NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) assigns a preliminary long-term credit rating of AA with a Stable Outlook to Fidus Re Ltd.’s Series 2018-1 Class A Principal-at-Risk Variable Rate Notes due March 31, 2030. Build America Mutual Assurance Company (“BAM”), a mutual financial guaranty company that focuses exclusively on lower risk segments of the U.S. public finance market, is sponsoring the issuance of variable rate notes (“Notes”) through an off-shore (Bermuda) bankruptcy remote special purpose insurer, Fidus Re Ltd. (“Fidus”). KBRA’s rating is related solely to the Notes and should not be construed as an insurance financial strength rating (IFSR) on BAM as a statutory entity.
Fidus will provide reinsurance against aggregate losses that exceed $165 million on a pre-defined portion of BAM’s financial guarantee portfolio (“Covered Portfolio”). Interest payments on the Notes will be variable, paid monthly, and will be paid from earnings on permitted investments and from a reinsurance premium paid by BAM for the excess of loss reinsurance coverage. The Covered Portfolio consists of approximately 95% of BAM’s entire portfolio of U.S. public finance financial guaranty policies issued through December 31, 2017, but excludes surety policies and all exposures rated below investment grade by other rating agencies.
While the Covered Portfolio includes policies that mature over thirty years, the Reinsurance Agreement covers only those amounts of insured principal and interest that come due through the period ending 12 years from Note issuance and only to the extent losses during this period exceed $165 million. The amount of total debt service (principal and interest) maturing over the 12-year scheduled redemption date of the Notes (the “Risk Period”) consists of approximately $37.0 billion. Noteholder credit risk is based on an assessment of the likelihood that BAM’s claims payments on the Covered Portfolio exceed $165 million before the end of the Risk Period and the collateral is tapped for any reinsurance claims. In addition to excluding any exposures currently rated below investment grade, the Covered Portfolio is granular, geographically diverse, and does not contain any exposure to higher risk sectors of the U.S. municipal market such as healthcare, housing, and private higher education.
KBRA reached its rating conclusion based on a detailed review of the legal and structural provisions of the transaction combined with a quantitative analysis of the Covered Portfolio using our financial guaranty Monte Carlo simulation model. KBRA’s Monte Carlo model attributed default frequency and severity assumptions to each insured position in the Covered Portfolio to develop a stress case loss scenario and determined that there is a very limited risk that losses in the Covered Portfolio over the Risk Period will exceed the $165 million attachment point and therefore trigger withdrawals from the Collateral Account or Reinsurance Trust Account.
The rating is based on KBRA’s Financial Guaranty Rating Methodology, along with elements of the Global General Rating Methodology for Asset-Backed Securities.
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