KBRA Affirms Rating for Fidus Re Series Notes

Kroll Bond Rating Agency (KBRA) has affirmed the long-term credit rating of AA with a Stable Outlook for Fidus Re Ltd.'s Series 2018-1 Class A Principal-at-Risk Variable Rate Notes due March 31, 2030. Build America Mutual Assurance Company (BAM), a mutual financial guaranty company, sponsored the issuance of variable rate notes ("Notes") through an offshore (Bermuda) bankruptcy remote special purpose insurer, Fidus Re Ltd. (Fidus). KBRA said its rating is related solely to the Notes and should not be construed as an insurance financial strength rating on BAM as a statutory entity.

Fidus reinsures aggregate losses that exceed $165 million on a predefined static portion of BAM's financial guarantee portfolio ("Covered Portfolio"). According to the rating agency, monthly interest payments on the Notes are variable and paid from earnings on permitted investments in the collateral account and from a premium paid by BAM for the reinsurance coverage.

KBRA said the Covered Portfolio is granular, geographically diverse and has no exposure to higher risk sectors of the US municipal market such as health care, housing, or private higher education; the Covered Portfolio does not include any exposures underwritten by BAM since the transaction closed. Since transaction inception, total debt service (principal and interest) for the Covered Portfolio has declined by approximately 7 percent with no material changes in risk profile or sector concentrations.

While the Covered Portfolio includes policies that mature over 30 years, the reinsurance agreement covers only those amounts of insured principal and interest that come due through the period ending 12 years from Note issuance and only to the extent losses during this period exceed $165 million, up to a maximum payout of $100 million, according to KBRA. As of December 31, 2018, the amount of debt service over the remaining time of the 12-year risk period of the Notes, ending March 31, 2030 (the "Risk Period"), is approximately $34.3 billion. To date, BAM has paid no losses on the Covered Portfolio and reports no loss reserves, the rating agency added.

KBRA said its 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 Portfolio using KBRA's financial guaranty Monte Carlo simulation model. Its Monte Carlo model attributed default frequency and severity assumptions to each insured position in the Covered Portfolio to develop a stress case loss scenario and determined that there is a very limited risk that losses in the Covered Portfolio over the Risk Period will exceed the $165 million attachment point and, therefore, trigger withdrawals from the collateral account.

The rating is based on KBRA's Financial Guaranty Global Rating Methodology, along with elements of the Global General Rating Methodology for Asset-Backed Securities.

The full Fidus Re rating report is now available on the KBRA website with complimentary registration.

Find out about captives as special purpose vehicles (SPVs) in Captives and the Management of Risk.

The Captive as an SPV

The risk securitization transactions that have been accomplished so far have used an SPV to access the capital markets. If the risk to be securitized is the risk of an insurance or reinsurance company, an SPV may be formed as a nonaffiliated captive insurance company. This is because the objective for an insurance or reinsurance company, when securitizing risk, is to remove the liability for payment of future losses from the balance sheet without creating on-balance sheet debt. If the reinsurance company simply issued risk bonds directly, or through a subsidiary, it would still have the liability to repay the bonds and would not have reduced its loss reserves by a corresponding amount.