NEW YORK--(BUSINESS WIRE)--Following a review of the discontinuity risk (D-Cap) analysis for all Fitch-rated Canadian covered bond programs, the agency has maintained its overall D-Cap assessment at 'Moderate high' (3 notches) for the five structured and six registered programs secured by prime Canadian residential mortgages.
For most programs, this is solely driven by the 'Moderate high' assessment for the Systemic Alternative Management component. Fitch considers it highly likely that the trustee would seek bondholder approval for major decisions that would affect bondholders upon a switch of the recourse from the issuer to the asset-owning SPV acting as the guarantor. This could delay action by the guarantor, increasing the risk of payment interruptions on the covered bonds. Both the structured and the registered covered bond programs rely heavily on the trustee acting on behalf of the guarantor after issuer insolvency. For Bank of Nova Scotia (BNS) and Caisse Centrale Desjardins' (CCD) covered bond programs, the D-Cap assessment of 'Moderate high' is driven by both the Cover Pool-Specific Alternative Management and Systemic Alternative Management components.
The Asset Segregation D-Cap component for the registered programs of Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), National Bank of Canada (NBC) and Royal Bank of Canada (RBC) has been revised to ' Low' from 'Moderate'. This reflects legislative enhancements including the statutory bankruptcy and insolvency protections afforded to registered covered bond investors in Canada's National Housing Act (NHA) and the high percentages of the cover pool for which the express waiver of set-off has been signed by the borrower as established by the Canada Mortgage and Housing Corporation's 'Canadian Registered Covered Bond Programs Guide' for loans extended, advanced or renewed after July 1, 2014.
The 'Moderate' Asset Segregation D-Cap component for BNS and CCD's registered programs reflect the low percentage of cover pool assets for which an express waiver of set-off has been signed by the borrower. In Fitch's view, the existence of a large proportion of loans containing a set-off waiver explains the differentiation between 'Low' and 'Moderate' risk for the registered programs.
For the structured covered bond programs, the Asset Segregation D-Cap component has been maintained at 'Moderate'. This reflects the strength of the contractual arrangements which ensure that cover pool assets are validly ring-fenced, with minimal commingling risk. There is residual clawback risk for all programs, including registered programs, which is mitigated by the short 30-day exposure period and the relatively high burden of proof that the conditions for challenging a payment made within that period have taken place.
Liability clawback risk is further mitigated for the registered programs through the NHA provisions which include the right for covered bond payments to be made. This leads to the 'Low' risk assessment for the registered covered bonds (except BNS and CCD's programs) as compared to the 'Moderate' risk assessment for the structured programs.
The revision in the Asset Segregation component for BMO's, CIBC's, NBC's and RBC's registered programs has no impact on the overall D-Cap assessment of 'Moderate high', as D-Caps are driven by the weakest link among the components.
Both the Liquidity Gap and Systemic Risk and the Privileged Derivatives components of the D-Cap assessment remain at 'Moderate' for all the Canadian programs rated by Fitch.
Fitch's D-Cap assessment captures the risk of payment interruption on the covered bonds upon the transition from the issuer to the cover pool as the source of covered bond payments and is expressed as a maximum number of notches that can be achieved above the Issuer Default Rating (IDR), as adjusted by the IDR uplift to the tested covered bond rating on a probability of default basis.
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. 23 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868658
Covered Bonds Rating Criteria -- Mortgage Liquidity and Refinancing Stress Addendum (pub. 06 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867987
Fitch's Mortgage Covered Bond Refinancing Stresses - Excel File (pub. 03 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867930
Related Research
Covered Bonds Surveillance Snapshot
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752991
Covered Bonds Surveillance Snapshot - Excel
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752990
Covered Bonds Surveillance Snapshot - Excel File
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869146
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