DBRS Assigns AAA Rating to CIBC Covered Bonds, Series CB14

DBRS Limited (DBRS) has today assigned a rating of AAA to the Series CB14 covered bonds issued under the Canadian Imperial Bank of Commerce (CIBC) Global Public Sector Covered Bond Programme (the Programme). The Series CB14 (CHF 200 million) covered bonds have a coupon rate of 1.0% and a hard-bullet maturity date of February 13, 2019. As all covered bonds issued under the Programme (the Covered Bonds) rank pari passu with each other, DBRS has also confirmed the AAA ratings of all other outstanding series of Covered Bonds.

The ratings are based on several factors:

(1) The Covered Bonds are senior unsecured direct deposit obligations of CIBC, which is the fifth-largest bank in Canada by assets and rated AA and R-1 (high) with Stable trends by DBRS.

(2) In addition to a general recourse to CIBC’s assets, the Covered Bonds are supported by a diversified collateral pool of first-lien prime residential mortgages insured by Canada Mortgage and Housing Corporation (CMHC) and National Housing Act Mortgage-Backed Securities (NHA-MBS) (the Cover Pool). CMHC provides a timely payment guarantee on NHA-MBS and, as an agent of Her Majesty in right of Canada, is rated AAA by DBRS. The Cover Pool was approximately $15.4 billion as of December 30, 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 CIBC’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 significantly mitigated 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) CIBC 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 and timely payment guarantee with respect to NHA-MBS 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 3.1% overcollateralization (corresponding to an asset percentage of 97%) as the amount commensurate with the AAA rating. In comparison, at least 7.9% overcollateralization was available for the Covered Bonds, which is based on the asset percentage of 92.7% as of December 30, 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 CIBC is not rated at least A (low) or R-1 (middle) and the funding of pre-maturity liquidity if CIBC’s rating falls below A (high) or A (low) within six or 12 months, respectively, of any Covered Bond maturity date.

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

CIBC, with assets of $353.7 billion and $14.6 billion in common equity as at October 31, 2011, 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 CIBC. 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. This is the first DBRS rating on this financial instrument.

For additional information on this rating, please see DBRS Limited: Canadian Covered Bonds Linking Document.

Lead Analyst: Kevin Chiang
Rating Committee Chair: Jamie Feehely
Initial Rating Date: February 13, 2012
Most Recent Rating Update: February 13, 2012

This credit rating has been issued outside the European Union (EU) and may be used for regulatory purposes by financial institutions in the EU.

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 at the right of the screen or by contacting us at info@dbrs.com.