Fitch Affirms BACBI Mortgage Covered Bonds at 'AA'; Outlook Stable
KEY RATING DRIVERS
The 'AA' rating of BACBI's mortgage covered bonds is based on the 'A+' Long-Term Issuer Default Rating (IDR) of Bank of America N. A. (BANA), which acts as the program sponsor, and on the program's unchanged one-notch Discontinuity Cap (D-Cap). The covered bond rating is also based on the program's 77% contractual asset percentage (AP), which Fitch takes into account in its analysis and which provides more protection than Fitch's 'AA' breakeven AP of 85%.
The Stable Outlook for the covered bonds rating is due to the Stable Outlook on the U. S. sovereign rating and on BANA's IDR.
The 77% contractual AP allows the covered bonds to achieve a two-notch recovery uplift from the 'A+' tested rating on a probability of default basis, which is also the rating floor for the covered bonds. This level of AP provides for recoveries given default of at least 91% in a 'AA' scenario, but it is not adequate to sustain timely payments higher than the 'A+' rating floor.
The cash flow valuation component of 13% is the main contributor to the 85% 'AA' breakeven AP (17.6% overcollateralization [OC]). This is driven by the 66.4% open interest rate positions in an increasing interest rate scenario, which drives the results, and the maturity mismatch between assets and liabilities. The WA life of the assets is 14.0 years as opposed to 0.8 years for the covered bonds. The asset disposal loss of 11% represents a stressed valuation of the entire cover pool after an assumed covered bonds default in a 'AA' scenario.
The credit loss component is 5.3% and represents the impact on the breakeven OC from the 14.4% weighted average (WA) frequency of foreclosure and the 65.2% WA average recovery rate for the mortgage cover assets.
The unchanged D-Cap of one notch is driven by the very high discontinuity assessment of the liquidity gap and systemic risk component. The very high discontinuity assessments reflects a longer asset liquidation period than that of the extension period offered by the soft-bullet bonds and that the sponsor bank could be subject to a 90-day stay period by the Federal Deposit Insurance Corporation (FDIC) in the event of insolvency, which could impede an administrator's access to the cover pool to arrange for asset liquidation.
The U. S. does not have a bail-in regime in place, therefore in Fitch's view, the IDR remains a satisfactory indicator of the likelihood that the recourse against the cover pool would be enforced, and no IDR uplift is applicable.
The 'AA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by one or more notches to 'A' or below; or (ii) the Asset Percentage that Fitch considers in its analysis increases above Fitch's 'AA' breakeven level of 85%.
The Fitch breakeven Asset Percentage 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 Asset Percentage to maintain the covered bond rating cannot be assumed to remain stable over time.