KBRA Assigns and Publishes Rating to Fidus Re Ltd.'s Series 2025-1 Notes
19 Feb 2025 | New York
KBRA assigns and publishes a AA long-term credit rating to Fidus Re Ltd.'s Series 2025-1 Class A Principal-at-Risk Variable Rate Notes due January 8, 2037. The rating Outlook is Stable. On January 15, 2025, a AA preliminary rating was assigned on an unpublished basis.
Build America Mutual Assurance Company (“BAM”), a mutual financial guaranty company, has sponsored the issuance of variable rate notes (the “Notes”) through Fidus Re Ltd. (“Fidus”), an offshore (Bermuda) bankruptcy-remote special purpose insurer. This marks the fourth issuance of notes by Fidus, with the transaction structure remaining consistent with the prior three issuances. Concurrently, the Series 2018-1 Notes (“Fidus I”) will be called and fully redeemed.
Proceeds from the Notes are held in a Collateral Account, invested in high-quality, liquid assets such as U.S. Treasury or government agency money market funds, or cash. Under the terms of an excess of loss reinsurance agreement (“Reinsurance Agreement”), Fidus provides reinsurance coverage for aggregate losses exceeding the $190 million attachment point on a defined, static portion of BAM’s in-force financial guaranty portfolio (the “Covered Portfolio”). Interest on the Notes is variable and paid monthly from investment earnings in the Collateral Account and reinsurance premiums paid by BAM.
The Covered Portfolio is a static pool comprising policies underwritten by BAM before November 30, 2024, and excludes exposures covered under prior Fidus transactions. Eligible outstanding exposure previously covered by Fidus I is now covered by the excess of loss facility associated with this transaction, following the redemption of Fidus I notes. Over time, the par amount of the Covered Portfolio will decline due to scheduled amortization and redemptions. The portfolio generally includes limited exposure in the healthcare sector (underwritten in primary and secondary markets) and the public student housing sector though the overall credit profile of the portfolio remains largely unchanged.
KBRA’s rating conclusion reflects a comprehensive review of the transaction’s legal and structural provisions and quantitative analysis using the KBRA Portfolio Loss Simulation (KPLS) Model. The Covered Portfolio is granular, geographically diverse, and has minimal exposure to relatively higher-risk sectors within the U.S. municipal market. The KPLS Model applied default frequency and loss severity assumptions to each insured position in the Covered Portfolio to develop a stress case loss scenario. The analysis determined that losses exceeding the $190 million attachment point during the risk period are unlikely, limiting the risk of withdrawals from the Collateral Account. Noteholder credit risk is explicitly based on an assessment of the likelihood that BAM’s claims payments on the Covered Portfolio exceed the attachment point before the end of the Risk Period and the collateral is tapped for reinsurance claims.
While some policies in the Covered Portfolio have maturities extending beyond 35 years, the Reinsurance Agreement applies only to scheduled principal and interest payments due within the 12-year Risk Period, ending December 31, 2036. Losses during this period are covered only if they exceed the $190 million attachment point, up to a maximum payout of $275 million (the issuance amount of the Notes). As of November 30, 2024, the insured debt service due during the Risk Period totals approximately $50.3 billion.
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