Fitch Assigns 'AAA'(EXP) Rating to BNS' Inaugural Legislative Mortgage Covered Bonds

Tue Mar 25, 2014 10:48am EDT

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(The following statement was released by the rating agency) NEW YORK, March 25 (Fitch) Fitch Ratings has assigned an 'AAA'(EXP) rating with Stable Outlook to Bank of Nova Scotia's (BNS; 'AA-'/'F1+', Stable Outlook) inaugural series of registered covered bonds issued under its newly established legislative program. Fitch's expected rating takes into account a hypothetical EUR-denominated jumbo issuance with a soft bullet maturity of up to seven years. KEY RATING DRIVERS The rating of BNS' mortgage covered bonds is based on the issuer's long-term Issuer Default Rating (IDR) of 'AA-', Fitch Discontinuity-Cap (D-Cap) of '3' (moderate high risk) and the program's contractual AP which is expected to be in line with Fitch's 'AAA' breakeven AP of 93.5%. The program D-Cap is driven by Fitch's moderate high risk assessment of both the cover-pool and systemic alternative management components. The cover-pool specific alternative management assessment addresses both the data quality and quantity of the historical performance data provided by the issuer. The assessment of the systemic specific alternative management reflects the significant roles performed post issuer default by the guarantor, or third parties acting on its behalf. The guarantor would likely seek bondholder approval for major decisions and need to contract other parties to perform important functions. This assessment is consistent across all Canadian mortgage covered bond programs. All other D-Cap components have been assessed as moderate risk. The inaugural covered bonds are secured by a cover pool drawn from an initial indicative portfolio consisting of 65,149 uninsured Canadian residential mortgages totalling approximately CAD11.2 billion. As of month-end January 2014, the portfolio had a weighted average (WA) current loan to value (LTV) of 58% and a WA marked-to-market combined LTV of 77.1% (as calculated by Fitch) reflecting amounts available to be drawn on BNS' Scotia Total Equity Plan (STEP) multi-component mortgage product which Fitch takes into account in estimating the pool's probability of default (PD). Approximately 84% of the loans in the initial portfolio were STEP loans. In addition, the cover assets had a non-zero WA credit score of 773 and were roughly 24 months seasoned, with a large percentage of loans concentrated in Ontario (49.6%). The pool's WA expected loss of 6.8% incorporates an additional 1.6% loss attributable to interest accrued on defaulted loans from initial delinquency through to liquidation. Fitch's 'AAA' breakeven AP of 93.5% is driven by a WA PD of 13.7% and a WA RR of 62.1% on the cover pool in an 'AAA' scenario. The assets have a WA residual maturity of approximately 2.6 years while the first series of covered bonds are expected to have a WA residual maturity of up to seven years. RATING SENSITIVITIES BNS' covered bonds' rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by three notches to 'A-'; (ii) the D-Cap fell by at least three categories to '0' (full discontinuity); or (iii) the AP that Fitch takes into account in its analysis exceeded 93.5%. Fitch breakeven AP for a given covered bonds' ratings will be affected by, among others, the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore it cannot be assumed to remain stable over time. Fitch is in the process of implementing its recently updated covered bond criteria to reflect the beneficial position for covered bonds under bank resolution frameworks where covered bonds are exempted from bail-in. The course of implementation will take place as described in Feedback Report: Covered Bond Rating Criteria Change - Developments in Bank Resolution Frameworks Beneficial. The presale report is available on Fitch's website at 'www.fitchratings.com'. Contact: Primary Analyst Vanessa Purwin Senior Director +1-212-908-0269 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Roger Lin Director +1-212-908-0778 Committee Chairperson Helene Heberlein Managing Director + 33 1 44 29 9140 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Covered Bonds Rating Criteria' (March 10, 2014); --'Counterparty Criteria for Structured Finance and Covered Bonds ' (May 13, 2013); --'Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum' (June 3, 2013); --'Canadian Residential Mortgage Loan Loss Model Criteria' (May 15, 2013). Applicable Criteria and Related Research: Bank of Nova Scotia here Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum here Counterparty Criteria for Structured Finance and Covered Bonds here Canadian Residential Mortgage Loan Loss Model here Covered Bonds Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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