The Rating Watch Negative reflects Fitch's analysis of BACBI's program following the implementation of the criteria no longer supports its current rating. The asset percentage (AP) that Fitch takes into account in its analysis of 80.7% does not support a two-notch recovery uplift from the Long-term Issuer Default Rating (IDR) of the program sponsor Bank of America N.A. (BANA; rated 'A'/'F1' with a Stable Outlook by Fitch) to maintain the current 'AA-' rating. Under its updated criteria, Fitch considers the BACBI program to be in wind-down and therefore relies on the contractual AP level. Previously, Fitch took into account the highest AP of the last year (76.3% as of March 2012).

No Outlook has been assigned to the covered bonds issued by WM Covered Bond Program (WMCBP) which remain on Negative Watch because the long-term IDR of the program sponsor JP Morgan Chase Bank N.A.' (JPM; rated 'A+'/'F1'; Negative Watch by Fitch), is on Negative Watch. Stable Outlooks have been assigned to the ratings of all Canadian programs. Discontinuity Caps (D-Caps) have also been assigned to each program.

Fitch expects to receive feedback from BANA within one month regarding any plans to change its program. If no changes are proposed, Fitch expects to downgrade the rating. If changes likely to impact the ratings are proposed, Fitch will review any implementation plans to determine how the Negative Watch should be resolved. Provided changes addressing the drivers of a potential downgrade are implemented within a reasonable timeframe, the ratings would be affirmed.

The Stable Outlooks assigned to the ratings of the Canadian programs reflect the Stable Outlooks on the sovereign and issuers' IDRs. Also, Fitch's expectation is that both the asset performance and OC maintenance will remain stable.

D-Caps determine the maximum rating notch uplift from the IDR to the covered bond rating on a probability of default (PD) basis reflecting Fitch's view of the likelihood of a program defaulting in the aftermath of an issuer default. For cases apart from a D-Cap of 8 (minimal discontinuity), the D-Cap is based on the highest risk assessment of the following components: asset segregation, liquidity gap and systemic risk, alternative management (systemic and cover pool-specific) and privileged derivatives.

Fitch has assigned a very low risk assessment of asset segregation for the US covered bonds because the agency considers it very unlikely that any claims would reduce the cover pool available to investors post issuer default. For the Canadian programs, the agency has assigned a moderate assessment of asset segregation to take into account the risks associated with asset and liability clawback, set-off and commingling. The moderate assessment reflects the presence of these risks but the agency views these factors as unlikely to materially affect the cover pool post issuer default.

The liquidity gap and systemic risk component of the D-Cap drives the overall assessment for US programs because of the weak liquidity mechanisms provided for in the programs, which are reflected in assessments of very high and full discontinuity for BACBI and WMCBP, respectively. As the US sovereign IDR is 'AAA' with a Negative Outlook, the rating does not act as a constraining factor in this assessment of the US programs.

For the liquidity gap and systemic risk component, all Canadian programs have been assigned a moderate risk assessment reflecting adequate protection from payment discontinuity in the form of extendable maturities (12 months) and pre-maturity tests (12 months) triggered at the loss of the issuers' 'F1+' rating. As the Canadian sovereign IDR is 'AAA' with a Stable Outlook, the rating does not act as a constraining factor in this assessment of the Canadian programs.

The systemic alternative management risk assessment is moderate high for both the US and Canadian programs due to the significant roles being performed post issuer default by the trustee, acting on behalf of the guarantor, who would likely seek bondholder approval for major decisions and need to contract other parties to perform important functions. However, Fitch gains comfort from contractual provisions being in place designating a responsible party post issuer default.

Fitch considers the US programs to have high cover pool-specific alternative management risk as the sponsors have not actively issued since 2007 and data provision in certain areas such as cover pool cash flows and historical asset performance has been weak. With the exception of Caisse Centrale Desjardins (CCD), this assessment is moderate for the Canadian programs, which comprise only residential mortgage cover pools and the sponsors have adequate IT systems and data delivery. CCD's cover pool-specific assessment is viewed as weaker (moderate high) than that of the other Canadian programs given the complexity of its decentralized servicing operation, which is spread across over 150 member caisses, or credit unions.

The moderate risk assessment for privileged derivatives for the BACBI program is primarily due to the reliance on external counterparties to pay covered bond interest post issuer default, with the assessment as moderate risk. The same risk exists for the WMCBP but the assessment is very low risk as now credit is given for this feature considering the overall full discontinuity assessment. This risk assessment is moderate for all Canadian programs, given the use of internal counterparties for material cross currency swaps between assets and liabilities. This component is not the sole driver of the D-Cap for any of the listed programs.

The programs' D-Caps and the risk assessment of the D-Cap components are as follows:

The Negative Watch is driven by the revised treatment for wind down programmes under the updated criteria. Fitch considers the programme in wind down because no issuance has occurred since 2007. A 'AA-' rating for the covered bonds is still possible, but the current level of AP that Fitch relies on does not support two notches recovery uplift from BANA's long-term IDR.

The driver of the D-Cap is the very high risk assessment for liquidity gap and systemic risk. The assessment reflects the 120-day extension period on the bonds which potentially gives the trustee only 30 days to liquidate the cover pool if the Federal Deposit Insurance Corporation (FDIC) imposes a 90-day automatic stay period on BANA's insolvency estate.

The Negative Watch is driven by the JPM's long-term IDR which remains on Negative Watch.

The driver of the D-Cap is the full discontinuity assessment for liquidity gap and systemic risk. The assessment reflects the 60-day extension period on the Series 2 bonds which does not provide the trustee with sufficient time to liquidate the cover assets if the FDIC imposes a 90-day automatic stay period on JPM's insolvency estate.

For all of the above mentioned programs, the driver of the D-Cap is the moderate high risk assessment of systemic alternative management risk.

The driver of the D-Cap for CCD's program is the moderate high risk assessment of systemic and cover pool-specific alternative management risk.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

Covered Bonds Counterparty Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681797

ResiLogic^TM Mortgage Loss Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686011

U.S. RMBS Loan Loss Model Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685646

Covered Bonds Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688092

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