WaMu’s Covered Bonds Upgraded by Fitch

Fitch Ratings said Thursday that it had upgraded the outstanding series of covered bonds issued by WM Covered Bond Program’s to ‘AA+’ from ‘AA-,’ after a completed review of documents relating to the transfer of the program from Washington Mutual Bank to JPMorgan Chase Bank, National Association. JPM’s long-term issuer default rating is ‘AA-‘ by Fitch, a key factor in rating the bonds; Fitch said JPM’s strong rating, as well as a contractual minimum overcollateralization of 49.3 percent between the cover pool and the covered bonds, contributed to the upgrade. JPM assumed most of WMB’s assets and select other liabilities, which include WMB’s obligation under its mortgage bonds. The Fitch upgrade provides unique insight into how the agency sees covered bonds, often cited as a critical long-term funding mechanism for restoring some liquidity into jumbo mortgage markets. There have only been a few issues of covered bonds in the United States, as well, meaning these sort of ratings actions aren’t yet a common sight. In particular, Fitch said it had assessed the likelihood of an interruption of payments under the covered bonds when an issuer defaults; when the bonds were owned by WaMu, the thrift had the equivalent of an insurance contract that ensured payment to investors, but JPM did not assume that contract (and only assumed the bonds). Bottom line: Fitch rated the bonds on the probability the JPM defaults on its obligations, a big change from how securitized deals are rated. WMCBP’s covered bonds were issued as soft-bullet bonds with a 60-day extension period for series 1 and 2 and a 120-day extension period for series 3, Fitch said. But because the bonds are in non-compliance with the Final Covered Bond Policy Statement issued by the Federal Deposit Insurance Corporation’s on July 15, 2008, the mortgage loans in WMCBP would be subject to a 90-day automatic stay period in the event of default by JPM. For series 1 and 2, a 90-day automatic stay period exceeds their maximum 60-day extension period. This helped push the ratings lower than they might otherwise have been, Fitch noted. For more information, visit http://www.fitchratings.com. Write to Paul Jackson at [email protected].