(The following statement was released by the rating agency)
Oct 11 - Fitch Ratings removed from Rating Watch Negative, BA Covered BondIssuer's (BACBI) mortgage covered bonds. Fitch also affirms BACBI's coveredbonds at 'AA-' with a Stable Outlook. The rating action follows the periodicreview of the program and the resolution of the Negative Watch which was placedon the covered bonds on Sept. 12, 2012 (see 'Fitch Places BACBI's Covered Bondson Negative Watch; Assigns US and Canadian D-Caps & Outlooks' at).
The rating is based on the Long-term Issuer Default Rating (IDR) of the programsponsor, 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 bevulnerable to downgrade if the IDR was downgraded by one or more notches or theprogram 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 thecontractually committed AP for the purpose of its analysis. This will be amendedfrom 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 ofdefault (PD) basis above BANA's IDR, but supports a two notch uplift above theIDR based on outstanding stressed recoveries from the cover pool in the event ofa default.
As of May 31, 2012, BACBI's cover pool consisted of 15,665 prime fixed-rate andhybrid adjustable-rate mortgage loans secured on U.S. residential propertiestotaling USD6.5 billion. The portfolio had a weighted average (WA) currentloan-to-value ratio (LTV) of 62%, a WA FICO score of 757, an WA averageseasoning of 52 months and included approximately 17.8% interest-only loans. Thepool is primarily concentrated in California (36%) and Florida (7.3%). In an'AA-' scenario, Fitch has calculated a weighted-average frequency of foreclosureof 21.3% and weighted-average recovery rate of 40.1%.
The outstanding covered bonds total EUR2.0 billion. Asset liability maturitymismatches are high in this program which is common for U.S. programs that aresecured by long-term 30 - 40 year mortgage loans, while the liabilities have aWA life of approximately 4.6 years.
The main drivers of the Fitch breakeven 'AA-' AP are the credit risk of thecover pool and the refinancing spread assumption used to estimate the stressedsale price for the cover pool that an alternative manager would liquidate in theaftermath of an issuer default.
The Fitch breakeven AP for the covered bond rating will be affected, amongothers, by the profile of the cover assets relative to outstanding coveredbonds, 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)