Fitch Affirms Ratings for 2 Canadian Mortgage Covered Bond Programs

Wed Jun 18, 2014 3:55pm EDT

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(The following statement was released by the rating agency) NEW YORK, June 18 (Fitch) Fitch Ratings has affirmed the ratings of two Canadian mortgage covered bond programs following the agency's annual reviews of the programs. The ratings of the outstanding covered bonds issued by National Bank of Canada (NBC: 'A+'/'F1'; Stable Outlook by Fitch) under its structured program and Royal Bank of Canada (RBC: 'AA'/'F1+'; Stable Outlook) under its registered program are affirmed at 'AAA' with a Stable Outlook. NBC's structured program remains in wind-down following the introduction of covered bond legislation in 2012 which prohibits issuance of covered bonds secured by insured mortgages. KEY RATING DRIVERS NBC's STRUCTURED MORTGAGE COVERED BONDS: The 'AAA' rating of NBC's structured mortgage covered bonds is based on the issuer's Long-term Issuer Default Rating (IDR) of 'A+', Fitch's unchanged Discontinuity Cap (D-Cap) of 3 (moderate high risk) and the program's contractual asset percentage (AP) of 93.2%, which provides more protection than the 'AAA' breakeven AP supporting Fitch's rating of 95%. The current contractual AP supports the rating on an 'AAA' probability of default (PD) basis. Since bail-in is not an explicit provision under the current Canadian framework, in Fitch's view, the IDR remains a satisfactory indicator of the likelihood that the recourse against the cover pool would be enforced, and no IDR uplift is applicable. CAD-equivalent 2 billion soft bullet bonds are outstanding under the program. They are secured by a cover pool consisting of CAD2.9 billion Canada Mortgage and Housing Corporation (CMHC)-insured residential mortgages as of April 2014. The 'AAA' breakeven AP is driven by a weighted average (WA) PD of 30.25% and a WA recovery rate (RR) of 96.5% on the cover pool in an 'AAA' scenario, which takes into account the benefit of the CMHC insurance on the mortgage loans. The assets have a WA residual maturity of approximately 1.1 years while the covered bonds have a WA residual maturity of 2.4 years. RBC's REGISTERED MORTGAGE COVERED BONDS: The 'AAA' rating of RBC's structured mortgage covered bonds is based on the issuer's Long-term IDR of 'AA', Fitch's unchanged D-Cap of 3 (moderate high risk) and the program's contractual AP of 93%, which provides more protection than the 'AAA' breakeven AP supporting Fitch's rating of 95%. The current contractual AP supports the rating on an 'AAA' PD basis. Since bail-in is not an explicit provision under the current Canadian framework, in Fitch's view, the IDR remains a satisfactory indicator of the likelihood that the recourse against the cover pool would be enforced, and no IDR uplift is applicable. CAD-equivalent 21.9 billion soft bullet bonds are outstanding under the program, which includes the EUR 1 billion Series CB15 closing June 19, 2014. They are secured by a CAD 34 billion cover pool consisting of uninsured Canadian residential mortgages. The 'AAA' breakeven AP is driven by a WA PD of 15.5% and a WA RR of 65.4% on the cover pool in an 'AAA' scenario. The assets have a WA residual maturity of approximately 2.1 years while the covered bonds, including Series CB15, have a WA residual maturity of 3.6 years. RATING SENSITIVITIES NBC's STRUCTURED and RBC's REGISTERED MORTGAGE COVERED BONDS NBC's structured covered bonds' rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by two notches to 'A-', (ii) the D-Cap fell to 1 (very high risk), or (iii) the AP that Fitch takes into account in its analysis exceeded 95%. For NBC's structured mortgage covered bonds, if CMHC lost the full backing of the Government of Canada, or if the Government of Canada's rating suffered a downgrade, Fitch would revise the credit given the insurance provided by CMHC on the mortgage loans in the cover pool. This could lead to weaker liquidity as well as higher credit risk expectations for the cover pool. As a result, the D-Cap would likely decrease and the breakeven AP for the current covered bonds' ratings would likely decrease as well. RBC's registered covered bonds' rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by four notches to 'A-', or (ii) the AP that Fitch takes into account in its analysis exceeded 95%. The covered bonds' rating could be maintained even if the D-Cap was reduced to 0 (full discontinuity), subject to a satisfactory level of AP, given the issuer's current IDR of 'AA' which enables the bonds to reach 'AAA' taking only recoveries into account. Fitch's breakeven AP for a given covered bond's ratings will be affected by, among other factors, 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. Contact: Primary Analyst Vanessa Purwin Senior Director +1-212-908-0269 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Roger Lin Director +1-212-908-0778 Committee Chairperson Rui Pereira Managing Director +1-212-908-0766 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 2014); --'Counterparty Criteria for Structured Finance and Covered Bonds' (May 2014); --'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum' (May 2014); --'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds' (January 2014); --'Covered Bonds Rating Criteria - Mortgage Liquidity and Refinancing Stress Addendum' (February 2014); --'Canadian Residential Mortgage Loan Loss Model Criteria' (May 2014). Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Counterparty Criteria for Structured Finance and Covered Bonds here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum here Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds here Covered Bonds Rating Criteria – Mortgage Liquidity and Refinancing Stress Addendum here Canadian Residential Mortgage Loan Loss Model 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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