OREANDA-NEWS. Fitch Ratings has affirmed the ratings of five Canadian mortgage covered bond programs following the agency's full annual reviews of the programs.

The ratings of the outstanding covered bonds issued by Bank of Montreal (BMO: 'AA-'/'F1+'; Stable Outlook by Fitch), Canadian Imperial Bank of Commerce (CIBC: 'AA-'/'F1+'; Stable Outlook by Fitch), Caisse Centrale Desjardins (CCD: 'AA-'/'F1+'; Stable Outlook by Fitch), National Bank of Canada (NBC: 'A+'/'F1'; Stable Outlook by Fitch), under their structured program and Royal Bank of Canada (RBC: 'AA'/'F1+'; Stable Outlook) under its registered program are affirmed at 'AAA' with a Stable Outlook. The structured programs remain in wind-down following the introduction of covered bond legislation in 2012 which prohibits issuance of covered bonds secured by insured mortgages.

KEY RATING DRIVERS

BMO's STRUCTURED MORTGAGE COVERED BONDS: The 'AAA' rating of BMO's structured mortgage covered bonds is based on the issuer's 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 of 95%. The current contractual AP supports the rating on an 'AAA' probability of default (PD) basis.

The 95% AAA' breakeven AP, corresponding to a breakeven OC of 5.3% is driven by Fitch's expectations for the cover pool's asset disposal loss of 5.4%, followed by its expectations for the credit loss component of 0.5%. The cash flow valuation component leads to a lower 'AAA' breakeven OC by 0.5%. The 0.5% 'AAA' credit loss represents the impact on the breakeven OC from the 13.8% weighted average (WA) default rate and the 96.5% WA average recovery rate for the mortgage cover assets, which takes into account the benefit of the CMHC insurance on the mortgage loans. 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.

CIBC's STRUCTURED MORTGAGE COVERED BONDS: The 'AAA' rating of CIBC's structured mortgage covered bonds is based on the issuer's IDR of 'AA-', Fitch's unchanged D-Cap of 3 (moderate high risk) and the program's contractual AP of 95.1%, which is equal to the 'AAA' breakeven AP supporting Fitch's rating of 95.1%. The current contractual AP supports the rating on an 'AAA' PD basis.

The 95.1% AAA' breakeven AP, corresponding to a breakeven OC of 5.2% is driven by Fitch's expectations for the cover pool's asset disposal loss of 6.1%, followed by its expectations for the credit loss component of 0.4%. The cash flow valuation component leads to a lower 'AAA' breakeven OC by 1.2%. The 0.4% 'AAA' credit loss represents the impact on the breakeven OC from the 10.5% weighted average (WA) default rate and the 96.5% WA average recovery rate for the mortgage cover assets, which takes into account the benefit of the CMHC insurance on the mortgage loans. 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.

CCD's STRUCTURED MORTGAGE COVERED BONDS: The 'AAA' rating of CCD's structured mortgage covered bonds is based on the issuer's IDR of 'AA-', Fitch's unchanged D-Cap of 3 (moderate high risk) and the program's contractual AP of 93.5%, which provides more protection than the 'AAA' breakeven AP supporting Fitch's rating of 95%. The current contractual AP supports the rating on an 'AAA' PD basis.

The 95% AAA' breakeven AP, corresponding to a breakeven OC of 5.3% is driven by Fitch's expectations for the cover pool's asset disposal loss of 5.6%, followed by its expectations for the credit loss component of 0.8%. The cash flow valuation component leads to a lower 'AAA' breakeven OC by 1.2%. The 0.8% 'AAA' credit loss represents the impact on the breakeven OC from the 23.3% weighted average (WA) default rate and the 96.5% WA average recovery rate for the mortgage cover assets, which takes into account the benefit of the CMHC insurance on the mortgage loans. 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.

NBC's STRUCTURED MORTGAGE COVERED BONDS: The 'AAA' rating of NBC's structured mortgage covered bonds is based on the issuer's IDR of 'A+', Fitch's unchanged D-Cap of 3 (moderate high risk) and the program's contractual AP of 93.2%, which provides more protection than the 'AAA' breakeven AP supporting Fitch's rating of 95%. The current contractual AP supports the rating on an 'AAA' PD basis.

The 95% AAA' breakeven AP, corresponding to a breakeven OC of 5.3% is driven by Fitch's expectations for the cover pool's asset disposal loss of 5.9%, followed by its expectations for the credit loss component of 1.0%. The cash flow valuation component leads to a lower 'AAA' breakeven OC by 1.4%. The 1.0% 'AAA' credit loss represents the impact on the breakeven OC from the 27.8% weighted average (WA) default rate and the 96.5% WA average recovery rate for the mortgage cover assets, which takes into account the benefit of the CMHC insurance on the mortgage loans. 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.

RBC's REGISTERED MORTGAGE COVERED BONDS: The 'AAA' rating of RBC's structured mortgage covered bonds is based on the issuer's IDR of 'AA', Fitch's unchanged D-Cap of 3 (moderate high risk) and the program's contractual AP of 93%, which provides more protection than the 'AAA' breakeven AP supporting Fitch's rating of 95%. The current contractual AP supports the rating on an 'AAA' PD basis.

The 95% AAA' breakeven AP, corresponding to a breakeven OC of 5.3% is driven by Fitch's expectations for the cover pool's credit loss of 5.7%, followed by its expectations for the asset disposal loss component of 3.1%. The cash flow valuation component leads to a lower 'AAA' breakeven OC by 1.6%. The 5.7% 'AAA' credit loss represents the impact on the breakeven OC from the 16.6% weighted average (WA) default rate and the 67.3% 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.

With respect to all of the programs, 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.

The programs' discontinuity caps (D-Caps) of 3 are based on the weak link assessment of systemic alternative management as 'moderate high risk', which has not changed since Fitch's last review. The systemic alternative management assessment is driven by the significant roles performed post-issuer default by the guarantor, or third parties acting on its behalf. The guarantor would likely seek bondholder approval for major decisions and need to contract other parties to perform important functions. This assessment is consistent across all Canadian mortgage covered bond programs. Fitch also takes into account the contractual AP maintained in the programs, since amounts in excess of the contractual commitment are secured back to the issuer through the demand loan and therefore not available to covered bond holders in the event of issuer default.

Under the current Canadian banking legislation bail-in is not an explicit provision; therefore, in Fitch's view, the Issuer Default Rating (IDR) remains a satisfactory indicator of the likelihood that the recourse against the cover pool would be enforced, and no IDR uplift is applicable.

Lastly, 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 overcollateralization 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.

RATING SENSITIVITIES

For BMO's, CIBC's, CCD's, NBC's 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.

BMO's 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 is reduced to 0(full discontinuity), or (iii) the AP that Fitch takes into account in its analysis exceeded 95%.

CIBC's 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 is reduced to 0(full discontinuity), or (iii) the AP that Fitch takes into account in its analysis exceeded 95.1%.

CCD's 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 is reduced to 0 (full discontinuity), or (iii) the AP that Fitch takes into account in its analysis exceeded 95%.

NBC's structured covered bonds' rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by two notches to 'A-', (ii) the D-Cap fell to 1 (very high risk), or (iii) the AP that Fitch takes into account in its analysis exceeded 95%.

RBC's registered covered bonds' rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by four notches to 'A-', or (ii) the AP that Fitch takes into account in its analysis exceeded 95%. The covered bonds' rating could be maintained even if the D-Cap was reduced to 0 (full discontinuity), subject to a satisfactory level of AP, given the issuer's current IDR of 'AA' which enables the bonds to reach 'AAA' taking only recoveries into account.