Fitch Upgrades WMCBP's Mortgage Covered Bonds to 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded WM Covered Bond Program's (WMCBP) mortgage covered bonds to 'AA+' from 'AA-' with a Stable Outlook.

The Stable Outlook for the covered bonds rating is primarily driven by the Stable Outlook on the U.S. sovereign and on JP Morgan Chase N.A.'s (JPM) Issuer Default Rating (IDR).

The upgrade to 'AA+ ' is driven by lower credit losses on the cover pool and program sponsor JPM's Fitch's IDR of 'AA-', which means that interest rate stresses at this IDR level are not applied to the program.

KEY RATING DRIVERS

The rating is based on the 'AA-' Long-term IDR of the program sponsor, JP Morgan Chase Bank N.A. (JPM, 'AA-'/'F1+'; Stable Outlook), an unchanged Discontinuity Cap (D-Cap) of 0 notches (full discontinuity) and the 67% asset percentage (AP) that Fitch takes into account in its analysis. The 67% relied-upon AP, which is the contractual AP, provides more protection than Fitch's 85.5% 'AA+' breakeven AP and is adequate for a 2-notch recovery uplift in an 'AA+' rating scenario. The program is in wind-down.

The 85.5% 'AA+' breakeven AP, corresponding to an 'AA+' breakeven overcollateralization (OC) of 17%, is driven by the cover pool's credit loss of 32% in an 'AA+' scenario, followed by the asset disposal loss of 14%. The cash flow valuation component leads to a lower 'AA+' breakeven OC of 17.8% primarily due to the excess spread generated by the assets.

The 32% 'AA+' credit loss represents the impact on the breakeven OC from the 54.5% weighted average (WA) default rate and the 55.5% WA recovery rate for the $3.95 billion first-lien fixed-rate and hybrid- and payment option-adjustable rate residential mortgages that comprise the cover pool. The cover assets have a WA residual life of approximately 12 years while the outstanding series 2 EUR2 billion covered bonds have a WA residual life of around one year.

WMCBP's unchanged overall D-Cap of 0 notches is driven by the weak-link assessment of the liquidity gap and systemic risk component of the D-Cap analysis since the potential 90-day stay period that could be imposed by the Federal Deposit Insurance Corporation (FDIC) in the event receivership exceeds the two-month maturity extension on the bonds. For more information on the D-Cap assessment see 'Fitch: D-Cap Assessment Unchanged for U.S. Covered Bond Programs" published on Sept. 8, 2015.

Since covered bonds are not explicitly exempt from the distribution provisions of the FDIC-Receiver under Orderly Liquidation Authority under Title II of the Dodd Frank Act, Fitch has not assigned an IDR uplift.

RATING SENSITIVITIES

The 'AA+' rating of WM Covered Bond Program's (WMCBP) mortgage covered bonds would be vulnerable to downgrade if any of the following occurs: (i) JP Morgan Chase Bank N.A.'s Issuer Default Rating (IDR) 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 85.5%.

The Fitch breakeven AP for the covered bond rating will be affected by, 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 issuance. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.

Additional information is available on www.fitchratings.com

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 14 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744175

Covered Bonds Rating Criteria (pub. 23 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868658

Covered Bonds Rating Criteria - Mortgage Liquidity and Refinancing Stress Addendum (pub. 23 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871331

Fitch's Mortgage Covered Bond Refinancing Stresses - Excel File (pub. 07 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870773

U.S. RMBS Loan Loss Model Criteria (pub. 03 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868923

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991461

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991461

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings Inc.
Primary Analyst
Roger Lin, +1-212-908-0778
Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Susan Hosterman, +1-212-908-0670
Director
or
Committee Chairperson
Thomas Crowe, +1-212-908-0227
Senior Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings Inc.
Primary Analyst
Roger Lin, +1-212-908-0778
Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Susan Hosterman, +1-212-908-0670
Director
or
Committee Chairperson
Thomas Crowe, +1-212-908-0227
Senior Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com