DBRS Assigns AAA Rating to RBC Covered Bonds, Series CB7 (Tranche 3)

DBRS Limited (DBRS) has today assigned a AAA rating to the Series CB7 (Tranche 3) Covered Bonds issued under the Royal Bank of Canada (RBC) EUR 15 billion Global Covered Bond Programme (the Programme). The CHF 75 million Series CB 7 (Tranche 3) covered bonds are the second re-opening of the Series CB7 covered bonds and have the same coupon rate (2.25%) and maturity date (April 21, 2021) as Tranche 1 and Tranche 2. 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 $12.8 billion as of July 29, 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 60.5% as of July 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 latest review of the Cover Pool, DBRS considers 5% overcollateralization (corresponding to an asset percentage of 95%) as the amount commensurate with a AAA rating. In comparison, at least 8.9% overcollateralization was available for the Covered Bonds, based on the asset percentage of 91.8% as of July 29, 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 $35.4 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 principal methodology applicable is Rating Canadian Covered Bonds, which can be found on www.dbrs.com.

The sources of information used for this rating include loan-level data provided by RBC. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating concerns a newly issued financial instrument.

For additional information on this rating, please see the Canadian Covered Bonds Linking Document.

Lead Analyst: Kevin Chiang
Rating Committee Chair: Jerry Marriott
Initial Rating Date: August 23, 2011
Most Recent Rating Update: August 23, 2011

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 under Related Research or by contacting us at info@dbrs.com.