Fitch Affirms CIBC's Registered Covered Bonds at 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'AAA'/Stable Outlook on the Canadian Imperial Bank of Commerce's (CIBC; 'AA-'/'F1+'/Stable) legislative mortgage covered bonds following the annual review of the program.

KEY RATING DRIVERS

The 'AAA' rating of CIBC's legislative mortgage covered bonds is based on the issuer's Long-Term Issuer Default Rating (IDR) of 'AA-', Fitch's unchanged Discontinuity Cap (D-Cap) of 3 notches (moderate high risk), and the program's contractual asset percentage (AP) of 93.0% which Fitch takes into account in its analysis, and is equal to Fitch's 'AAA' breakeven AP of 93.0%. The Stable Outlook for the covered bonds rating is due to the Stable Outlook on the Canadian sovereign and on CIBC's IDR. Since bail-in is not an explicit provision under the current Canadian framework, the IDR remains a satisfactory indicator in Fitch's view, of the likelihood that recourse against the cover pool would be enforced, and no IDR uplift is applicable.

The 93.0% 'AAA' breakeven AP, corresponding to a breakeven overcollateralization (OC) of 7.5%, is driven by the cover pool's credit loss of 7.8% followed by the asset disposal loss which increased the OC by 2.9%. The cash flow valuation component decreased the OC by .7%. The 7.8% 'AAA' credit loss represents the impact on the breakeven OC from the 16.11% weighted average (WA) frequency of foreclosure and the 55.0% WA average recovery rate for the mortgage cover assets. The breakeven AP considers whether timely payments are met in a 'AA' scenario and tests for recoveries given default of at least 91% in a 'AAA' scenario, this is why the sum of the breakeven OC drivers is higher than CIBC's 'AAA' breakeven OC.

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 before the first benchmark covered bond maturity and determined that the OC level is sufficient for all possible sale periods under a given rating scenario.

The following criteria variations were applied during the analysis of this program. Fitch utilized the Canadian RMBS Loan Loss Model Criteria for the asset analysis of the CIBC legislative covered pool. For the cash flow analysis, Fitch assumed that the defaults on the assets occurred at 25% per year for the first four years, the servicing fee was .32%, the negative spread on cash reinvestments was .10%, and prepayment assumptions of 5% and 30% were used. These assumptions are not currently described in existing criteria for analyzing Canadian covered bonds. The rating impact of applying these criteria variations is undetermined.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the Issuer Default Rating 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 Asset Percentage that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven level of 93.0%.

The Fitch breakeven Asset Percentage for the covered bond rating will be affected by, amongst 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 Asset Percentage to maintain the covered bond rating cannot be assumed to remain stable over time.

More details on the cover pool and Fitch's analysis will be available in a credit update report, which will be available at www.fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria

Canadian RMBS Loan Loss Model Criteria (pub. 20 Jun 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881457

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 18 Jul 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884963

Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 18 Jul 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884964

Covered Bonds Rating Criteria (pub. 11 Mar 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878761

Covered Bonds Rating Criteria - Mortgage Liquidity and Refinancing Stress Addendum (pub. 23 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871331

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879815

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009736

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009736

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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Fitch Ratings
Primary Analyst
Susan Hosterman
Director
+1-212-908-0670
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Sara De Novellis
Analyst
+39 02 879 087 295
or
Committee Chairperson
Suzanne Mistretta
Senior Director
+1-212-908-0639
or
Media Relations:
Hannah James, New York, + 1 646-582-4947
Email: [email protected]

Source: Fitch Ratings

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