DBRS Assigns AAA Rating to RBC Covered Bonds, Series CB8

DBRS Limited (DBRS) has today assigned a AAA rating to the Series CB8 covered bonds issued under the Royal Bank of Canada (RBC) Global Covered Bond Programme (the Programme). The Series CB8 (USD 2.5 billion) covered bonds have a coupon rate of 1.2% and maturity date of September 19, 2017. 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.

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 $14.6 billion as of August 31, 2012.

(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 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 61.5% as of August 31, 2012, 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 5.3% overcollateralization (corresponding to an asset percentage of 95%) as the amount commensurate with a AAA rating. In comparison, at least 9.8% overcollateralization was available for the Covered Bonds, based on the asset percentage of 91.1% as of August 31, 2012.

(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, as measured by assets, with assets of $824.4 billion and $38.4 billion in common equity as at July 31, 2012. 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. This is the first DBRS rating on this financial instrument.

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

Lead Analyst: Kevin Chiang
Rating Committee Chair: Jamie Feehely
Initial Rating Date: September 19, 2012
Most Recent Rating Update: September 19, 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 or by contacting us at info@dbrs.com.