Moody’s has affirmed 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.
Following on from an upgrade to the Avondale Securities life ILS notes by Standard & Poor’s, Moody’s Investors Service has now affirmed the EUR380m Baa1(sf) Class A-1 notes (senior tranche) of Avondale Securities SA’s (Avondale) and changed the outlook to positive. Moody’s has also affirmed the EUR20m Baa3(sf) Class A-2 notes (junior tranche) of Avondale with a stable outlook.
The EUR400m Avondale life insurance-linked securities transaction had been beleaguered due to the sovereign rating performance of Ireland, putting the notes 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.
The Avondale ILS deal allowed 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’s ratings, resulting in a number of actions over the years.
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.
Now, Moody’s has changed the “outlook to positive on the Irish sovereign rating and reflects the linkage between the factors that drive the sovereign credit profile — economic strength, institutional strength, government financial strength and susceptibility to event risk — with that of life insurers such as Bank of Ireland Life and consequently the notes’ credit profile.”
Moody’s further explains the situation; “Weak investment returns and higher surrender rates (negative persistency) are the main risks affecting the surplus of the securitized book, and therefore the improvement in both factors will lower the risk of losses for the noteholders. The collateralisation of the notes in aggregate improved to 510% at year-end 2014, up from 406% at year-end 2013, and compares well with the 293% at inception in 2007, driven by continued positive economic growth prospects of the Irish economy and largely favourable equity markets.”
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 and the collateralisation of the notes looking increasingly positive, previous fears about the value of the assets underlying this securitisation are reducing, hence the positive outlook and affirmation from Moody’s.