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Fitch Affirms WM Covered Bond Program's Covered Bonds at 'AA-'; Removes Rating Watch Negative

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has removed from Rating Watch Negative, WM Covered Bond Program's (WMCBP) EUR4 billion outstanding mortgage covered bonds. Fitch also affirms WMCBP's covered bonds at 'AA-' with a Negative Outlook.

The rating action follows the resolution of the Negative Watch on the Issuer Default Rating (IDR) of the program sponsor, JP Morgan Chase Bank N.A. (JPM: rated 'A+/F1'; Stable Outlook by Fitch) (see 'Fitch Affirms JPMorgan Chase & Co.'s Ratings at 'A+/F1'; Revises Outlook to Stable' dated Oct. 10, 2012 at www.fitchratings.com).

The covered bond rating is based on JPM's Long-term IDR, the Discontinuity Cap (D-Cap) of 0 (full discontinuity) and the asset percentage (AP) of 67% 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 sponsor's Long-term IDR was downgraded by one or more notches or the program's contractual AP went above 68.9%, which is the breakeven level in line with the 'AA-' rating.

The Negative Outlook is driven by the limited overcollateralization cushion, which could be easily eroded by prepayments and defaults as the program winds down. Given that the program has not been used for new issuance since 2007, Fitch relies on the contractually committed AP for the purpose of its analysis. This supports a one-notch uplift for the rating of the covered bonds above JPM's IDR, based on above-average stressed recoveries from the cover pool in the event of a default.

The D-Cap of 0 is driven by the full discontinuity assessment for liquidity gap and systemic risk. The assessment reflects the 60-day extension period on the Series 2 bonds which does not provide the trustee with sufficient time to liquidate the cover assets if the FDIC imposes a 90-day automatic stay period on JPM's insolvency estate (see 'Fitch Places BACBI's Covered Bonds on Negative Watch; Assigns US and Canadian D-Caps & Outlooks' dated Sept. 12, 2012 at www.fitchratings.com).

As of Sept. 30, 2012, WMCBP's cover pool consisted of 19,257 payment-option and hybrid adjustable rate mortgage loans secured on U.S. residential properties totalling USD7.9 billion. The portfolio had a weighted average (WA) current loan-to-value ratio (LTV) of 63.0%, a WA FICO score of 736, an average seasoning of 90 months and included approximately 51.9% interest-only loans. The pool is highly concentrated in California (51.9%), with the top five states accounting for roughly 72.2% of the portfolio. In an 'AA-' scenario, Fitch has calculated a weighted-average frequency of foreclosure of 66.7% and weighted-average recovery rate of 40%.

The weighted average life (WAL) of the assets in the cover pool is approximately 17.8 years, compared to the WAL of 2.8 years for the covered bonds. The assets are variable rate, USD-denominated, whereas the bonds are fixed rate, EUR-denominated. Interest rate and currency risks on the covered bonds are hedged via swaps with Barclays Bank plc (rated 'A'/'F1'; Stable Outlook) and Royal Bank of Scotland plc (rated 'A'/'F1'; Stable Outlook).

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.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Covered Bonds Rating Criteria' (Sept. 10, 2012);

--'Covered Bonds Counterparty Criteria' (July 25, 2012);

--'U.S. RMBS Loan Loss Model Criteria' (Aug. 10, 2012).

Applicable Criteria and Related Research:

Covered Bonds Rating Criteria - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688092

Covered Bonds Counterparty Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681797

U.S. RMBS Loan Loss Model Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685646

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Fitch Ratings
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Email: brian.bertsch@fitchratings.com

Source: Fitch Ratings