Fitch Assigns RBC's Covered Bonds 'AAA' Rating

Fitch Assigns RBC's Covered Bonds 'AAA' Rating

Fitch Ratings has today assigned Royal Bank of Canada's (RBC; rated 'AA/F1+' with a Stable Outlook) CAD-denominated benchmark Series CB6 issue of mortgage covered bonds an 'AAA' rating. The bonds, which pay interest at a fixed rate with a scheduled maturity of seven years, are guaranteed by RBC Covered Bond Guarantor Limited Partnership (LP), a limited liability partnership established for the programme with restricted permitted activities.

The rating is based on RBC's long-term Issuer Default Rating (IDR) of 'AA' and a Discontinuity Factor (D-Factor) of 18.1%, the combination of which enables the mortgage covered bonds to be rated 'AAA' on a probability of default (PD) basis because the overcollateralisation (OC) is sufficient to sustain this level of stress. The programme's contractual asset percentage (AP) of 93% is equal to the AP supporting the rating.

While the assets do not carry mortgage insurance, Fitch takes into account the ability for a potential buyer to purchase CMHC insurance on a portion of the loans post issuer default. Fitch is in the process of reassessing this assumption and its impact on its analysis. In addition, the rating does not yet take into account the application of Fitch's 'Covered Bond Counterparty Criteria' dated March 14, 2011. However, the agency notes that the impact is not expected to be material to the rating of RBC's mortgage covered bonds.

As of month-end January, the cover pool consisted of 124,160 first lien, uninsured residential mortgage loans. The outstanding principal balance of the aggregate pool is CAD14.8 billion and the average principal balance of each loan is approximately CAD119,274. The portfolio has a weighted average (WA) current loan-to-value (LTV) of 72.1%, taking into account the maximum amount that can be drawn. The WA original term of the mortgages is 59.6 months and the WA seasoning is 24.5 months. The portfolio's largest geographic concentrations are Ontario (40.2%), British Columbia (24.1%), Alberta (16.5%) and Quebec (10.8%). Other provinces represent less than 3% of the pool as of the cut-off date.

Given the programme's dynamic nature, the composition and credit quality of the cover pool may change over time. In an 'AAA' scenario, Fitch has calculated a cumulative weighted average frequency of foreclosure (WAFF) for the cover assets of 13.8% and a weighted average recovery rate (WARR) of 72.5%. As limited performance data are available on the Canadian market, the agency's default analysis is based on the U.S. residential mortgage default model criteria with risk multipliers for Canadian provinces mapped to U.S. states with comparable economic characteristics and outlooks.

Interest received from the cover assets is swapped into CAD floating-rate. Also, the guarantor LP has entered into a swap to transform the Canadian dollar floating-rate cash flows into fixed-rate flows payable on the bonds.

Major drivers of the supporting AP are the effects of a selected assets required amount (SARA) clause, the capacity constraints that would be generated by the amount of assets required to be sold at any given time following default of the issuer, the short (two-to-five years) tenors of the cover assets, and the potential higher liquidity of assets that could become insured, upon payment of the relevant fee, by a buyer via CMHC.

The agency's supporting AP will be affected, among other things, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:

--'Covered Bonds Rating Criteria', dated Aug. 13, 2010;

--'Assessment of Liquidity Risks in Covered Bonds', dated Aug. 16, 2010;

--'ResiLogic: U.S. Residential Mortgage Loss Model Criteria', dated Aug. 11, 2009;

--'National Risk Index, State- and MSA-level Risk Multipliers in ResiLogic', dated March 18, 2011;

--'Covered Bonds Counterparty Criteria', dated March 14, 2011;

--'Counterparty Criteria for Structured Finance Transactions', dated March 14, 2011;

--'Counterparty Criteria for Structured Finance Transactions: Derivative Addendum', dated March 14, 2011.

Applicable Criteria and Related Research:

Covered Bonds Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547527

Assessment of Liquidity Risks in Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=540786

ResiLogic: U.S. Residential Mortgage Loss Model Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=461916

National Risk Index, State- and MSA-level Risk Multipliers in ResiLogic

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=613325

Covered Bonds Counterparty Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=606185

Counterparty Criteria for Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=605425

Counterparty Criteria for Structured Finance Transactions: Derivative Addendum

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=605427

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Fitch Ratings
Sandro Scenga, +1-212-908-0278
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Primary Analyst:
Vanessa Purwin, +1-212-908-0269
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Rachel Brach, +1-212-908-0224
Director
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