NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AAA' rating with a Stable Outlook on the Bank of Nova Scotia's (BNS; 'AA-'/'F1+'; Outlook Stable) structured mortgage covered bonds following Fitch's annual review. The program remains in wind-down following the 2012 introduction of covered bond legislation prohibiting issuance of covered bonds secured by insured mortgages.
KEY RATING DRIVERS
The 'AAA' rating on BNS' structured mortgage covered bonds is based on the issuer's Long-term Issuer Default Rating (IDR) of 'AA-', Fitch's unchanged Discontinuity Cap (D-Cap) of 3 (moderate high risk) and the program's contractual asset percentage (AP) of 95%, which is equal to the 'AAA' breakeven AP supporting Fitch's rating. 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, Fitch views the IDR as a satisfactory indicator of the likelihood that the recourse against the cover pool would be enforced, and no IDR uplift is applicable.
CAD-equivalent 12.2 billion soft bullet bonds are outstanding under the program. They are secured by a cover pool consisting of CAD13.5 billion Canada Mortgage and Housing Corporation (CMHC)-insured residential mortgages as of May 2014. The 'AAA' breakeven AP is driven by a weighted average (WA) PD of 22% 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 1.9 years while the covered bonds have a WA residual maturity of 1.7 years.
BNS' structured 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 to 0 (full discontinuity), or (iii) the AP that Fitch takes into account in its analysis exceeded 95%.
For BNS' 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.
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.
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);
--'Covered Bonds Rating Criteria - Mortgage Liquidity and Refinancing Stress Addendum' (February 2014);
--'Canadian Residential Mortgage Loan Loss Model Criteria' (May 2014);
--'Global Criteria for Lenders' Mortgage Insurance in RMBS' (June 2014).