DBRS Upgrades Ratings on Bank of Ireland Mortgage Bank Covered Bonds (ACS – Mortgages) to AA (high)

DBRS Ratings Limited (DBRS) has today upgraded to AA (high) from AA (low) the rating on the outstanding covered securities issued under the Bank of Ireland Mortgage Bank (BOIMB or the Issuer) EUR 15,000,000,000 Mortgage Covered Securities Programme (the Programme). The rating action follows the completion of a full review of the Programme.

The upgrade reflects in particular the evolution in the quality of the cover pool (CP) and the level of overcollateralisation of the Programme. The rating is based on the following analytical considerations:

-- A Covered Bonds Attachment Point (CBAP) of “A”, being the Long-Term Critical Obligations Rating of The Governor and Company of the Bank of Ireland (“Bank of Ireland”). Bank of Ireland is the Reference Entity for the Programme.
-- A legal and structuring framework (LSF) assessment of Strong associated with the Programme.
-- A Cover Pool Credit Assessment (CPCA) of BBB, being the lowest CPCA in line with the LSF-Implied Likelihood (LSF-L).
-- An LSF-L of AA (low).
-- A two-notch uplift for good recovery prospects.
-- A level of overcollateralisation (OC) of 40.8% that DBRS gives credit to, being the minimum observed OC level during the past 12 months adjusted by a scaling factor of 0.85.

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.

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the covered bonds rating by one notch. In addition, the ratings of the Programme would be downgraded if any of the following occurred: (1) the CPCA were downgraded below BBB, (2) the quality and consistency of the CP were no longer sufficient to support a two-notch uplift for good recovery prospects, (3) the LSF Assessment associated with the Programme was downgraded by two categories to Average, (4) the relative amortisation of the CB and CP were to move adversely or (5) volatility in the financial markets were to cause the currently estimated market value spreads to be increased.

The total outstanding amount of securities under the Programme is EUR 7.94 billion, while the aggregate balance of the CP is EUR 11.83 billion (as of June 2016, including mortgages and substitution assets), resulting in a total OC of 49.0%. Of the Mortgage Covered Securities outstanding, 72.3% pay a fixed coupon. The interest rate mismatch in the Programme is hedged with Bank of Ireland.

As of the end of June 2016, the CP included EUR 10.68 billion first-lien residential mortgages and EUR 1.15 billion substitution assets. The weighted-average (WA) current loan-to-value (LTV) of the mortgages was 56.7%, while the WA-indexed LTV was 71.9%. The WA seasoning was 9.4 years and the WA remaining term was 18.5 years.

Fixed-rate mortgages in the CP accounted for 12.7% of the balance, while tracker and variable mortgages represented 87.3% of the 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.

For further information on the BOIMB ACS Programme, please refer to the rating report available on www.dbrs.com.

The LSF Assessment associated with the Programme is Strong. It has been upgraded from Adequate, following the DBRS upgrade of the Republic of Ireland’s long-term ratings to A (high) - Stable trend.

The Strong LSF Assessment associated with the programme reflects DBRS’s view of: (1) the satisfactory level of segregation provided by the ACS legal framework and the CB holders first priority right on the CP; (2) the composition of the CP, being 100% prime residential mortgage loans concentrated in an A (high) Domicile Sovereign, combined with a contractual provision to automatically extend each and all CB maturities by 12 months, even though the period may not be entirely available to attempt a fire sale of the CP as the Issuer is not immediately required to look for alternative refinancing arrangements; (3) the lack of any prescriptive structural mitigant or equivalent regulatory feature that might ensure the CP meeting interest and senior costs on the CB in the immediate aftermaths of an assumed default of the Reference Entity; (4) the role of the Central Bank of Ireland in the supervision of the Irish CB, combined with the high penetration of covered bonds as a funding tool for Irish banks in an A (high) Host Sovereign, an asset monitor appointed by and reporting directly to the regulator; and (5) the high involvement of the regulator in the contingency plans dedicated to covered bonds.

DBRS considers Ireland as a jurisdiction for which covers bonds are a particularly important financing tool. For more information, please refer to DBRS commentaries “DBRS’s assessment of European jurisdictions for which Covered Bonds are systemically important” and “Irish Covered Bonds Legal and Structuring Framework” available at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating European Covered Bonds.”

This can be found at http://www.dbrs.com/about/methodologies.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology. A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

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 these ratings include stratification data on the CP provided by the Issuer. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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 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 25 July 2016, when DBRS assigned a AA (low) rating to Series 57 and 58.

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

For further information on DBRS historic default rates published by the European Securities and Markets Authority (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: Antonio Laudani, Vice President
Rating Committee Chair: Christian Aufsatz, Senior Vice President

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

-- Rating European Covered Bonds
-- Rating European Covered Bonds Addendum: Market Value Spreads Range (Midpoints)
-- Critical Obligations Rating Criteria
-- Global Methodology for Rating Banks and Banking Organisations
-- DBRS Criteria: Support Assessments for Banks and Banking Organisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- The Effect of Sovereign Risk on Securitisations in the Euro Area
-- Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings

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