NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AAA' rating with a Stable Outlook on the Canadian Imperial Bank of Commerce's (CIBC; 'AA-'/'F1+'; Outlook Stable) legislative mortgage covered bonds following Fitch's annual review.
KEY RATING DRIVERS
CIBC's LEGISLATIVE MORTGAGE COVERED BONDS: The 'AAA' rating of CIBC's legislative mortgage covered bonds is based on the issuer's 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 92.4% that Fitch takes into account in its analysis which provides more protection than the 93% 'AAA' breakeven AP. The current contractual AP supports the rating on an 'AAA' probability of default (PD) basis.
The 93% 'AAA' breakeven AP, corresponding to a breakeven overcollateralization (OC) of 7.5% is driven by the cover pool's credit loss component of 7.5%, followed by the asset disposal loss of 4%. The cash flow valuation component leads to a lower 'AAA' breakeven OC by 1.7%. The 7.5% 'AAA' credit loss represents the impact on the breakeven OC from the 15.4% weighted average (WA) default rate and the 54.4% WA average recovery rate for the mortgage cover assets. The breakeven AP considers whether timely payments are met in an 'AA' scenario and tests for recoveries given default of at least 91% in an 'AAA' scenario, this is why the sum of the breakeven OC drivers is higher than CIBC's AAA breakeven OC.
Under the current Canadian banking legislation bail-in is not an explicit provision; therefore, 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.
Canadian covered bond program documents include a feature called the Selected Assets Required Amount (SARA) clause, which places some conditions on the sale of assets in the event of an issuer default. Fitch has considered the impact of this clause by modelling an issuer default in each of the first six quarters and in every quarter with a covered bond maturity date to ensure that OC would be sufficient for all possible sale periods under a given rating scenario.
There may be some scenarios not considered in Fitch's current analysis of the SARA clause in Canadian covered bond programs. Fitch is currently in the process of fine-tuning its approach to the SARA clause. Following this review, expected to be completed in the third quarter of this year, Fitch will re-run the cash flow modelling on these programs to evaluate any impact on the break-even AP for the ratings.
Lastly, CIBC's program documents contain rating agency removal language (RRL), which allows the issuer to remove a rating agency and rating agency specific language from legal documents without consulting bondholders even if bondholders may see this as materially prejudicial to their interests. For example, if CIBC's ratings were downgraded by Fitch below 'A/F1' and CIBC chose to remove Fitch's rating then this would also mean the removal of minimum Fitch rating thresholds in respect of the account bank, cash manager deposit rating and servicer deposit threshold rating below which there is currently a contractual obligation to pursue certain remedies to protect against counterparty risk. This would mean a counterparty could remain in its role without pursuing any form of remedy in the event that the counterparty's Fitch rating fell below the currently specified minimum Fitch rating thresholds. If Fitch's rating is removed from the transaction, then Fitch may choose either to (i) withdraw its rating; or (ii) maintain its rating provided there is sufficient information for it to do so. In both cases, Fitch would reflect the removal of this contractual obligation to protect against counterparty risk in its rating opinion (in the case of withdrawal prior to the rating being withdrawn). This could lead to the ratings of the notes being capped at the level of the counterparty's rating, with any notes rated above this level being downgraded.
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) CIBC's 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 'AAA' breakeven level of 93.0%.
The Fitch breakeven AP for the covered bond rating will be affected, amongst other factors, by 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.
Additional information is available on www.fitchratings.com
Canadian Residential Mortgage Loan Loss Model Criteria (pub. 16 Apr 2015)
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14
Counterparty Criteria for Structured Finance and Covered Bonds:
Derivative Addendum (pub. 14 May 2014)
Covered Bonds Rating Criteria (pub. 23 Jul 2015)
Covered Bonds Rating Criteria - Mortgage Liquidity and Refinancing
Stress Addendum (pub. 06 Jul 2015)
Criteria for Interest Rate Stresses in Structured Finance Transactions
and Covered Bonds (pub. 19 Dec 2014)
Dodd-Frank Rating Information Disclosure Form