DBRS Finalizes AAA Rating on Caisse centrale Desjardins du Québec Covered Bonds, Series 1

DBRS has today finalized the AAA rating on the Covered Bonds, Series 1 (the Covered Bonds) issued under the Caisse centrale Desjardins du Québec (CCDQ) EUR 5 billion Global Covered Bond Programme (the Programme). The Covered Bonds (US$1.0 billion) have a coupon rate of 2.55% and a maturity date of March 24, 2016.

The rating is based on several factors:

(1) The Covered Bonds are senior, unsecured, direct deposit obligations of CCDQ, which is rated AA and R-1 (high) with Stable trends by DBRS.

(2) In addition to a general recourse to CCDQ’s assets, the Covered Bonds are supported by a collateral pool (the Cover Pool) of first-lien, prime residential mortgages insured by Canada Mortgage and 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 $1.291 billion as at February 28, 2011.

(3) The Covered Bonds benefit from several structural features, such as a reserve fund, when applicable, and rating thresholds for the swap counterparties and servicer.

(4) As the Covered Bonds are non-hard-bullet, the final maturity date can be extended for 12 months upon a default by CCDQ. For hard-bullet covered bonds, which may also be issued under the Programme, the funding of pre-maturity liquidity is provisioned if CCDQ’s rating falls below certain thresholds. These features increase the likelihood that the Covered Bonds can be fully repaid.

Despite the above strengths, the Covered Bonds could face the following challenges:

(1) The Cover Pool is entirely concentrated in Québec, exposing the Cover Pool assets to high geographic and regional economic risk. A weakened housing market in Québec could result in higher defaults and lower recoveries than the assumptions used for credit protection assessment. This risk is significantly reduced 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.

(2) CCDQ may need 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 is commensurate with the AAA rating assigned. Based on the Cover Pool as at February 28, 2011, DBRS considers 3% overcollateralization (corresponding to an asset percentage of 97%) as the amount commensurate with a AAA rating, compared with at least 6.5% overcollateralization available as of March 24, 2011.

(3) 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 CCDQ is not rated at least A (low) or R-1 (middle) and the 12-month maturity extension for non-hard-bullet covered bonds upon a default by CCDQ or, if CCDQ’s rating falls below certain thresholds, funding of pre-maturity liquidity for hard-bullet covered bonds.

(4) 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 CCDQ and a generally creditor-friendly legal environment in Canada.

CCDQ is an affiliate of Desjardins Financial Group, the largest co-operative financial services group in Canada, with assets of $172.3 billion and equity of $13.1 billion as at December 31, 2010. 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 Rating Canadian Covered Bonds, which can be found on our website under Methodologies.