Kroll Bond Rating Agency (KBRA) assigns a preliminary long-term credit rating of AA with a Stable Outlook to Fidus Re Ltd.’s Series 2021-1 Class A Principal-at-Risk Variable Rate Notes due January 11, 2033.
Build America Mutual Assurance Company (“BAM” or the “Ceding Insurer”), a mutual financial guaranty company, sponsored the issuance of variable rate notes (“Notes”) through an off-shore (Bermuda) bankruptcy remote special purpose insurer, Fidus Re Ltd. (“Fidus” or the “Issuer”). This is the second issuance of notes by the Issuer (the Fidus Series 2018-1 Notes are rated AA/Stable by KBRA). The Note proceeds are held in a Collateral Account and invested in high quality, liquid investments (U.S. Treasury or government agency money market funds or cash). Under the terms of an excess of loss reinsurance agreement (“Reinsurance Agreement”), Fidus reinsures aggregate losses that exceed $135 million on a pre-defined static portion of BAM’s financial guarantee portfolio (“Covered Portfolio”). Interest payments on the Notes are variable, paid monthly, and paid from earnings on permitted investments in the Collateral Account and from a premium paid by BAM for the reinsurance coverage.
The Covered Portfolio consists of scheduled principal and interest payment on select bonds which were insured by BAM prior to October 31, 2020. It excludes exposures covered under the Excess of Loss facility associated with the Fidus Series 2018-1 Notes and any exposures which were specifically excluded from that facility. The Covered Portfolio is static and does not include any exposures underwritten by BAM after October 31, 2020. Over time, the par amount of the Covered Portfolio will continue to decline as exposures amortize or are refunded. The Covered Portfolio specifically excludes any exposures which were deemed by BAM as having elevated COVID-19 risk.
KBRA’s rating conclusion is based on a detailed review of the legal and structural provisions of the transaction in combination with a quantitative analysis of the Covered Portfolio using the KBRA Portfolio Loss Simulation (KPLS) Model. The Covered Portfolio is granular, geographically diverse, and does not contain any exposure to higher risk sectors of the U.S. municipal market which generally include healthcare, housing, or private higher education. The KPLS 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 period ending December 31, 2032 (the “Risk Period”) will exceed the $135 million attachment point and therefore trigger withdrawals from the Collateral Account. The risk period end date may be updated based upon the closing date of the transaction.
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Disclosures
Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority pursuant to the Temporary Registration Regime. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.
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