Fitch Ratings has placed the Washington Mutual covered bond program series 1, 2 and 3, rated 'AAA' on Rating Watch Negative. This move came after the lowering of Washington Mutual Bank's long-term Issuer Default Rating (IDR) to 'BBB' from 'A-' and affirmation of its short-term IDR at 'F2'. The outlook for WaMu's long-term IDR remains negative. Under the rating agency's covered bond methodology, a downgrade of the long-term IDR of the financial institution acting as debtor of recourse could possibly lead to a downgrade of the covered bond rating depending on the assigned Discontinuity Factor (D-Factor). The D-Factor measures the likelihood of an interruption of payments resulting from covered bond holders caused by the transition from the debtor of recourse to the cover pool as a source of payment on the covered bonds. Fitch is currently assigning a D-Factor to WaMu's program. The rating agency will consider the validity of the segregation mechanism by looking at the assets pledged over other factors. These other factors include the mortgage bond indenture trustee, the robustness of WMB's IT systems to manage the cover pool, the liquidity gaps between the cover pool and the covered bonds in a WMB insolvency scenario, notably considering the effect of a potential 90-day stay period imposed pursuant to Federal Deposit Insurance Act; as well as the lack of a dedicated covered bonds oversight in the U.S, the rating agency said.
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