DBRS Finalizes the Rating of AAA to BMO Covered Bonds

DBRS has today finalized the rating of AAA to the Bank of Montreal (BMO) Global Covered Bond Programme’s Series 1, Tranche 1 (the Covered Bonds).

The rating is based on several factors. First, the Covered Bonds are senior unsecured direct obligations of BMO, rated AA and R-1 (high) by DBRS. Second, in addition to a general recourse to BMO’s assets, the Covered Bonds are supported by a diversified collateral pool of first-lien prime conventional (uninsured) and insured residential mortgages in Canada. Third, the Covered Bonds benefit from several structural features, such as a reserve fund, when applicable, and a minimum rating requirement for swap counterparties, servicer and cash manager. Fourth, the underlying collateral originated by BMO is of a high credit quality with a low credit loss historically. And, lastly, the final maturity date on the Covered Bonds can be extended for an additional 12 months, if required, which increases the likelihood that the Covered Bonds can be fully repaid.

Despite the above strengths, the Covered Bonds have the following challenges:

(1) A weakened housing market in Canada could result in higher losses and lower recovery rates than those used for credit enhancement determinations. This is mitigated by the home equity available in conventional mortgages and conservative underlying asset values for all mortgages.

(2) BMO may be required to add mortgages to maintain the collateral pool, incurring substitution and potentially credit deterioration risk. These risks are mitigated by the ongoing monitoring of the underlying assets to ensure the overcollateralization available is commensurate with the AAA rating assigned.

(3) There is a liquidity gap between the scheduled payment of the Covered Bonds and the repayment of underlying mortgage loans over time. This risk is mitigated by the overcollateralized collateral pool through the monitoring of asset coverage and amortization tests, the buildup of a reserve fund if BMO’s rating falls below A (low) or R-1 (middle) and the extendible maturity date for an additional 12 months, if required.

(4) There is no specific covered bond legislative framework in Canada, unlike in many European countries. This is mitigated by a generally creditor-friendly legal environment in Canada and the contractual obligations of the transaction parties, which are supported by the opinions provided by BMO’s legal counsel to DBRS, among others (with the exception of the English law documents; for those, DBRS only reviewed the opinion addressed to BMO).

BMO is one of Canada’s five largest banks, with assets of $366.5 billion and $14.1 billion in common equity as at October 31, 2007. It is the servicer of the mortgages in the portfolio.

Note:
All figures are in Canadian dollars unless otherwise noted.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.

Media Contact
Caroline Creighton
Senior Vice President, Communications
+1 416 597 7317
ccreighton@dbrs.com