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Fitch Affirms BACBI's Mortgage Covered Bonds at 'AA-'; Revises Outlook to Stable
October 1, 2014 / 5:33 PM / 3 years ago

Fitch Affirms BACBI's Mortgage Covered Bonds at 'AA-'; Revises Outlook to Stable

(The following statement was released by the rating agency) NEW YORK, October 01 (Fitch) Fitch Ratings has affirmed BA Covered Bond Issuer's (BACBI) mortgage covered bonds ratings at 'AA-' following the agency's periodic review of the program. The Rating Outlook has been revised to Stable from Negative. KEY RATING DRIVERS The rating is based on the 'A' long-term Issuer Default Rating (IDR) of the program sponsor, Bank of America N.A. (BANA, 'A'/'F1'/Outlook Negative), no IDR applied, unchanged Discontinuity Cap (D-Cap) of 1 (very high risk) and the 70.1% asset percentage (AP) that Fitch takes into account in its analysis which is higher than the agency's 'AA-' breakeven AP of 77%. The revised outlook for the covered bonds rating is primarily driven by the improvement in the AP on account of reduced loss expectations for the cover pool as the weighted average marked-to-market combined loan-to-value of the assets has declined from 69.5% to 57.6%. The 77% 'AA-' breakeven AP, corresponding to an 'AA-' breakeven overcollateralization (OC) of 29.9%, is driven by the cover pool's credit loss of 9.7% in an 'AA-' scenario, followed by the asset disposal loss of 16.5%. The cash flow valuation component leads to a higher 'AA-' breakeven OC by 16.4% primarily due to the longer weighted average life of the assets versus the liabilities. Fitch's AA-' breakeven OC is lower than the sum of the components, because the agency gives credit for a minimum recovery given default of 91%, rather 100%, in its 'AA-' scenario. This recovery expectation supports a two-notch uplift from the 'A' rating equal to the sponsor's IDR. The 9.7% 'AA-' credit loss represents the impact on the breakeven OC from the 19% weighted average (WA) default rate and the 53.4% WA recovery rate for the $4.8 billion first lien fixed-rate and hybrid- adjustable rate residential mortgages that comprise the cover pool. The cover assets have a WA residual life of approximately 14.4 years while the outstanding series CB2007-2 EUR2 billion covered bonds have a WA residual life of around 2.8 years. Fitch's D-Cap remains driven by the 'Very High' assessment of liquidity gap and systemic risks on account of the relatively short maturity extension (four months) on the bonds compared to the potential 90 day stay that could be imposed by the Federal Deposit Insurance Corporation (FDIC) if the program sponsor were to enter receivership. The systemic alternative management component of the D-Cap was assessed as 'Moderate High' risk comparable to other U.S. covered bonds. Asset segregation and privileged derivatives were assessed as 'Very Low' and 'Moderate' risk respectively. Since covered bonds are not explicitly exempt from the distribution provisions of the FDIC-Receiver under Orderly Liquidation Authority under Title II of the Dodd Frank Act, Fitch determined that no additional IDR uplift is applicable. Fitch takes into account the contractual AP maintained in the program since the program is in wind-down. RATING SENSITIVITIES The 'AA-' rating would be vulnerable to downgrade if any of the following occurs: (i) BACBI's IDR is downgraded by two or more notches; or (ii) the AP that Fitch considers in its analysis increases above Fitch's 'AA-' breakeven level of 77%. The covered bonds' rating could be maintained even if the D-Cap was reduced to 0 (full discontinuity), subject to a satisfactory level of AP, given BANA's current IDR of 'A' which enables the bonds to reach 'AA-' taking only recoveries into account. The Fitch breakeven AP for the covered bond rating will be affected, amongst others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore, the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time. In the report Breaking Down Breakeven Overcollateralisation, published July 8, 2014, Fitch details its approach for determining the breakeven OC components. Contact: Primary Analyst Vanessa Purwin Senior Director +1-212-908-0269 Fitch Ratings Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Roger Lin Director +1-212-908-0778 Committee Chairperson Rui Pereira Managing Director +1-212-908-0766 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Covered Bonds Rating Criteria' (August 2014); --'Counterparty Criteria for Structured Finance and Covered Bonds' (May 2014); --'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum' (May 2014); --'Covered Bonds Rating Criteria - Mortgage Liquidity and Refinancing Stress Addendum' (February 2014); --'U.S. RMBS Loan Loss Model Criteria' (December 2013). Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here Covered Bonds Rating Criteria – Mortgage Liquidity and Refinancing Stress Addendum here U.S. RMBS Loan Loss Model Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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