PRESS RELEASE: Fitch Rates Bank of Ireland UK Covered Bonds AAA
Fitch has assigned BOI's mortgage covered bonds a Discontinuity Factor (D-Factor) of 13.6%, as a measure of the likelihood of interruption of payments on the covered bonds upon a default of BOI. The D-Factor has been increased from the former 11.4%, in order to reflect that the new series does not benefit from an extendable maturity date but is instead protected by a pre-maturity test. Unlike its predecessors where the original maturity date can be extended by up to 12 months to compensate for maturity mismatches between the amortising loans in the cover pool and the bullet redemptions of the covered bonds, the latest bond has a pre-maturity test, which requires cash to be set aside six months ahead of maturity if the issuer loses its 'F1+' rating. This is extended to 12 months if the rating is downgraded below 'F1'. A non-Fitch rating trigger has been breached, so the issuer is required to post the cash six months prior to redemption.
The D-Factor is measured on a scale between 0% and 100%, with 0% reflecting perfect continuity and 100% equivalent to an interruption of payments due on covered bonds upon an issuer default. The D-Factor assigned to the bank's mortgage covered bonds, combined with BOI's Long-term Issuer Default Rating (IDR) of 'A', limits the rating on the covered bonds on a probability of default basis to a maximum of 'AA+'. Under the agency's cash flow analysis, existing over-collateralisation (OC) allows the cover pool to withstand 'AA+' stress levels and still repay the covered bonds on a timely basis. However, should the covered bonds default, projected recoveries above 91% at 'AAA' stress levels support an uplift of up to two notches. This implies a maximum rating of 'AAA' for the bank's covered bonds.
BOI's cover pool is made up solely of English, Welsh and Northern Irish mortgage loans. As at 11 March 2009 it consisted of 54,345 loans, secured on residential properties, with a total outstanding balance of GBP5.5bn. The portfolio has a weighted average (WA) original loan-to-value ratio (LTV) of 68.2%. The WA current indexed LTV of 70.1% is based on Fitch's methodology, giving credit to 50% of any appreciation in the house price index and full consideration to any depreciation in the index. The WA seasoning is 2.85 years. In a 'AAA' scenario, Fitch has calculated the pool's cumulative weighted average frequency of foreclosure at 18.1%, with a weighted average recovery rate of 67.2%.
Fitch formed assumptions on the credit behaviour of the cover pool under a 'AAA' stress scenario, and tested mismatches between the cover pool and the mortgage covered bonds in a wind-down scenario. In particular, it was assumed that portions of the portfolio could be sold, if needed, to meet the payments under the mortgage covered bonds. Different assumptions are taken into account by the agency when estimating the sale price under a 'AAA' stress scenario within a relatively tight timeframe. An asset coverage test is designed to ensure that a minimum level of OC on the covered bonds is available at any time to protect the bondholders against credit and market risks. The contractual maximum asset percentage is 93.5%. However, outstanding covered bonds currently cannot exceed 87.6% of the total cover pool, providing at least 14.2% OC. Available nominal OC currently stands at approximately 22.8%.
Due to the dynamic nature of the cover pool and covered bonds, Fitch will monitor the key characteristics of the cover assets on a quarterly basis and periodically check whether available OC provides protection that is commensurate with the rating. A report on BOI's covered bond programme, entitled "Bank of Ireland - Mortgage Covered Bonds", is available on the agency's public website, www.fitchratings.com.
On 11 March 2009, Fitch announced its proposed refinement of the agency's assumptions related to liquidity risks within covered bond programmes. The proposals are detailed in a report entitled "Exposure Draft on Assessment of Liquidity Risks in Covered Bonds", which is available on the agency's public website, www.fitchratings.com. The exposure draft report is subject to a six-week market consultation period. D-Factors and overcollateralisation in line with assigned ratings are generally expected to increase.
Contacts: Jan Seemann, London, Tel: +44 207 417 3533; Suzanne Albers, +44 207 417 6325.
Media Relations: Hannah Warrington, London, Tel: +44 (0) 207 417 6298, Email: hannah.warrington@fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Publié le 24 mars 2009 Copyright © 2009 Dowjones
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