TEXT-Fitch cuts WM Covered Bond Program U.S. covered bonds
May 14 - Fitch Ratings has downgraded WM Covered Bond Program's (WMCBP) outstanding EUR 4 billion mortgage covered bonds to 'AA-' from 'AA' and placed them on Rating Watch Negative. This downgrade follows the downgrade of the Issuer Default Rating (IDR) of the program sponsor, JP Morgan Chase Bank N.A. (JPM) to 'A+/F1' from 'AA-/F1+' (see Fitch Downgrades JPMorgan to 'A+/F1'; L-T IDR on Watch Negative dated May 11, 2012 at www.fitchratings.com). JPM's IDR downgrade does not change the rationale for the rating of the covered bonds. The D-Factor assigned to the program remains at 100% which only allows for the rating of the covered bonds on a probability-of-default (PD) basis to be equalized with JPM's long-term IDR at 'A+'. As per Fitch's covered bond rating methodology, an uplift of one notch can be granted, provided that stressed recoveries are in the range of 51% to 90% in the case of a default on the covered bonds. The program's contractual maximum asset percentage (AP) of 67% is within the Fitch supporting AP of 76.5% commensurate with an 'AA-' stress scenario (on a recovery basis). The 76.5% reflects the incorporation of Fitch's USD LIBOR stresses in the cash flow analysis as per the agency's Covered Bonds Counterparty Criteria for issuers with IDRs below 'AA-/F1+'. The supporting AP level for a given rating will be affected, 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 issuances. The covered bonds are secured by a pool of payment-option and hybrid adjustable rate first lien mortgage loans secured on U.S. residential properties totaling approximately USD7.9 billion as of March 31, 2012. The portfolio had a weighted average (WA) current loan-to-value ratio (LTV) of 63.8% and a WA FICO score of 737. The WA residual maturity of the cover assets is approximately 24 years while that of the covered bonds is approximately 3.2 years.