DBRS Assigns AAA Rating to CIBC Covered Bonds, Series CB9

DBRS has today assigned a rating of AAA to the Series CB9 covered bonds issued under the Canadian Imperial Bank of Commerce (CIBC) Global Public Sector Covered Bond Programme (the Programme). The Series CB9 (USD 2 billion) covered bonds have a coupon rate of 2.75% and a maturity date of January 27, 2016. 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 deposit obligations of CIBC, which is the fifth largest bank in Canada by assets and rated AA and R-1 (high) with a Stable 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 and Housing Corporation (CMHC) and National Housing Act Mortgage-Backed Securities (NHA MBS) (the Cover Pool). CMHC is an agent of Her Majesty in right of Canada and is rated AAA by DBRS. Consequently, NHA MBS is also rated AAA due to the timely payment guarantee by CMHC. The Cover Pool was approximately $10.1 billion as of January 4, 2011. 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 could face the following challenges. First, a weakened housing market in Canada could result in higher defaults and lower recoveries than the assumptions used for credit protection assessment. This risk is significantly mitigated as DBRS considers the credit loss negligible for defaulted mortgages as a result of the mortgage insurance covering principal and interest provided by AAA-rated CMHC. Second, CIBC 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 and timely payment guarantee in respect of NHA MBS provided by CMHC and the ongoing monitoring of the Cover Pool to ensure that the overcollateralization available is commensurate with the AAA rating assigned. Based on the latest review of the Cover Pool as of January 4, 2011, DBRS considers 3% overcollateralization (corresponding to an asset percentage of 97%) as the minimum amount required for a AAA rating, compared with 5% overcollateralization available as of December 31, 2010. 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 CIBC fails to maintain a rating of either A (low) or R-1 (middle) and the funding of pre-maturity liquidity if CIBC’s rating falls below A (high) or A (low) within six or 12 months, respectively, of any Covered Bond 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, which are supported by the well-developed commercial and bankruptcy laws in Canada, the satisfactory opinions provided by legal counsel to CIBC and a generally creditor-friendly legal environment in Canada.

CIBC, with assets of $352.0 billion and $12.6 billion in common equity as at October 31, 2010, 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.

There is no rating report for this issuance. More details on the Cover Pool and the Programme are provided in the Monthly Canadian Covered Bond Report, which is available by clicking on the link below or by contacting us at info@dbrs.com.

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