DBRS Confirms AA (high) Ratings of Bank of Ireland Mortgage Bank Covered Bonds (ACS - Mortgages)

DBRS Ratings Limited (DBRS) has today confirmed the AA (high) ratings 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). This confirmation follows the rating action on the Issuer’s parent, The Governor and Company of the Bank of Ireland (BoI or the Group), on 21 April 2017 when DBRS upgraded the Group’s non-guaranteed senior ratings to A (low), including its Issuer Rating and Non-Guaranteed Long-Term Debt and Non-Guaranteed Long-Term Deposits ratings. The Group’s R-1 (low) Non-Guaranteed Short-Term Debt and Non-Guaranteed Short-Term Deposits ratings were confirmed. BoI’s Long Term Critical Obligations Rating (COR) was upgraded to A (high) from “A.” The trends on all of the ratings are Stable.

Concurrently, DBRS has discontinued the rating on Series 19, which matured on 12 October 2016.

The ratings are based on the following analytical considerations:
-- A Covered Bonds Attachment Point (CBAP) of A (high), which is the Long Term Critical Obligations Rating of BoI. BoI 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 (low), which is 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 26.8% that DBRS gives credit to, which is the minimum observed OC level during the past 12 months adjusted by a scaling factor of 0.85.

The transaction was modelled with the DBRS European Covered Bond Cash Flow Model. The main assumptions focused on the timing of defaults and recoveries of the assets and interest rate stresses to calculate liquidation values on the cover pool (CP).

Everything else being equal, a downgrade of the CBAP by one notch would lead to a downgrade of the covered bonds’ ratings by one notch. However, the level of OC that DBRS gives credit to currently suffices for a CPCA of BBB.

In addition, the ratings of the Programme would be downgraded if any of the following occurred: (1) the CPCA were downgraded below BBB (low), (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 were downgraded, (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 increase.

The total outstanding amount of securities under the Programme is EUR 7.9 billion, while the aggregate balance of the CP is EUR 11.1 billion (as at March 2017, including mortgages and substitution assets). The substitution assets are held in a deposit account that is not contractualised, and the replacement trigger of R-2 (low), being the lowest DBRS short-term rating commensurate with Credit Quality Step 2 — as required for deposits under Article 129(1)(c) of the Capital Requirements Regulation — is not in line with DBRS’s legal criteria. Hence, DBRS gives 40% credit to these assets, leading to a total CP of EUR 10.4 billion, which results in a total OC of 31.5%. Of the securities outstanding, 72.2% pay a fixed coupon. The interest rate mismatch in the Programme is partially hedged with BoI.

As at the end of March 2017, the CP included EUR 9.9 billion of first-lien residential mortgages and EUR 1.2 billion of substitution assets. The mortgage CP has a weighted-average (WA) current unindexed loan-to-value ratio of 55.3%, a WA seasoning of 121 months and a WA remaining time to maturity of 216 months.

As of today, the DBRS-calculated WA life of the CP is roughly 11 years based on a 0% prepayment rate, which is longer than the 4.6 years of WA life on the securities, not accounting for any maturity extension. All CP assets and securities are denominated in euros. As such, investors are not currently exposed to any foreign exchange risk.

DBRS has assessed the LSF related to the Programme as Strong in accordance with its rating methodology. For more information, please refer to DBRS’s commentaries “DBRS Assigns Legal and Structuring Framework Assessment to Irish Covered Bonds Programmes,” “Irish Covered Bonds Legal and Structuring Framework” and “DBRS Upgrades Ratings on Bank of Ireland Mortgage Bank Covered Bonds (ACS – Mortgages) to AA (high),” which are available at www.dbrs.com.

For further information on the Programme, please refer to the associated rating report at www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

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

In DBRS’s opinion, the changes under consideration do not require the application of the entire principal methodology. Therefore, DBRS focused on the cash flow analysis. A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

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

The sources of data and information used for this rating include investor reports provided by BoI. DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on this transaction took place on 23 September 2016 when DBRS upgraded the ratings on the BOIMB Covered Bonds to AA (high).

The lead analyst responsibilities for this transaction have been transferred to Roger Bickert.

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

For further information on DBRS historical 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.

Lead Analyst: Roger Bickert, Vice President
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 18 April 2012

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

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