Fitch Assigns Rating Uplifts to Canadian Covered Bonds on New Criteria

LONDON--()--Fitch Ratings has assigned IDR Uplift, Payment Continuity Uplift (PCU) and Recovery Uplift (RU) to 10 Canadian banks' covered bond programs based on Fitch's updated 'Covered Bonds Rating Criteria' published on Oct. 26, 2016.

The theoretical maximum achievable covered bonds rating for each of the Fitch-rated Canadian covered bonds programmes is unchanged at 'AAA'. Cushions against issuer downgrades were increased from the prior criteria with a higher Payment Continuity Uplift (PCU) assigned to the programmes than the former Discontinuity Cap of (D-Cap).

Fitch will reassess the 'AAA' breakeven asset percentage (AP) of each programme within six months of the publication of the revised criteria. A full list of all affected programmes and their applicable rating uplifts is provided at the end of this press release.

IDR Uplift

Fitch has assigned the Canadian covered bonds an IDR uplift of zero notches (formerly N/A). While the Canadian bank resolution framework was passed by parliament in June 2016, the details on the resolution regime are yet to be finalised and implemented. The agency will reassess its IDR uplift when the details of the final rules are published.

PCU 6 Notches for Registered Programmes; 5 for Structured

Fitch has assigned a PCU of six notches to the six registered programmes and a PCU of five notches to the four structured programmes, up from the former D-Cap of three notches.

For nine of the programmes, protection against principal payment interruption risk upon a switch of the recourse to the cover pool is provided through a 12-month extendable maturity feature. For one structured programme, which has hard bullets covered bonds outstanding, a 12-month pre-maturity test is triggered at the loss of an 'F1+' rating. The interest payment interruption risk is mitigated by a reserve fund that will be funded upon the issuer's rating falling below 'A' or 'F1'. If triggered, the reserve fund would cover three-months of senior expense and interest payments of the covered bonds.

The structured programmes' PCU is one notch lower than the registered programmes' to reflect the lack of a provision to repay the demand loan in kind. The demand loan is backed by excess cover pool mortgages that are not needed to pass the asset coverage test (ACT). Should the source of payments switch to the cover pool, the excess mortgages would need to be refinanced in order to repay the demand loan in cash. The demand loan is due from the covered bond guarantor to the issuer and ranks senior to the covered bonds in the priority of payment. Depending on the size of the demand loans, this could exacerbate the liquidity shortfall. However, the cover pools securing the structured programmes consist of mortgages insured by Canada Mortgage and Housing Corporation (CMHC), and Fitch took into account in its analysis the availability of refinancing via CMHC mortgage-backed securities.

The potential cost associated with the sale of insured mortgages to repay the demand loan in cash in the structured programmes is not yet sized for in the 'AAA' breakeven AP given that the issuers of the structured programmes are all highly rated, at 'AA-'. Should the issuer rating be downgraded in the future, the agency will reassess this risk.

Recovery Uplift 1-2 notches for Registered Programmes; 1 for Structured

The six registered programmes are eligible for a two-notch recovery uplift, but only five benefit since the AP Fitch takes into account compensates for the published 'AAA' credit loss. One registered programme has been assigned a one-notch recovery uplift since the contractual AP does not cover the 'AAA' credit loss. The recovery uplift may change upon the agency's updated asset and cashflow analysis.

Fitch concluded that the registered programmes are not exposed to material downside foreign exchange (FX) risk in a recovery given default scenario. CAD denominated cover assets have a shorter average life than the covered bonds, which are in other currencies and hedged by FX swaps until the extended maturity date. As such, the FX swaps also offer some protection against currency mismatches in a recovery given default scenario, and the programmes' recovery uplift is not capped at one notch.

The four structured programmes have a one-notch recovery uplift due to their material exposure to recoveries denominated in a different currency than the covered bonds. CAD denominated cover assets have a longer average residual life than the covered bonds, which are in other currencies, mainly EUR and USD, and are swapped into CAD up to their extended maturity date; therefore, cash flows from longer dated assets are not hedged in a recovery given default scenario. The liabilities have a shorter profile because the programmes are dormant. The last outstanding bonds in three of the structured programmes are scheduled to mature by the end of Q117.

Registered Mortgage Covered Bond Programmes

Bank of Montreal ('AA-'/Outlook Stable)

--IDR uplift zero notches

--PCU six notches

--RU two notches

Caisse Centrale Desjardins ('AA-'/Outlook Stable)

--IDR uplift zero notches

--PCU six notches

--RU two notches

Canadian Imperial Bank of Commerce ('AA-'/Outlook Stable)

--IDR uplift zero notches

--PCU six notches

--RU two notches

National Bank of Canada ('A+'/Outlook Stable)

--IDR uplift zero notches

--PCU six notches

--RU two notches

Royal Bank of Canada ('AA'/Outlook Negative)

--IDR uplift zero notches

--PCU six notches

--RU two notches

The Bank of Nova Scotia ('AA-'/Outlook Stable)

--IDR uplift zero notches

--PCU six notches

--RU one notch

Structured Mortgage Covered Bond Programmes

Bank of Montreal ('AA-'/Outlook Stable)

--IDR uplift zero notches

--PCU five notches

--RU one notch

Caisse Centrale Desjardins ('AA-'/Outlook Stable)

--IDR uplift zero notches

--PCU five notches

--RU one notch

Canadian Imperial Bank of Commerce ('AA-'/Outlook Stable)

--IDR uplift zero notches

--PCU five notches

--RU one notch

The Bank of Nova Scotia ('AA-'/Outlook Stable)

--IDR uplift zero notches

--PCU five notches

--RU one notch

Additional information is available on www.fitchratings.com

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Contacts

Fitch Ratings
Kate Lin, +44 20 3530 1706
Director
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
or
Susan Hosterman, +1-212-908-0670
Director
or
Suzanne Mistretta, +1-212-908-0639
Managing Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Kate Lin, +44 20 3530 1706
Director
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
or
Susan Hosterman, +1-212-908-0670
Director
or
Suzanne Mistretta, +1-212-908-0639
Managing Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com