Fitch: D-Cap Assessment Unchanged for U.S. Covered Bond Programs

NEW YORK--()--Following a review of the discontinuity risk (D-Cap) analysis for the U.S. mortgage covered bond programs rated by Fitch Ratings, the agency has maintained its overall D-Cap at 0 notches or 'Full discontinuity' for WM Covered Bond Program (WMCBP) and at 1 notch or 'Very high' for BA Covered Bond Issuer (BACBI).

For both programs, this is driven by the assessment of liquidity gap and systemic risk, which constitutes the weakest link among the D-Cap components. Factors considered in determining this include the relatively short maturity extension on the bonds compared to Fitch's assumption that there is a six-month liquidation timeline for U.S. mortgages and the potential 90-day stay period (three months) that could be imposed by the Federal Deposit Insurance Corporation (FDIC) if the program sponsor were to enter receivership.

WMCBP's Liquidity Gap and Systemic Risk assessment remains at 'Full discontinuity' because the potential 90-day FDIC stay period exceeds the two-month maturity extension period on the WMCBP covered bonds. BACBI's Liquidity Gap and Systemic Risk assessment remains at 'Very high' given that the four-month maturity extension period is greater than the potential 90-day FDIC stay period but still less than Fitch's six-month liquidation timeline for U.S. mortgages.

The Asset Segregation component was assessed at 'Very low' risk for both programs mainly reflecting the fact that assets are segregated and pledged under the Uniform Commercial Code in the U.S. through the creation of a first-priority perfected security interest. The Systemic Alternative Management component of the D-cap was assessed at 'Moderate high' risk for both programs given the absence of a specific legal framework for covered bonds in the U.S.. The Cover Pool Specific Alternative Management is assessed at 'High' and reflects the wind-down nature of the U.S. covered bond programs.

The Privileged Derivatives component for BACBI have been maintained at 'Moderate', while WMCBP's was revised from 'Very Low' to 'Moderate'. The latter reflects Fitch's reassessment of the materiality of the covered bond swaps given that the transaction has 100% FX exposure between the U.S. denominated collateral and the EUR denominated bonds.

Fitch's D-cap analysis captures the risk of payment interruption on the covered bonds upon the transition from the issuer to the cover pool as the source of covered bond payments and is expressed as a maximum number of notches that can be achieved above the Issuer Default Rating (IDR) as adjusted by the IDR uplift to the tested covered bond rating on a probability of default basis.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria:

U.S. RMBS Loan Loss Model Criteria (pub. 3 Aug 2015)

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)

Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 14 May 2014)

Covered Bonds Rating Criteria (pub. 23 Jul 2015)

Covered Bonds Rating Criteria --Mortgage Liquidity and Refinancing Stress Addendum (pub. 06 Jul 2015)

Fitch's Mortgage Covered Bond Refinancing Stresses - Excel File (pub. 07 Sep 2015)

Applicable Research:

Covered Bonds Surveillance Snapshot (pub. 29 Jul 2015)

Covered Bonds Surveillance Snapshot - Excel File (pub. 29 Jul 2015)

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Contacts

Fitch Ratings
Roger Lin
Director
+1-212-908-0778
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Suzanne Mistretta
Senior Director
+1-212-908-0639
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Roger Lin
Director
+1-212-908-0778
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Suzanne Mistretta
Senior Director
+1-212-908-0639
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com