Press Release

DBRS Assigns Provisional Rating of AAA to BMO Covered Bonds, Series 2, Tranche 1

Covered Bonds
June 03, 2010

DBRS has today assigned a provisional rating of AAA to the Covered Bonds, Series 2, Tranche 1 to be issued under the Bank of Montreal (BMO) Global Public Sector Covered Bond Programme (the Programme). All covered bonds issued under the Programme (the Covered Bonds) rank pari passu with each other.

The finalization of the rating is contingent upon receipt of final documents conforming to information already received.

The ratings are based on several factors. First, the Covered Bonds are senior unsecured direct obligations of BMO, which is the fourth largest bank in Canada and 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 residential mortgages insured by Canada Mortgage and Housing Corporation (CMHC) – the Cover Pool. CMHC is an agent of Her Majesty in right of Canada and is rated AAA by DBRS. The Cover Pool was approximately $4.3 billion as of May 20, 2010. 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, upon a default by BMO, the final maturity date on the Covered Bonds can be extended for 12 months, which 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 could result in higher defaults and loss severities than the assumptions used for credit protection assessment. This risk is significantly mitigated by the mortgage insurance covering principal and interest provided by AAA-rated CMHC. Second, BMO may be required to add mortgages to maintain the Cover Pool, 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 3% as of May 31, 2010) 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 BMO’s rating falls below A (low) or R-1 (middle) and the extendible maturity date for 12 months upon a default by BMO. Lastly, there is no specific covered bond legislative framework in Canada. This risk is mitigated by the contractual obligations of the transaction parties, supported by the well developed commercial and bankruptcy laws in Canada, satisfactory opinions provided by legal counsel to BMO and a generally creditor-friendly legal environment in Canada.

BMO is Canada’s fourth largest bank, with assets of $390.2 billion and $17.8 billion in common equity as at April 30, 2010. It is the servicer of the mortgages in the Cover Pool.

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

The name of the Programme was changed to Bank of Montreal Global Public Sector Covered Bond Programme in the prospectus dated December 18, 2009.

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

Ratings

  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.