Covered Bonds: Legal and Structuring Framework Review,” both available at www.dbrs.com.

The total outstanding amount of securities under the Programme is EUR 8,696,450,000. Of the Mortgage Covered Securities outstanding, 67.1% pay a fixed coupon. The interest rate mismatch in the Programme is hedged with BOI.

As of the end of June 2015, the CP included EUR 11.74 billion residential mortgages and EUR 1.34 billion substitution assets. The weighted-average (WA) current loan-to-value (LTV) of the mortgages was 58.41%, while the WA indexed LTV was 79.76%. Buy-to-let mortgages represented 18.91% of the CP. Fixed-rate mortgages in the CP accounted for 7.84% of the balance, while tracker and variable mortgages represented 92.16% of CP balance. All CP assets and all Mortgage Covered Securities are denominated in euros. As such, investors are not currently exposed to any foreign exchange risk.

DBRS upgraded the sovereign rating of the Republic of Ireland to “A” on 13 March 2015 (please see the DBRS press release and corresponding report). House prices have also recovered from their lows over the past year, resulting in the improvement of LTV in the CP. DBRS consequently reduced its Probability of Default and Loss Given Default assumptions on the CP in its cash flow analysis. The expected loss assumption at single B rating level is consequently reduced to 3.96%.

The transaction was modelled using the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults, recoveries of the assets, interest rate stresses and market value spreads to calculate liquidation values on the CP.

Following a wind-down cash flow simulation aimed at covering the cost of funding under a stress scenario, which yielded good recovery prospects, DBRS granted one-notch uplift from the LSF-L. As a result, DBRS confirms the Programme’s rating at “A.”

Everything else being equal, the ratings of the Programme would be downgraded if any of the following occurred: (1) the CPCA were downgraded below BB (high), (2) the sovereign rating of the Republic of Ireland was downgraded below A (low), (3) the LSF Assessment associated with the Programme were downgraded; (4) the quality and consistency of the CP were no longer sufficient to support a one-notch uplift for good recovery prospect or (5) volatility in the financial markets caused the currently estimated market value spreads to increase.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Rating European Covered Bonds (8 September 2015).

DBRS is undertaking a review and will remove the rating from this status as soon as it is appropriate.

Other methodologies and criteria referenced in this transaction are listed at the end of this press release. This can be found at http://www.dbrs.com/about/methodologies.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include historical default performance data and loan-by-loan level information on the CP provided by the Issuer that allowed DBRS to further assess the portfolio.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; DBRS was not supplied with third-party assessments; however, this did not impact the rating analysis.

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The last rating action on this transaction took place on 3 September 2015, when DBRS assigned an “A” rating to Series 50.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

This rating is Under Review with the Developing Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (ESMA) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Keith Gorman
Initial Rating Date: 18 April 2012
Initial Rating Committee Chair: Erin Stafford

Lead Surveillance Analyst: Vito Natale
Rating Committee Chair: Diana Turner

DBRS Ratings Limited
1 Minster Court, 10 Floor Mincing Lane
London EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960.

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

-- Rating European Covered Bonds
-- Global Methodology for Rating Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Unified Interest Rate Model Methodology for European Securitisations
-- Derivative Criteria for European Structured Finance Transactions

A description of how DBRS analysis structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.