KBRA Affirms Ratings for Fidus Re Ltd.'s Series 2018-1, Series 2021-1, and Series 2022-1 Notes; Revises Outlook to Positive for Series 2021-1
14 Mar 2024 | New York
KBRA affirms the AA+ long-term credit rating for Fidus Re Ltd.'s Series 2022-1 Class A Principal-at-Risk Variable Rate Notes due January 11, 2035 and affirms the AA long-term credit ratings for Fidus Re Ltd.'s Series 2018-1 Class A Principal-at-Risk Variable Rate Notes due January 11, 2035 and Series 2021-1 Class A Principal-at-Risk Variable Rate Notes due January 11, 2033. The Outlook for the Series 2022-1 and Series 2018-1 Notes is Stable. The Outlook for the Series 2021-1 Notes has been revised to Positive from Stable.
Build America Mutual Assurance Company (“BAM” or the “Ceding Insurer”), a mutual financial guaranty company, sponsored the issuance of three series of variable rate notes (Series 2018-1 (“Fidus I”), Series 2021-1 (“Fidus II”), and Series 2022-1 (“Fidus III”), collectively, “the Notes”) through an off-shore (Bermuda) bankruptcy remote special purpose insurer, Fidus Re Ltd. (“Fidus” or “the Issuer”). KBRA’s ratings are related solely to the Notes and should not be construed as an insurance financial strength rating (IFSR) on BAM as a statutory entity.
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”) for each issuance, Fidus reinsures aggregate losses which exceed the attachment point on a pre-defined static portion of BAM’s inforce financial guarantee portfolio (“the Covered Portfolio”). Interest payments on the Notes are variable and paid monthly from earnings on permitted investments in the Collateral Account and from a premium paid by BAM for the reinsurance coverage.
KBRA’s rating conclusion is based on a detailed review of the legal and structural provisions of the transaction combined with a quantitative analysis of the Covered Portfolios using the KBRA Portfolio Loss Simulation (KPLS) Model. The Covered Portfolios are granular, geographically diverse and, in the case of Fidus III only, contain minimal exposure) to higher risk sectors of the U.S. municipal market. The KPLS Model attributed default frequency and loss severity assumptions to each insured position in the Covered Portfolios to develop a stress case loss scenario and determined that there is a limited risk that losses in the Covered Portfolios over each respective risk period will exceed the attachment points of each transaction at the confidence interval which corresponds to their rating level and therefore trigger withdrawals from the Collateral Account. Despite macro-level economic headwinds, credit risk within the Covered Portfolios has remained low, demonstrated by rating upgrades of insured risks which continue to outpace downgrades. Each individual Covered Portfolio is static, covering unique policies, and does not include any exposures underwritten by BAM since the transactions closed.
The ratings on each transaction reflect aggregate modelled annual loss payments over the remaining risk period at each respective confidence level (97.2% for a AA rating and 97.9% for a AA+ rating) were below the attachment points with a comfortable margin remaining. In KBRA’s opinion, as the rate of actual amortization of the financial guarantee portfolio across each transaction exceeds the scheduled amortization at issuance, the likelihood or probability that the modeled stress losses on the insured credit risk will approach or exceed the attachment points decreases, even at higher confidence intervals. All else equal, insured portfolio amortization reduces credit risk exposure and modelled stress losses.
The change in Outlook to Positive from Stable for Fidus II reflects actual amortization of the portfolio at a rate which exceeds scheduled amortization in combination with the credit characteristics of the insured portfolio such that the likelihood or probability that modeled stress losses on the insured credit risk will exceed the attachment point has decreased, in KBRA’s opinion.
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