DBRS Confirms the Ratings of Algonquin Credit Card Trust

DBRS has today confirmed all the ratings of the outstanding notes (the Notes) issued by Algonquin Credit Card Trust (the Trust). The confirmations are part of DBRS’s continued effort to provide timely credit rating opinions and increased transparency to market participants.

-- AAA (sf) for Series 2007-1, Class A Notes
-- A (sf) for Series 2007-1, Class B Notes
-- BBB (sf) for Series 2007-1, Class C Notes

The rating confirmation is based on the following factors:

(1) For the AAA-rated Notes, credit enhancement is available through subordination of 20.5% and excess spread, which is currently in the range of 6% to 8%.

(2) For the A-rated Notes, credit enhancement is available through subordination of 10.5% and excess spread.

(3) For the BBB-rated Notes, credit enhancement is composed of excess spread and a series-specific spread account, with an initial required amount of 2.5% of the total series amount, which can increase to 6% if the three-month average excess spread for the series falls below 2%.

(4) The portfolio’s yield and payment rate remained stable and close to the historical levels around 20% and 10%, respectively. The one-month loss rate, after reaching the peak in October 2009, has been on a decline since and was at 4% as of September 30, 2011.

(5) The custodial pool is a well-diversified and relatively seasoned portfolio, composed of certain MasterCard credit card accounts originated, managed and designated by Capital One Bank (Canada Branch) (Capital One Canada). Capital One Bank is one of the largest credit card issuers in the world and is rated A (low) and R-1 (low) with Stable trends by DBRS.

The Trust participates in a co-ownership structure, which means the proceeds from each series of Notes were used to purchase an undivided co-ownership interest in the receivables of the designated accounts in the custodial pool. Each co-ownership interest is separate from and in addition to co-ownership interests previously created. Capital One Canada, as the seller, retains the residual undivided co-ownership interest (Retained Interest) in the custodial pool. The receivables include all amounts to be collected under the designated accounts, such as finance charges, cash advance fees, annual fees and principal amounts billed to cardholders, as well as interchange. The Retained Interest is at least 5% for all series of Notes. However, this amount may be reduced to 2% if certain conditions are met.

As the accounts are sold on a fully serviced basis, no servicing fee will be paid as long as Capital One Canada remains as the servicer. The servicer is not entitled to commingle collections and is required to deposit collections into the Collection Account within two business days of processing. However, as long as Capital One Canada remains the servicer and it or its performance guarantor maintains a minimum rating of R-1 (low), Capital One Canada need not make the daily deposits into the Trust accounts until immediately prior to each distribution day. The Trust does not incorporate DBRS’s partial commingling policy for revolving asset pools as outlined in the Legal Criteria for Canadian Structured Finance (see Related Research below). While DBRS believes that the partial commingling provisions mitigate potential losses to the noteholders and also provide clarification to market participants with respect to the collection process if the seller/servicer is financially weakened, the non-existence of these provisions for the Notes is not considered detrimental to the ratings, given the current financial strength of Capital One Bank.

Notwithstanding the stated expected principal payment dates of the Notes, certain events may result in early repayment or delays of one or more series. Such events are called amortization events. Following the occurrence of a series amortization event, collections allocable to this series will be directed first to pay Trust expenses and interest on the series notes sequentially and then to repay the outstanding principal of the Class A Notes until it is zero. Principal repayments of lower-ranked notes will be made only after more senior notes have been repaid in full. Essentially, this provides the more senior notes preferential access to the cash flows generated from the receivables for principal repayments, in an amount equal to the subordination available for this class of notes.

The accounts in the custodial pool are originated and managed by Capital One Canada, as seller and servicer, according to its underwriting standards and credit and collection policies. In order to be eligible for transfer to the custodial pool, accounts must meet certain criteria. There are also restrictions on account additions by Capital One Canada, as seller, to ensure consistent credit quality of the custodial pool.

As the Trust participates in a co-ownership structure, all series of Notes are supported by the same pool of receivables and generally issued under the same requirements in respect of servicing, accumulation period, amortization events, priority of distributions and eligible investments. However, these requirements may be series specific. For more detailed information on the transaction structure, please refer to the rating reports of the Trust at www.dbrs.com.

The performance and characteristics of the custodial pool and the Notes are available and updated each month in the Monthly Canadian ABS Report (see Related Research below). DBRS conducts monthly stress testing of each rated class of the Notes, and the results indicate that simultaneous declines in yield and payment rates and increases in losses would not result in a failure of the Trust in repaying the Notes on a timely basis. The severity of the tests applied is commensurate with the respective ratings of the Notes.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are DBRS Criteria for Canadian Credit Card Securitization and Legal Criteria for Canadian Structured Finance, which are available on our website under Methodologies.