ANGLO IRISH Bank’s mortgage covered bonds have been downgraded to junk status by Moody’s, as the rating agency believes it is “very improbable” that bondholders would receive timely payment should the lender default.

Covered bonds – which are a form of IOU that allow banks to borrow from mostly overseas investors using mortgages as collateral – issued by Bank of Ireland, AIB and EBS Building Society were downgraded, but retained their investment grade status.

Mortgage covered bonds issued by Anglo Irish Bank and Anglo Irish Mortgage Bank have been marked down from Baa3 to Ba3, which is a sub-investment grade.

Covered bonds issued by Bank of Ireland Mortgage Bank, AIB Mortgage Bank and EBS Mortgage Finance have all been downgraded to Baa3.

Moody’s believes the likelihood of timely payment on all Irish covered bond programmes in the event of an issuer default is now “very improbable”.

Yesterday’s actions were prompted by corresponding downgrades recently made by Moody’s to the ratings of the underlying institutions supporting the covered bonds.

Last Friday the agency downgraded the unguaranteed senior unsecured debt of the six domestic banks to reflect increased doubt over the State’s willingness to provide additional support to the banks, beyond that which has already been provided to date.

Moody’s said yesterday this in turn creates greater uncertainty over the ability and willingness of the bond issuers to provide support to a covered bond programme in the event of default.

It warned the ratings of Irish mortgage covered bonds could be cut further, because the ratings of the underlying banks remain under review. Oliver Gilvarrry, head of research at Dolmen Securities, said the downgrades were “not hugely surprising” as the agency flagged the fact that it was examining covered bond programmes.

Moody’s also downgraded the ratings of the Mortgage Backed Promissory Notes (MBPNs) issued by Bank of Ireland Mortgage Bank to Baa2, while those issued by KBC Bank Ireland have been downgraded to Baa1.