DBRS Finalizes the Rating of AAA to RBC Covered Bonds, Series CB3

DBRS has today finalized the rating of AAA to Royal Bank of Canada Global Covered Bond Programme, Series CB3 (Tranche 1). All covered bonds issued under this programme (the Covered Bonds) rank pari passu with each other.

The rating is based on several factors. First, the Covered Bonds are senior unsecured direct obligations of Royal Bank of Canada (RBC), which is the largest bank in Canada and rated AA and R-1 (high) by DBRS. Second, in addition to a general recourse to RBC’s assets, the Covered Bonds are supported by a diversified collateral pool of first-lien prime conventional residential mortgages with maximum loan-to-values (LTVs) of 80% in Canada (Covered Bond Portfolio), which was approximately $11.6 billion as of September 30, 2009. 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 RBC is of a high credit quality, with low credit losses historically. And, lastly, the final maturity date on the Covered Bonds can be extended for an additional 12 months following an RBC event of default. This increases the likelihood that the Covered Bonds can be fully repaid.

Despite the above strengths, the Covered Bonds have the following challenges. First, a weakened housing market in Canada may result in higher losses and lower recovery rates than those used for credit protection assessment. This is mitigated by the home equity available in relation to the portfolio weighted-average LTV of 60.7% as of September 30, 2009, as reported by RBC. Secondly, RBC may be required to add mortgages to maintain the Covered Bond Portfolio, incurring substitution and potential credit deterioration risk. These risks are mitigated by the ongoing monitoring of the Covered Bond Portfolio to ensure the overcollateralization available (at least 7% as of September 30, 2009) is commensurate with the AAA rating assigned. Third, there is an inherent liquidity gap between the scheduled payments of the Covered Bonds and the repayment of underlying mortgage loans over time. This risk is mitigated by the overcollateralized Covered Bond Portfolio, the buildup of a reserve fund if RBC’s rating falls below A (high) or R-1 (middle) and the extendible maturity date for an additional 12 months, if required. And lastly, there is no specific covered bond legislative framework in Canada. This is mitigated by the contractual obligations of the transaction parties, supported by the opinions provided by legal counsel to RBC and a generally creditor-friendly legal environment in Canada.

RBC is Canada’s largest bank, with assets of $659.9 billion and $30.8 billion in common equity as at July 31, 2009. It is the servicer of the mortgages in the Covered Bond Portfolio.

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

The applicable methodology is Covered Bonds: DBRS’s Rating Approach (to Canadian Issues), which can be found on our website under Methodologies

This is a Structured Finance rating.

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