Avondale Securities life insurance-linked notes upgraded by S&P

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The life insurance-linked notes issued by Avondale Securities SA., which were issued to transfer a block of life insurance risk to the capital markets through securitisation for the Bank of Ireland, have been upgraded by rating agency Standard & Poor’s.

The Avondale transaction was designed to allow the Bank of Ireland to capitalise on the expected value-in-force of a block of life insurance policies, by securitising the risk and selling the notes to investors. However, that meant the tranches of notes were weak-linked to the Bank of Ireland credit ratings, resulting in a number of rating actions over the years.

The Avondale life insurance-linked notes have been on and off a negative watch at a number of credit rating agencies over the last few years, due to the sovereign crisis in Europe and its impact on Ireland and its banks.

Under a support agreement in the Avondale Securities life ILS deal, the Bank of Ireland is obliged to meet payments due on the notes net of potential tax liabilities and costs from servicing the policies, under certain conditions.

It was the Bank of Ireland’s weak credit rating outlook that resulted in a number of downgrades for the Avondale ILS notes, but the latest news from S&P is more positive.

On the 20th July S&P raised the long-term counterparty credit rating on the Bank of Ireland and so given Avondale Securities class A-1 and A-2 notes are weak-linked to that rating, the two tranches of life insurance-linked notes have also had their ratings raised.

S&P explained:

Our ratings on Avondale Securities’ class A-1 and A-2 notes are weak-linked to our long-term rating on the Bank of Ireland due to a support agreement, which we have recently reviewed. The agreement obligates the Bank of Ireland to meet, under certain conditions, payments due on the notes net of potential tax liabilities and costs from servicing the policies.

At year-end 2014, the total outstanding balance on the insurance-linked securities was €92.8 million, close to half of the €181.0 million balance at year-end 2012. At this level, it is sufficiently overcollateralized relative to the value of the total projected surplus from the defined insurance portfolio over time, and including stressed scenarios. The legal maturity on the notes is July 30, 2032.

Originally issued in 2007 by Avondale Securities, a special purpose vehicle set up in Luxembourg by the Bank Of Ireland, the €400m of life ILS notes have been under almost constant assessment by rating agencies.

As well as the counterparty credit fears, linked to the sponsor the Bank of Ireland, rating agencies had also expressed a fear that the value in force (VIF) of the book of securities associated with this transaction could have seen a shortfall.

With the economic outlook for Ireland much improved over the last couple of years, the fears about the value of the assets underlying the securitisation are less of a concern. Hence the upgrade by S&P, as the Avondale Securities transaction meets both counterparty credit and collateralisation requirements under the rating assessment.

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