DBRS Assigns Provisional Rating of AAA to TD Covered Bonds, Series 1

DBRS has today assigned a provisional rating of AAA to the Covered Bonds, Series 1 (the Covered Bonds) to be issued under The Toronto-Dominion Bank (TD) EUR 10 billion Global Public Sector Covered Bond Programme (the Programme).

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 TD, which is the second largest bank in Canada and rated AA and R-1 (high) by DBRS. Second, in addition to a general recourse to TD’s assets, the Covered Bonds are supported by a diversified collateral pool (the Cover Pool) of prime credit home equity lines of credit (HELOCs) insured by Canada Mortgage & Housing Corporation (CMHC) . CMHC is an agent of Her Majesty in right of Canada and is rated AAA by DBRS. The Cover Pool was approximately $10.7 billion as of April 19, 2010. Third, the Covered Bonds benefit from several structural features, such as a reserve fund, when applicable; a minimum rating requirement for swap counterparties, servicer and cash manager; and, lastly, for Series 1, which is expected to be issued as hard-bullet covered bonds, the funding of pre-maturity liquidity if TD’s rating falls below certain thresholds.

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, TD may be required to add loans to maintain the Cover Pool, incurring substitution and potential credit deterioration risks. 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 July 19, 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 loans over time. This risk is mitigated by the overcollateralized Cover Pool, the buildup of a reserve fund if TD’s rating falls below A (low) or R-1 (middle) and the funding of pre-maturity liquidity if TD’s rating falls below A (high) or A (low) within six or 12 months of maturity date. 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 TD and a generally creditor-friendly legal environment in Canada.

TD is Canada’s second largest bank, with assets of $573.9 billion and $38.4 billion in shareholders’ equity as at April 30, 2010. It is the servicer of the assets 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.