NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Canadian Imperial Bank of Commerce's (CIBC; 'AA-'/'F1+'; Stable Outlook by Fitch) outstanding CAD-equivalent 1.85 billion legislative mortgage covered bonds following the agency's annual review of the program at 'AAA' with a Stable Outlook.
KEY RATING DRIVERS
The rating is based on CIBC's Long-term Issuer Default Rating (IDR) of 'AA-', an IDR uplift of 0, unchanged Discontinuity Cap (D-Cap) of 3 (moderate high risk) and the 92.4% asset percentage (AP) that Fitch takes into account in its analysis which provides more protection than the 93% 'AAA' breakeven AP. The Stable Outlook for the covered bonds rating is primarily driven by the Stable Outlook on the Canadian sovereign and on CIBC's IDR.
The 93% 'AAA' breakeven AP, corresponding to a breakeven overcollateralization (OC) of 7.5% is driven by the cover pool's credit loss of 7.9% in an 'AAA' scenario, followed by the asset disposal loss component of 3.8% due to the refinancing spreads applied. The cash flow valuation component leads to a lower 'AAA' breakeven OC by 1.6% primarily due to the short weighted average life of the mortgages, generally three to five years, which results in a high value for the cover pool.
For this rating that considers both an uplift on a probability of default basis and for recoveries given default, the asset disposal loss component is in line with the rating scenario that is tested for timely payments (i.e. 'AA' scenario on a probability of default [PD] basis), while the other breakeven OC components represent 'AAA' stresses. This, plus Fitch's testing for at least 91% recoveries rather than 100% to assign 2-notches credit for recoveries given default, is why the sum of the breakeven OC drivers is higher than CIBC's 'AAA' breakeven OC.
The 7.9% 'AAA' credit loss represents the impact on the breakeven OC from the 16.03% weighted average default rate and the 54.14% weighted average recovery rate for the mortgage cover assets. As of June 2014, the cover pool consisted of 28,315 conventional first-lien residential mortgage loans totalling CAD 7.63 billion. The pool had a weighted average (WA) original combined loan-to-value of 71.3%, a WA Beacon score of 729 and was primarily concentrated in Ontario (47%) and British Columbia (23%). The assets have a WA residual maturity of approximately 2.6 years while the covered bonds have a WA residual maturity of 3.7 years.
The unchanged D-Cap of 3 is due to the weak-link assessment of systemic alternative management as moderate high risk, which is consistent across all Canadian covered bond programs. Fitch has revised the assessment of the liquidity gap and systemic risk component of CIBC's D-Cap to moderate risk from moderate high risk, reflecting the issuance of soft bullet bonds with 12-month maturity extensions which provide more protection than hard bullets subject to a pre-maturity test which were initially contemplated under the program. However, the use of hard bullets is not prohibited and Fitch would revisit its analysis if hard bullets were issued, which could result in a higher risk assessment for Liquidity Gap and Systemic Risk. All other D-Cap components are assessed as moderate risk.
Since bail-in is not an explicit provision under the current Canadian framework, in Fitch's view, the IDR remains a satisfactory indicator of the likelihood that the recourse against the cover pool would be enforced, and no IDR uplift is applicable.
Fitch takes into account the contractual AP maintained in the program, since amounts in excess of the contractual commitment are secured back to CIBC through the demand loan and therefore not available to covered bond holders in the event of issuer default.
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by three or more notches to 'A-' or below; or (ii) the number of notches represented by the D-Cap is reduced to 0; or (iii) the AP that Fitch considers in its analysis increases above Fitch's '[CVB Rating]' breakeven level of 93%.
The Fitch breakeven AP for the covered bond rating 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 issuance. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.
More details on the portfolio and Fitch's analysis will be available in a credit update report, which will be available shortly at www.fitchratings.com.
In the report Breaking Down Breakeven Overcollateralisation, published 8 July 2014, Fitch details its approach for determining the breakeven OC components (available at www.fitchratings.com).
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)
Applicable Criteria and Related Research:
Canadian Residential Mortgage Loan Loss Model
Covered Bonds Rating Criteria - Mortgage Liquidity and Refinancing Stress Addendum
Counterparty Criteria for Structured Finance and Covered Bonds
Covered Bonds Rating Criteria