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

NEW YORK--()--Fitch Ratings has assigned a final 'AAA' rating with Stable Outlook to Bank of Nova Scotia's (BNS; 'AA-'/'F1+', Stable Outlook) inaugural series CBL1 of registered covered bonds issued under its newly established legislative program. The bonds have a par value of EUR1 billion with a five year soft bullet maturity.

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 71.7% (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 series CBL1 covered bonds have a WA residual maturity of five 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.

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:

Covered Bonds Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=738975

Counterparty Criteria for Structured Finance and Covered Bonds

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

Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum

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

Canadian Residential Mortgage Loan Loss Model

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=825953

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Contacts

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

Sharing

Contacts

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