Fitch Upgrades BACBI's Mortgage Covered Bonds to 'AA'; Outlook Stable
The Stable Outlook for the covered bonds rating is primarily driven by the Stable Outlook on the U.S. sovereign and on Bank of America, N.A.'s (BAC, the program sponsor) Long-term Issuer Default Rating (IDR).
The upgrade for BACBI's covered bond rating to 'AA' from 'AA-' is driven by lower credit losses on the cover pool and a higher starting point for the covered bond rating (BAC's 'A+' IDR).
KEY RATING DRIVERS
The covered bond program's 'AA' rating is based on BAC's IDR ('A+/F1'/Outlook Stable), an unchanged Discontinuity Cap (D-Cap) of one notch (Very high risk) and the 77% asset percentage (AP) that Fitch takes into account in its analysis. The 77% relied upon AP, which is the contractual AP, provides more protection than Fitch's 80.5% 'AA' breakeven AP. The program is in wind-down.
BACBI's program could theoretically achieve a maximum three-notch uplift above BAC's IDR -- one for the D-Cap analysis and two notches for recoveries. However, the relied upon AP of 77% constitutes a constraint to the covered bond rating as it does not allow timely payments on the covered bond above the sponsor's 'A+' IDR. On the other hand, this level of AP allows for a two-notch recovery uplift above BAC's IDR.
The 80.5% 'AA' breakeven AP, corresponding to a 'AA' breakeven overcollateralization (OC) of 24.2%, is driven by the cash flow valuation component of 17% primarily due to the longer weighted average life of the assets versus the liabilities, followed by the asset disposal loss of 12.2%. The cover pool's credit loss of 7% is an 'AA' scenario.
The 7% 'AA' credit loss represents the impact on the breakeven OC from the 18.1% weighted average (WA) default rate and the 64% WA recovery rate for the $4.86 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 years while the outstanding series CB2007-2 EUR2 billion covered bonds have a WA residual life of around 1.8 years.
Fitch's D-Cap remains driven by the 'Very high' risk assessment (one-notch) of the liquidity gap and systemic risk component given that the four-month maturity extension period is greater than the potential 90-day Federal Deposit Insurance Corporation (FDIC) stay period if the program sponsor were to enter receivership but less than Fitch's six-month liquidation timeline for U.S. Mortgages. For more information on the D-Cap assessment see 'Fitch: D-Cap Assessment Unchanged for U.S. Covered Bond Programs,' published Sept. 8, 2015.
The 'AA' rating of BA Covered Bond Issuer's (BACBI) mortgage covered bonds would be vulnerable to downgrade if any of the following occurs: (i) Bank of America N.A.'s Issuer Default Rating is downgraded by one or more notches; or (ii) the Asset Percentage that Fitch considers in its analysis increases above Fitch's 'AA' breakeven level of 80.5%.
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.