DBRS Assigns AAA Rating to RBC Covered Bonds, Series CB7 (Tranche 2)

DBRS has today assigned a rating of AAA to the Series CB7 (Tranche 2) covered bonds issued under the Royal Bank of Canada (RBC) EUR 15 billion Global Covered Bond Programme (the Programme). The CHF 225 million Series CB7 (Tranche 2) covered bonds are a re-opening of the existing Series CB7 (Tranche 1) covered bonds and have the same coupon rate (2.25%) and maturity date (April 21, 2021). All covered bonds issued under the Programme (the Covered Bonds) rank pari passu with each other and are currently rated AAA with Stable trends by DBRS.

The ratings are based on several factors:

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

(2) In addition to a general recourse to RBC’s assets, the Covered Bonds are supported by a diversified collateral pool of first-lien, prime, conventional residential mortgages with maximum loan-to-values (LTVs) of 80% in Canada (the Cover Pool). The Cover Pool has experienced low credit losses historically and was approximately $13.59 billion as of May 31, 2011.

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

(4) Upon a default by RBC, 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 could face the following challenges:

(1) 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 reduced by the home equity available in relation to the portfolio weighted-average LTV of 60.6% as of May 31, 2011, reported by RBC.

(2) RBC may need to add mortgages to maintain the Cover Pool, incurring substitution and potential credit deterioration risk. These risks are mitigated by 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 April 30, 2011, DBRS considers 5% overcollateralization (corresponding to an asset percentage of 95%) as the amount commensurate with a AAA rating compared with at least 7% overcollateralization available as of May 31, 2011.

(3) There is an inherent liquidity gap between the scheduled payments of the Covered Bonds and the repayment of the underlying mortgage loans over time. This risk is mitigated by the overcollateralized Cover Pool, the buildup of a reserve fund if RBC is not rated at least A (low) or R-1 (middle) and the 12-month maturity extension upon a default by RBC.

(4) There is no specific covered bond legislative framework in Canada. This 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 RBC and a generally creditor-friendly legal environment in Canada.

RBC is Canada’s largest bank, with assets of $728.9 billion and $35.6 billion in common equity as at April 30, 2011. 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.

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