NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA'(EXP) rating with Stable Outlook to La Caisse central Desjardins du Quebec (CCD; 'AA-'/Outlook Stable/'F1') 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 five years.
KEY RATING DRIVERS
The rating of CCD's 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 asset percentage (AP) which is expected to be in line with Fitch's 'AAA' breakeven AP of 93.7%.
The program D-Cap is driven by Fitch's moderate high risk assessment of the systemic alternative management component of its discontinuity analysis due to 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 expected to be secured by a cover pool drawn from an initial indicative portfolio consisting of 13,041 uninsured Canadian residential mortgages approximately CAD1.6 billion and CAD 0.1 billion in substitute assets consisting of Canadian government bonds (total of CAD1.66 billion). The portfolio had a weighted average (WA) original combined loan-to-value (LTV) of 68.66%, a non-zero WA credit score of 758 and was roughly 27 months seasoned, with a 100 percentage of loans concentrated in Quebec as of Jan. 31, 2014. The CAD 100 million (6% of total pool) of substitute assets are consistent with the requirements under the CMHC Program Guide. Substitute assets are subject to an overall limit of 10% of the cover portfolio.
Fitch's 'AAA' breakeven AP of 93.7% is driven by a WA Probability of Default of 16%, a WA Recovery Rate of 58.5% and a WA expected loss of 8.5% which incorporates an additional 1.9% loss attributable to interest accrued on defaulted loans through liquidation on the mortgage assets in an 'AAA' scenario. The cover assets have a WA residual maturity of approximately 2.0 years while the first series of covered bonds are expected to have a WA residual maturity of up to five years.
CCD's 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 three categories to 0 (full discontinuity); or (iii) the program's contractual AP that Fitch takes into account in its analysis exceeded 93.7%.
Fitch's breakeven AP for a given covered bonds' ratings will be affected, among others, by 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);
--'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: La Caisse centrale Desjardins
Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum
Covered Bonds Rating Criteria
Counterparty Criteria for Structured Finance and Covered Bonds
Canadian Residential Mortgage Loan Loss Model