DBRS Assigns AAA Rating to Caisse centrale Desjardins du Québec Covered Bonds, Series 2

DBRS Limited (DBRS) has today assigned a rating of AAA to the Series 2 covered bonds issued under the Caisse centrale Desjardins du Québec (CCDQ) EUR 5 billion Global Covered Bond Programme (the Programme). The Series 2 (US$1.5 billion) covered bonds have a coupon rate of 1.6% and a maturity date of March 6, 2017. As all covered bonds issued under the Programme (the Covered Bonds) rank pari passu with each other, DBRS has also confirmed the AAA rating of the outstanding series of Covered Bonds.

The ratings are based on several factors:

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

(2) In addition to a general recourse to CCDQ’s assets, the Covered Bonds are supported by a collateral pool (the Cover Pool) of first-lien, prime residential mortgages insured by Canada Mortgage and 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 $1.265 billion as of January 31, 2012, and was subsequently increased to an amount sufficient for the issuance of the Covered Bonds.

(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) As the Covered Bonds are non-hard-bullet, the final maturity date can be extended for 12 months upon a default by CCDQ. For hard-bullet covered bonds, which may also be issued under the Programme, the funding of pre-maturity liquidity is provisioned if CCDQ’s rating falls below certain thresholds. These features increase the likelihood that the Covered Bonds can be fully repaid.

Despite the above-noted strengths, the Covered Bonds could face the following challenges:

(1) The Cover Pool is entirely concentrated in Québec, exposing the Cover Pool assets to high geographic and regional economic risk. A weakened housing market in Québec 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) CCDQ 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 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 a AAA rating. In comparison, at least 7.0% overcollateralization was available for the Covered Bonds, which is based on the asset percentage of 93.5% as of January 31, 2012.

(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 CCDQ is not rated at least A (low) or R-1 (middle) and the 12-month maturity extension for non-hard-bullet covered bonds upon a default by CCDQ or the funding of pre-maturity liquidity for hard-bullet covered bonds if CCDQ’s rating falls below certain thresholds.

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

CCDQ is an affiliate of Desjardins Group, the largest co-operative financial services group in Canada, with assets of $189.8 billion and equity of $13.7 billion as at September 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 CCDQ. 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: March 6, 2012
Most Recent Rating Update: March 6, 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.