Moody's Affirms Ratings on Bank of America Mortgage Deals, Despite Interest Rate Hedge Amendments

Strategic Insights -

Bank of America's recent amendments to interest rate hedge agreements on several mortgage-backed securities will not lead to a downgrade or withdrawal of their ratings, according to Moody's Investors Service. The changes, which would allow the use of guarantees from third-party entities to mitigate "Ratings Events," were deemed sufficient by Moody's to address the current concerns surrounding Bank of America's creditworthiness. Specifically, Moody's downgraded Bank of America's long-term senior debt rating from Aa3 to A2 on September 21, 2011, triggering a "Ratings Event" under the hedge agreements. The proposed amendments would enable Bank of America to provide a guarantee from Merrill Lynch Derivative Products, AG (MLDP) (Aa3), which would effectively mitigate the impact of a future downgrade on the mortgage-backed securities.

Key Takeaways:

  • Moody's affirmed the ratings of Bank of America's mortgage-backed securities, despite the amendments to interest rate hedge agreements.
  • The proposed amendments would allow Bank of America to use guarantees from third-party entities, such as Merrill Lynch Derivative Products, AG (MLDP), to mitigate "Ratings Events."
  • Moody's assessed the degree of compliance with its credit substitution criteria and the likelihood of effective remedial action in the event of a future downgrade of Bank of America or its guarantor.
  • The rating agency considered factors outlined in its "Framework for De-Linking Hedge Counterparty Risks from Global Structured Finance Cashflow Transactions" published in October 2010.
  • The affected transactions include Washington Mutual Mortgage Pass-Through Certificates, WMALT Series 2005-4, 2005-7, and 2005-8.
  • Bank of America's long-term senior debt rating was downgraded from Aa3 to A2 on September 21, 2011.

Sources:

  • Moody's Investors Service
  • Washington Mutual Mortgage Pass-Through Certificates, WMALT Series 2005-4, 2005-7, and 2005-8
  • Moody's rating implementation guideline, "Framework for De-Linking Hedge Counterparty Risks from Global Structured Finance Cashflow Transactions" published in October 2010