Fitch Assigns Final 'AAA' Rating to NBC's Inaugural Legislative Mortgage Covered Bonds

NEW YORK--()--Fitch Ratings has assigned a final 'AAA' rating with a Stable Outlook to National Bank of Canada's (NBC, 'A+'/F1', Stable Outlook) inaugural series of registered covered bonds issued under its newly established legislative program. The series CBL1 bonds have a par value of EUR 1 billion and a five-year maturity with a 12-month extension.

KEY RATING DRIVERS

The rating of NBC's mortgage covered bonds is based on the issuer's Long-term Issuer Default Rating (IDR) of 'A+', Fitch Discontinuity-Cap (D-Cap) of 3 (moderate high risk), and the program's contractual asset percentage (AP) which is expected to be in line with Fitch's 'AAA' breakeven AP of 91.7%.

The program D-Cap is driven by Fitch's moderate high risk assessment of the systemic alternative management component of its discontinuity analysis which is the result of 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 35,271 uninsured Canadian residential mortgages totaling approximately CAD5.5 billion. The portfolio had a weighted average (WA) original combined loan-to-value (LTV) of 73.1%, a non-zero WA credit score of 734, and was roughly 17 months seasoned, with a large percentage of loans concentrated in Quebec (61%) as of June 2013. Fitch's 'AAA' breakeven AP of 91.7% is driven by a WA probability of default of 22.6% and a WA recovery rate of 57.9% 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 have a WA residual maturity of five years.

RATING SENSITIVITIES

NBC's 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 by two categories to 1 (very high risk); or (iii) the program's contractual AP that Fitch takes into account in its analysis exceeded 91.7%.

Fitch's breakeven AP for a given covered bond's 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.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Covered Bonds Rating Criteria' (Sept. 4, 2013);

--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 13, 2013);

--'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum' (May 13, 2013);

--'Covered Bond 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:

Canadian Residential Mortgage Loan Loss Model

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708242

Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709665

Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707156

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707155

Covered Bonds Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717321

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=812103

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Contacts

Fitch Ratings
Primary Analyst
Vanessa Purwin
Senior Director
+1-212-908-0269
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Roger Lin
Associate Director
+1-212-908-0778
or
Committee Chairperson
Rui Pereira
Managing Director
+1-212-908-0766
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Vanessa Purwin
Senior Director
+1-212-908-0269
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Roger Lin
Associate Director
+1-212-908-0778
or
Committee Chairperson
Rui Pereira
Managing Director
+1-212-908-0766
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com