LONDON & NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned Caisse Centrale Desjardins' (CCD; rated 'AA-/F1+'', with a Stable Outlook by Fitch) Series 2 issue of USD1.5 billion five-year hard bullet mortgage covered bonds an 'AAA' rating. The fixed-rate paying bonds are guaranteed by CCD Covered Bond Guarantor LP, a special purpose vehicle established for the program. The USD1 billion Series 1 mortgage covered bonds outstanding under the program are also affirmed.
The rating is based on CCD's Long-term Issuer Default Rating (IDR) of 'AA-' and a Discontinuity Factor (D-Factor) of 23.6%. This combination enables the covered bonds to reach 'AAA' on a probability-of-default (PD) basis because the overcollateralization (OC) is sufficient to sustain this level of stress. The program's contractual asset percentage (AP) is equal to Fitch's supporting AP of 93.5%. All else equal, the covered bonds could be rated 'AAA' so long as the issuer's long-term IDR does not fall below 'A-'.
As of Feb. 1, 2011, the cover pool consisted of 21,933 first-lien, Canada Mortgage and Housing Corporation (CMHC)-insured residential mortgage loans, totaling CAD3.2 billion. The portfolio had a weighted-average (WA) current loan to value of 91.2%, which is higher than that of all other Canadian mortgage covered bond programs Fitch rates. The WA remaining term of the mortgages was 33 months and the WA seasoning was 17 months. All of the loans in the pool are concentrated in the province of Quebec, although program documentation also allows for the inclusion of mortgages secured by properties in Ontario.
Given the program's dynamic nature, the composition and credit quality of the cover pool may change over time. In a 'AAA' scenario, Fitch has calculated a cumulative WA frequency of foreclosure (WAFF) for the cover assets of 33.0%, which includes an adjustment for the significant geographic concentration as compared to other Canadian cover pools, and a WA recovery rate (WARR) of 96.5%, which reflects the benefit of the CMHC insurance on the loans. Fitch's analysis of the cover pool relies on state- and MSA-level risk multipliers which reflect first quarter 2010 University Financial Associates, LLC's (UFA) data rather than the three-quarter average stipulated in the 'ResiLogic: U.S. Residential Mortgage Loss Model Criteria' to further mitigate fluctuations in credit enhancement as a result of quarterly updates. In addition, credit for mortgage insurance is based on an internal credit opinion of CMHC rather than a public or private rating as noted in Fitch's, 'Global Criteria for Lenders' Mortgage Insurance in RMBS'.
If CMHC lost the full backing of the government of Canada, or if the government of Canada was downgraded, Fitch would revise the credit given to the CMHC insurance, which could lead to weaker liquidity and lower recovery expectations on the assets and subsequently a higher D-Factor and lower AP to support the rating.
Interest received from the cover assets is swapped into CAD floating-rate plus a margin. As there is no requirement to maintain a higher margin, Fitch limits its credit given to the minimum payment applicable under the swap, which must be sized to be sufficient to cover the payments on the covered bonds plus a margin. In addition, the guarantor has entered into a swap to transform the CAD floating-rate cash flows into the USD-denominated fixed-rate flows payable on the bonds. For both the interest rate and covered bond swaps, CCD serves as swap counterparty.
The resulting level of AP supporting the expected rating currently stands at a maximum of 93.5%. Major drivers of the high supporting AP are the short tenors of the cover assets, which are two to five years compared with the 20 to 30 years seen in most jurisdictions, and the higher liquidity of CMHC-insured assets. The effects of the method of sale of selected loans (see the SARA clause in the 'Contractual Mechanisms in Covered Bonds: Under the Spotlight' dated June 4, 2009, and available at www.fitchratings.com) following a default of the issuer have also been factored into the agency's analysis. The supporting AP will be affected, among other things, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Covered Bonds Rating Criteria', Aug. 12, 2011;
--'Covered Bonds Counterparty Criteria', March 14, 2011;
--'ResiLogic: U.S. Residential Mortgage Loss Model Criteria', Aug. 12, 2011;
--'Global Criteria for Lenders' Mortgage Insurance in RMBS', Aug. 10, 2011;
--'Criteria for Rating Caps in Global Structured Finance Transactions', Aug. 9, 2011.
Applicable Criteria and Related Research:
Criteria for Rating Caps in Global Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648672
ResiLogic: U.S. Residential Mortgage Loss Model Technical Document
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=311212
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