(The following statement was released by the rating agency)
Oct 11 - Fitch Ratings removed from Rating Watch Negative, BA Covered Bond Issuer's (BACBI) mortgage covered bonds. Fitch also affirms BACBI's covered bonds at 'AA-' with a Stable Outlook. The rating action follows the periodic review of the program and the resolution of the Negative Watch which was placed on the covered bonds on Sept. 12, 2012 (see 'Fitch Places BACBI's Covered Bonds on Negative Watch; Assigns US and Canadian D-Caps & Outlooks' at ).
The rating is based on the Long-term Issuer Default Rating (IDR) of the program sponsor, Bank of America N.A. (BANA, rated 'A'/'F1'; Stable Outlook by Fitch), the Discontinuity Cap (D-Cap) of 1 (very high risk) and the asset percentage (AP) of 70.1% that Fitch takes into account in its analysis.
In terms of sensitivity of the covered bonds' rating, the 'AA-' rating would be vulnerable to downgrade if the IDR was downgraded by one or more notches or the program AP went above 70.1%, which is the breakeven level in line with the 'AA-' rating.
Fitch considers the program to be in wind-down and therefore relies on the contractually committed AP for the purpose of its analysis. This will be amended from 80.7% to 70.1% in the program investor report to be published Oct. 15, 2012. This level does not justify a covered bonds rating on a probability of default (PD) basis above BANA's IDR, but supports a two notch uplift above the IDR based on outstanding stressed recoveries from the cover pool in the event of a default.
As of May 31, 2012, BACBI's cover pool consisted of 15,665 prime fixed-rate and hybrid adjustable-rate mortgage loans secured on U.S. residential properties totaling USD6.5 billion. The portfolio had a weighted average (WA) current loan-to-value ratio (LTV) of 62%, a WA FICO score of 757, an WA average seasoning of 52 months and included approximately 17.8% interest-only loans. The pool is primarily concentrated in California (36%) and Florida (7.3%). In an 'AA-' scenario, Fitch has calculated a weighted-average frequency of foreclosure of 21.3% and weighted-average recovery rate of 40.1%.
The outstanding covered bonds total EUR2.0 billion. Asset liability maturity mismatches are high in this program which is common for U.S. programs that are secured by long-term 30 - 40 year mortgage loans, while the liabilities have a WA life of approximately 4.6 years.
The main drivers of the Fitch breakeven 'AA-' AP are the credit risk of the cover pool and the refinancing spread assumption used to estimate the stressed sale price for the cover pool that an alternative manager would liquidate in the aftermath of an issuer default.
The Fitch breakeven AP for the covered bond rating will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore it cannot be assumed to remain stable over time.
(Caryn Trokie, New York Ratings Unit)