DBRS Confirms All Outstanding Ratings of CARDS II Trust

DBRS has today confirmed all the outstanding rated notes (the Notes) issued by CARDS II Trust (the Trust) in conjunction with the recent issuance of Series 2011-1, 2011-2 and 2011-3 on January 11, 2011. The confirmation is part of DBRS’s continued effort to provide timely credit rating opinions and increased transparency to market participants.

-- AAA (sf) for Credit Card Receivables-Backed Floating Rate Notes, Series 2005-2, Class A
-- AA (sf) for Credit Card Receivables-Backed Floating Rate Notes, Series 2005-2, Class B
-- A (sf) for Credit Card Receivables-Backed Floating Rate Notes, Series 2005-2, Class C
-- AAA (sf) for Credit Card Receivables-Backed Floating Rate Class A Notes, Series 2006-1
-- AA (sf) for Credit Card Receivables-Backed Floating Rate Class B Notes, Series 2006-1
-- A (sf) for Credit Card Receivables-Backed Floating Rate Class C Notes, Series 2006-1
-- AAA (sf) for Credit Card Receivables-Backed Floating Rate Class A Notes, Series 2006-2
-- AA (sf) for Credit Card Receivables-Backed Floating Rate Class B Notes, Series 2006-2
-- A (sf) for Credit Card Receivables-Backed Floating Rate Class C Notes, Series 2006-2
-- AAA (sf) for Credit Card Receivables-Backed Floating Rate Notes, Series 2010-1, Class A
-- BBB (low) (sf) for Credit Card Receivables-Backed Floating Rate Notes, Series 2010-1, Class B
-- AAA (sf) for Credit Card Receivables-Backed Notes, Series 2010-2, Class A
-- BBB (low) (sf) for Credit Card Receivables-Backed Notes, Series 2010-2, Class B
-- AAA (sf) for Credit Card Receivables-Backed Notes, Series 2010-3, Class A
-- BBB (low) (sf) for Credit Card Receivables-Backed Notes, Series 2010-3, Class B

The ratings are based on the following factors:

(1) For the Notes, credit enhancement is available through subordination, if applicable, excess spread, which is currently in the range of 12% to 14%, and series-specific cash reserve accounts, which could build up to 5% if three-month average excess spread for the series falls below 4%. The subordination levels for the 2005 and 2006 floating rate issuances are 10.07%, 6.16% and 2.25% for the AAA-rated, AA-rated and A-rated Notes, respectively. The subordination for the floating rate AAA-rated Class A Notes of Series 2010-1 is similar at 10.25%. In comparison, the subordination for the AAA-rated Series 2010-2 and 2010-3 Class A Notes is 7.25% as they are fixed rated notes.

(2) Over the past two years, three-month average payment rates have remained above 35%. While three-month average loss rates increased from below 4.0% before the recent recession to 7.1% in mid-2009, they have since moderated and are currently stabilizing at around 5%. In addition, the removal of the 2% cap on interchange fees in June 2009 increased the gross yield available to the Trust, which mitigated the elevated loss rates and resulted in significantly higher excess spread as the first defence against credit losses. Currently, the gross yield is in the range of 22%.

(3) The custodial pool is seasoned and well-diversified and is the largest in Canada. It is composed of credit card accounts in certain designated portfolios that are originated and managed by Canadian Imperial Bank of Commerce (CIBC), rated AA/R-1 (high) by DBRS.

The Trust participates in a co-ownership structure, which means the proceeds from each series of Notes were used to purchase an undivided co-ownership interest in the receivables of the credit card accounts in the custodial pool. Each co-ownership interest is separate from, and in addition to, co-ownership interests previously created. CIBC, as the seller, retains the residual undivided co-ownership interest (Retained Interest) in the custodial pool. The receivables include all amounts to be collected under the credit card accounts, such as finance charges, cash advance fees, annual fees and principal amounts billed to cardholders as well as interchange. The Retained Interest is at least 7% for all series of Notes.

As the accounts are sold on a fully serviced basis, no servicing fee will be paid to CIBC as long as CIBC remains as the servicer. CIBC may remit collections on each distribution day with no obligation to segregate the collections from its general funds, as long as it maintains a minimum short-term rating of R-1 (low). If the servicer fails to maintain this rating, remittance of collections to the account in the name of the Custodian will be required within two business days of processing. The Trust has incorporated DBRS’s partial commingling policy for revolving asset pools as outlined in the Legal Criteria for Canadian Structured Finance (see Related Research below). DBRS believes that the partial commingling provisions mitigate potential losses to the noteholders and also provide clarification to market participants with respect to the collection process if the seller/servicer is financially weakened.

Notwithstanding the stated targeted principal distribution dates of the Notes, certain events may result in early repayment or delays of one or more series. Such events are called amortization events. Following the occurrence of a series amortization event, collections allocable to this series will be directed first to pay Trust expenses and interest on the series notes and then to repay outstanding principal of the most senior class of notes until nil. Principal repayments of lower-ranked notes will be made only after more senior notes have been repaid in full. Essentially, this provides the more senior notes preferential access to the cash flows generated from the receivables for principal repayments, in an amount equal to the subordination available for this class of notes.

The accounts in the custodial pool are originated and managed by CIBC, as seller and servicer, according to its underwriting standards and credit and collection policies. In order to be eligible for transfer to the custodial pool, accounts must meet certain criteria. There are also restrictions on account additions by CIBC, as seller, to ensure consistent credit quality of the custodial pool.

As the Trust participates in a co-ownership structure, all series of Notes are supported by the same pool of receivables and generally issued under the same requirements in respect of servicing, accumulation period, amortization events, priority of distributions and eligible investments. However, these requirements may be series specific. For more detailed information on the transaction structure, please refer to the rating reports of the Trust at www.dbrs.com.

The performance and characteristics of the custodial pool and the Notes are available and updated each month in the Monthly Canadian ABS Report (see Related Research below). DBRS conducts a monthly stress testing of each rated class of the Notes and the results indicate that simultaneous declines in yield and payment rates and increases in losses would not result in a failure of the Trust in repaying the Notes on a timely basis. The severity of the tests applied is commensurate with the respective ratings of the Notes.

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

The applicable methodologies are DBRS Criteria for Canadian Credit Card Securitization and Legal Criteria for Canadian Structured Finance, which are available on our website under Methodologies.