Press Release

DBRS Increases Transparency and Ratings Predictability in the Covered Bond Market

Covered Bonds
November 27, 2007

DBRS has today released its Covered Bond (CB) rating methodology, which combines existing knowledge and practices with a new integrated approach that sets new standards in transparency and predictability for market participants.

The Covered Bond market has seen a dramatic increase in issuance in recent years, and by the end of 2007 it is estimated that there will be over €2 trillion of outstanding CBs in Europe, with approximately 80 issuers and over 200 investors. Perceived as being a highly secure asset class, Covered Bonds have becoming increasingly popular in the current market environment.

The DBRS methodology adopts an integrated approach that encompasses both qualitative and quantitative elements in order to determine CBs default probability. It differs from existing propositions by integrating three building blocks (or analytical pillars): the credit strength of the issuer (two components: Intrinsic Assessment and Support Assessment); the credit quality of the cover pool (see Note on Cover Pools for more details); and for the first time, the strength of the Legal Frameworks (ranked in four categories from Very Strong to Modest) in which Covered Bonds are issued.

Catherine Gerst, head of Covered Bonds and Managing Director SF EMEA, DBRS said: “By integrating three key building blocks we believe we have created an evolutionary methodology that will become a template for the CB market. The ongoing turbulence in the credit markets ensures continued demand for greater insight into the ratings process.”

Legal Frameworks are ranked according to their ability to minimize the degree of linkage between an Issuer’s credit risk and its Covered Bonds. For instance, the better ranked the Legal Framework, the smaller the link between the CB rating and the Issuer’s credit quality. DBRS will closely monitor changes in Legal Frameworks and their impact on Covered Bonds issued in their respective jurisdictions. DBRS plans to publish a full report detailing the ranking assessments for each Legal Framework in the first quarter of 2008.

The DBRS CB methodology aims to provide greater transparency and predictability to all market participants by publishing Rating Tables, a unique tool demonstrating CB ratings on a case-by-case basis according to the Issuer, its Cover Pool credit quality and its Legal Framework. DBRS believes that this approach enables both Issuers and investors to better understand how risks are assessed and anticipate potential rating changes.

“The development of this methodology is a significant milestone in the CB ratings process. We believe that demand for an accurate and reliable assessment of risk will continue to rise and this new methodology will play a key role in contributing to greater levels of knowledge across the CB market,” adds Apea Koranteng, Head of SF EMEA.

DBRS has already rated its first CB deal using the methodology, in a transaction for Royal Bank of Canada (RBC). A DBRS rating of AAA was assigned to this first RBC issue. For detailed information please access DBRS’s rating report on RBC dated November 6, 2007, on the DBRS website.

A copy of this Methodology is available by contacting us at info@dbrs.com.

DBRS is a recognized international rating agency, providing timely and comprehensive rating opinions to the world’s capital markets. Privately owned and independent, DBRS offers in-depth credit analysis of corporate, financial institutions and government issues in North America, Europe, Asia and Latin America. DBRS's extensive coverage of structured finance and securitization has solidified its standing as a leading provider of comprehensive, in-depth credit analysis.

DBRS is headquartered in Toronto, with offices in New York, Chicago, London, Frankfurt and Paris, and covers entities worldwide.

Note on Cover Pools: As elaborated in the methodology paper, the notion that Covered Bonds are essentially senior secured bank debt lies at the heart of DBRS’s credit risk assessment and rating methodology. DBRS believes that only in the unlikely case that a bank issuing CB faces liquidation or serious stress would the second line of defence – the cash-flows from pools of financial assets (the CP) originated by the Issuer to which investors have a preferential claim – would have to kick in. The likelihood that the cash-flows from the Cover Pool are sufficient to continue making payments of interest and principal on the outstanding CB without disruption depends on (1) the credit strength of the Cover Pools and (2) the smoothness of transition of the Cover Pool from the troubled bank to a third party.

DBRS’s qualitative assessment of Legal Frameworks in which CBs are issued captures the likelihood that payment obligations under the CB could be smoothly transferred from a potentially troubled bank to the Cover Pool – administrated by a third party. DBRS ranks those Legal Frameworks in four categories, from Very Strong to Modest. This analysis is key to determining the level of delinkage that can be obtained between an Issuer and its CB ratings.

Patrick Evans/Pete Marcus
Citigate Dewe Rogerson, London
+44 (0) 20 7638 9571
peter.marcus@citigatedr.co.uk