Fitch revised its outlook for AA- covered bonds issued by Bank of America Covered Bond Issuer (BACBI) from stable to negative yesterday (Thursday) upon implementation of its revised criteria, and noted that in the US covered bonds are not exempt from bail-in under the Dodd-Frank Act.

In the US, covered bonds are not exempt from bail-in under the Orderly Liquidation Authority provision of the Dodd-Frank Act, according to Fitch. It said that there is a high chance that covered bonds will be treated comparably to other secured debt in the event of bank failure, but that the legislation provides regulators with some discretion in the liquidation process.

“Therefore, given this uncertainty, we believe the sponsor IDR remains a satisfactory indicator of the likelihood that the recourse against the cover pool would be enforced, and no IDR uplift is applicable,” said Fitch.

It said it will revisit its analysis over time as soon as more clarity in the legislation with respect to covered bonds is provided.

The rating agency’s action on BACBI mortgage-backed covered bonds takes into account its decision at the end of March to place on negative outlook the A issuer default rating (IDR) of Bank of America NA (BANA), to which the rating of the covered bonds is equalised on a probability of default basis.

Fitch’s said that the rating is based on BACBI covered bonds’ rating is based on the IDR, a Discontinuity-Cap (D-Cap) of 1 (very high liquidity risk) and the programme’s contractual asset percentage (AP) providing more protection than Fitch’s breakeven AP.

According to the rating agency, a downgrade of one of more notches of the bank’s IDR or the AP level exceeding 71% could lead to a covered bond downgrade. Fitch said that the covered bonds could maintain their AA- rating even if the D-Cap were reduced to 0 subject to a satisfactory level of AP given BANA’s IDR of A, which enables the bonds to reach AA- taking only recoveries into account.

Fitch affirmed the AA- rating of Washington Mutual Covered Bond Program (WMCBP) covered bonds, with a stable outlook. The rating is based on programme sponsor JP Morgan Chase Bank NA’s IDR of A+ and an unchanged D-Cap of 0, the rating agency said.