NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of two Canadian mortgage covered bond programs following the agency's annual reviews of the programs. The ratings of the outstanding covered bonds issued by Bank of Montreal (BMO; 'AA-'/'F1+'; Stable Outlook) and Canadian Imperial Bank of Commerce (CIBC; 'AA-'/'F1+'; Stable Outlook) under their structured programs are affirmed at 'AAA' with a Stable Outlook. Both 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 Long-term Issuer Default Rating (IDR) of 'AA-', Fitch's 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. The current contractual AP supports the rating on an 'AAA' probability of default (PD) basis.
As of April 2014, CAD-equivalent 7.6 billion soft bullet bonds were outstanding under the program. They are secured by a cover pool consisting of CAD8.9 billion Canada Mortgage and Housing Corporation (CMHC)-insured residential mortgages. The 'AAA' breakeven AP is driven by a weighted average (WA) PD of 13.75% and a WA recovery rate (RR) of 96.5% on the cover pool in an 'AAA' scenario, which takes into account the benefit of the CMHC insurance on the mortgage loans.
KEY RATING DRIVERS: CIBC's STRUCTURED MORTGAGE COVERED BONDS
The 'AAA' rating of CIBC's structured mortgage covered bonds is based on the issuer's Long-term IDR of 'AA-', Fitch's 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. The current contractual AP supports the rating on an 'AAA' PD basis.
As of April 2014, CAD-equivalent 10.3 billion hard bullet bonds were outstanding under the program. They are secured by a CAD13.9 billion cover pool consisting of CMHC-insured Canadian residential mortgages. The 'AAA' breakeven AP is driven by a WA PD of 12% and a WA RR of 96.5% on the cover pool in an 'AAA' scenario, which takes into account the benefit of the CMHC insurance on the mortgage loans.
RATING SENSITIVITIES: BMO's and CIBC's STRUCTURED MORTGAGE COVERED BONDS
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 fell 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 fell to 0 (full discontinuity), or (iii) the AP that Fitch takes into account in its analysis exceeded 95.1%.
For BMO's and CIBC'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 respective cover pools. This could lead to weaker liquidity as well as higher credit risk expectations for the cover pool. As a result, the D-Caps would likely decrease and the breakeven APs for the current covered bonds' ratings would likely decrease as well.
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.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
Covered Bonds Rating Criteria (March 2014)
Counterparty Criteria for Structured Finance and Covered Bonds (May 2014)
Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (May 2014)
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (January 2014)
Applicable Criteria and Related Research:
Covered Bonds Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=738975
Counterparty Criteria for Structured Finance and Covered Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744175
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725537
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834846
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