DBRS Assigns Ratings of AAA to CIBC Covered Bonds, Series CB3 and Series CB4

DBRS has today assigned ratings of AAA to the Series CB3 (Tranche 1) and Series CB4 (Tranche 1) covered bonds issued under the Canadian Imperial Bank of Commerce (CIBC) Global Public Sector Covered Bond Programme (the Programme). Series CB3 (CHF 375 million) covered bonds have a coupon rate of 1.75% and a maturity date of January 30, 2015. Series CB4 (CHF 300 million) covered bonds have a coupon rate of three-month CHF LIBOR plus 0.1% and a maturity date of December 30, 2011. All covered bonds issued under the Programme (the Covered Bonds) rank pari passu with each other.

The ratings are based on several factors. First, the Covered Bonds are senior unsecured direct obligations of CIBC, which is the fifth largest bank in Canada and rated AA and R-1 (high) with a Negative trend by DBRS. Second, in addition to a general recourse to CIBC’s assets, the Covered Bonds are supported by a diversified collateral pool of first-lien prime residential mortgages insured by Canada Mortgage & Housing Corporation (CMHC) (the Cover Pool). CMHC is rated AAA by DBRS in its capacity as Agent of Her Majesty in Right of Canada. The Cover Pool was approximately $6.4 billion as of November 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. And, lastly, there is a pre-maturity test for fund accumulation based on CIBC’s rating as the Covered Bonds were all issued as hard-bullet covered bonds.

Despite the above strengths, the Covered Bonds have the following challenges. First, a weakened housing market in Canada could result in higher losses and lower recovery rates than those used for credit protection assessment. This is mitigated by the mortgage insurance as to principal and interest provided by AAA-rated CMHC. Second, CIBC may be required to add mortgages to maintain the required credit enhancement, incurring substitution and potential credit deterioration risk. These risks are mitigated by the mortgage insurance provided by CMHC and the ongoing monitoring of the Cover Pool to ensure the overcollateralization available (at least 5% as of November 30, 2009) is commensurate with the AAA rating assigned. Third, there is an inherent liquidity gap between the scheduled repayments of the Covered Bonds and the repayment of underlying mortgage loans over time. This risk is mitigated by the overcollateralized Cover Pool, the buildup of a reserve fund if applicable and the funding of pre-maturity liquidity if CIBC’s rating falls below A (high) or A (low) within 6 or 12 months respectively of any Covered Bond maturity date. 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 CIBC and a generally creditor-friendly legal environment in Canada.

CIBC is Canada’s fifth largest bank, with assets of $335.9 billion and $11.1 billion in common equity as at October 31, 2009. It is the servicer of the mortgages in the Cover Pool.

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