Fitch Affirms NBC's Structured Covered Bonds at 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'AAA' rating on the National Bank of Canada (NBC; 'A+'/'F1'/Outlook Stable) structured mortgage covered bonds. The Rating Outlook is Stable.

NBC's structured program remains in wind-down following the introduction of covered bond legislation in 2012 which prohibits issuance of covered bonds secured by insured mortgages. The outstanding two bonds in this program are due to mature in October 2016.

KEY RATING DRIVERS

The 'AAA' rating of NBC's structured mortgage covered bonds is based on the issuer's Issuer Default Rating (IDR) of 'A+', Fitch's unchanged Discontinuity Cap (D-Cap) of 3 (moderate high risk), and the program's contractual asset percentage (AP) of 93.2% that Fitch takes into account in its analysis, which is more conservative than Fitch's 'AAA' breakeven AP of 95%. The Stable Outlook for the covered bonds rating is due to the Stable Outlook on the Canadian sovereign and on NBC'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 95% 'AAA' breakeven AP, corresponding to a breakeven overcollateralization (OC) of 5.3% is driven by the cover pool's asset disposal loss of 5.1% followed by the credit loss which increased the OC by 1.1%. The cash flow valuation component leads to a decrease in the 'AAA' breakeven OC by .8%. The 1.1% 'AAA' credit loss represents the impact on the breakeven OC from the 32% weighted average (WA) default rate and the 96.5% 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 NBC'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. Due to the fact that there is only one bond outstanding and the program is in wind-down, Fitch has not considered the impact of the SARA clause. Rather, Fitch modelled an issuer default in the remaining quarter and before the final covered bond's 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 Residential Mortgage Loan Loss Model Criteria for the asset analysis of the NBC structured covered pool and assumed that the defaults on the assets occur in the first year.

RATING SENSITIVITIES

The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by two or more notches to 'A-' or below; or (ii) the number of notches represented by the D-Cap is reduced to 1; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven level of 95%.

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.

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 Residential Mortgage Loan Loss Model Criteria (pub. 16 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864357

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 14 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744175

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. 19 Dec 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=838868

Global Structured Finance Rating Criteria (pub. 06 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004571

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004571

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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160516006636/en/

Fitch Ratings
Primary Analyst
Susan Hosterman
Director
+1-212-908-0670
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Roberto Del Ragno
Associate Director
+39 02 879 087 206
or
Committee Chairperson
Suzanne Mistretta
Senior Director
+1-212-908-0639
or
Media Relations
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Free Expo & Aviation Showcase Celebrates Historic Ford Hangar’s 100th Anniversary
• Registered Agents Inc Is Getting Into the Registry Game
• Trilith Foundation's Flourishing Summit Brings National Voices to Fayetteville Sept. 3