OREANDA-NEWS. Fitch Ratings has affirmed the ratings for Caisse Centrale Desjardins
(CCD; 'AA-'/'F1+'; Stable Outlook) outstanding CAD-equivalent 4.39 billion registered mortgage covered bonds following the Fitch's annual review of the program at 'AAA' with a Stable Outlook.

CCD indicated that it will lower the contractual asset percentage (AP) to 93.5% for its registered mortgage covered bond program, which is in line with Fitch's calculated breakeven AP for the 'AAA' rating. Fitch's breakeven AP decreased to 93.5% from 93.7%, which is below the 93.7% AP used in the asset coverage test currently reported in the monthly in the investor report. CCD indicated that it will amend the contractual AP in its next monthly report. The amendment, taken together with CCD's Long-term Issuer Default Rating (IDR) of 'AA-', the unchanged IDR uplift of N/A and the unchanged Discontinuity Cap (D-Cap) of 3 notches (moderate high risk), underpin the covered bonds 'AAA' rating.

KEY RATING DRIVERS

The rating is based on CCD's Long-term Issuer Default Rating (IDR) of 'AA-', an unchanged Discontinuity Cap (D-Cap) of 3 (moderate high risk) and the 93.5% asset percentage (AP) that Fitch takes into account in its analysis, which equals Fitch's 'AAA' breakeven AP. The Stable Outlook for the covered bonds rating is due to the stable outlook on the Canadian sovereign and CCD's IDR. 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.

The 93.5% 'AAA' breakeven AP, corresponding to a breakeven OC of 7.0% is driven by the cover pool's credit loss of 7.0%, followed by the asset disposal loss component of 3.3% due to maturity mismatches in a AAA scenario. The cash flow valuation component leads to a lower 'AAA' breakeven OC by 1.3% 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. The breakeven AP considers whether timely payments are met in an 'AA' scenario and tests for recoveries given default of at least 91% in a 'AAA' scenario.

The 7.0% 'AAA' credit loss represents the impact on the breakeven OC from the 16.1% weighted average (WA) default rate and the 59.6% WA average recovery rate for the mortgage cover assets. This reflects an increase in the 'AAA' credit loss from Fitch's prior analysis of 6.1% due to the cover pool's higher WA sustainable loan-to-value of 67.2% vs. 62.6%. The assets remain 100% concentrated in Quebec, for which Fitch assumes a sustainable market value decline of approximately 22%.
Fitch takes into account the contractual AP maintained in the program since amounts in excess of the contractual commitment are secured back to CCD through the demand loan and therefore not available to covered bond holders in the event of issuer default.

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.

Fitch is currently in the process of fine-tuning its approach to the SARA clause. Following this review, expected to be completed in the later half of 2016, 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
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 'AAA' breakeven level of 93.5%.

The Fitch breakeven AP for the covered bond rating will be affected, amongst others, 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.