DBRS Releases Rating Methodology on Covered Bonds Issued by Canadian Financial Institutions

DBRS has today released its Canadian Covered Bond rating methodology, which provides further transparency and predictability for market participants with respect to how DBRS assigns a rating to Covered Bonds issued by Canadian entities.

The Canadian Covered Bond market began in June 2007 after the Office of the Superintendent of Financial Institutions released a letter addressed to all Canadian deposit-taking institutions in which it affirmed its support for limited issuances of Covered Bonds. Although the Covered Bonds are obligations of Canadian financial institutions, they are generally issued and traded in England rather than in Canada.

The DBRS methodology adopts an integrated approach that encompasses both qualitative and quantitative elements in order to determine the default probability of Canadian Covered Bonds. It differs from traditional securitization methodologies by integrating three building blocks (or analytical pillars): the credit strength of the issuer (Issuer Rating); the credit quality of the collateral assets that back the Canadian Covered Bonds (the Cover Pool); and the strength of the legal framework under which the Canadian Covered Bonds are issued. Assessment of the legal framework, which is classified into one of four categories – Very Strong, Strong, Adequate and Modest, largely based on the degree of “de-linkage” between the issuer and the Cover Pool – forms an important part of the rating and probability of default assessment, since Canadian Covered Bonds are governed by contractual agreements rather than by specific legislation.

The integration of the three analytical pillars is illustrated in the rating tables included in the Canadian Covered Bond methodology. On a case-by-case basis, the rating tables indicate the appropriate Covered Bond rating based on the strength of the legal framework, the Issuer Rating and the Cover Pool credit quality. DBRS believes this integrated approach provides greater transparency and predictability of the Covered Bond rating, will assist issuers and investors in understanding how risks associated with Canadian Covered Bonds are assessed, and will enable them to anticipate and comprehend potential rating changes in the event that these occur.

DBRS has already rated two Canadian Covered Bond programs using this methodology: (1) the Royal Bank of Canada, where DBRS assigned ratings of AAA to the first and second series of its Covered Bonds, and (2) Bank of Montreal, where DBRS also assigned a rating of AAA to the first issuance of its Covered Bonds. For detailed information, please visit the DBRS website for the rating reports on (1) RBC Covered Bonds, dated November 6, 2007 and January 22, 2008, and (2) BMO Covered Bonds, dated January 23, 2008.

The methodology providing DBRS’s processes and criteria is available by contacting us at info@dbrs.com.

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