KBRA Affirms Ratings for Fidus Re Ltd.'s Series 2022-1 Notes
12 Oct 2023 | 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. The Outlook is Stable.
Build America Mutual Assurance Company (“BAM”), a mutual financial guaranty company, sponsored the issuance of a series of variable rate notes through an off-shore (Bermuda) bankruptcy remote special purpose insurer, Fidus Re Ltd. (“Fidus”). The third series of notes, the Series 2022-1 or Fidus III notes (“the Notes”) are the subject of this rating action. KBRA’s rating is 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, Fidus reinsures aggregate losses which exceed the attachment point ($110 million) 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 reflects a detailed review of the legal and structural provisions of the transaction combined with a quantitative analysis of the Covered Portfolio using the KBRA Portfolio Loss Simulation (KPLS) Model. The Covered Portfolio is granular, geographically diverse, and contains 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 Portfolio to develop a stress case loss scenario and determined that there is a limited risk that losses in the Covered Portfolio over the duration of the risk period will exceed the attachment point at the confidence interval which corresponds to the current rating level and therefore trigger withdrawals from the collateral account. The Covered Portfolio is static, covering unique policies, and does not include any exposures underwritten by BAM since the transaction closed.
The aggregate annual loss payments over the remaining risk period at the 97.2% confidence level, or that level associated with a AA rating, was below the attachment point with a comfortable margin remaining. All else equal, insured portfolio amortization reduces credit risk exposure and modelled stress losses.
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