DBRS Assigns AAA Ratings to TD Covered Bonds, Series 2 and Series 3

DBRS Limited (DBRS) has today assigned AAA ratings to the Series 2 and Series 3 Covered Bonds issued under The Toronto-Dominion Bank (TD) EUR 10 billion Global Public Sector Covered Bond Programme (the Programme). The USD 2 billion Series 2 covered bonds have a coupon rate of 0.875% and a hard-bullet maturity date of September 12, 2014. The USD 3 billion Series 3 covered bonds have a coupon rate of 1.625% and a hard-bullet maturity date of September 14, 2016. 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 TD, which is rated AA and R-1 (high) with Stable trends by DBRS.

(2) In addition to a general recourse to TD’s assets, the Covered Bonds are supported by a diversified collateral pool (the Cover Pool) of prime home equity lines of credit (HELOCs) insured by Canada Mortgage & 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 $8.2 billion as of July 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) The funding of pre-maturity liquidity is provisioned if TD’s rating falls below certain thresholds, as the Covered Bonds were all issued as hard-bullet covered bonds.

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 mitigated as DBRS considers the credit loss negligible for defaulted loans as a result of the mortgage insurance covering principal and interest provided by AAA-rated CMHC.

(2) TD may need to add loans 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 that the overcollateralization available is commensurate with the AAA rating assigned. Based on the latest review of the Cover Pool, DBRS considers 3% overcollateralization (corresponding to an asset percentage of 97%) as the amount commensurate with a AAA rating. In comparison, at least 5.3% overcollateralization was available for the Covered Bonds, based on the asset percentage of 95% as of July 31, 2011.

(3) There is an inherent liquidity gap between the scheduled payments of the Covered Bonds and the repayment of the underlying loans over time. This risk is mitigated by the overcollateralized Cover Pool, the build-up of a reserve fund if TD is not rated at least A (low) or R-1 (middle) and the funding of pre-maturity liquidity if TD’s rating falls below A (high) or A (low) within six or 12 months, respectively, of any maturity date of the Covered Bonds.

(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 TD and a generally creditor-friendly legal environment in Canada.

TD is Canada’s second largest bank, with assets of $664.8 billion and $43.3 billion in common equity as at July 31, 2011. It is the servicer of the assets 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 TD. 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: September 14, 2011
Most Recent Rating Update: September 14, 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