DBRS Assigns Provisional Ratings of AAA (sf), A (sf) and BBB (sf) to Canadian Credit Card Trust, Series 2013-1

DBRS has today assigned provisional ratings to the Credit Card Receivables-Backed Notes, Series 2013-1 (the Notes) to be issued by Canadian Credit Card Trust (the Trust) as indicated below:

– AAA (sf) to the Credit Card Receivables-Backed Class A Notes, Series 2013-1 (the Class A Notes)
– A (sf) to the Credit Card Receivables-Backed Class B Notes, Series 2013-1 (the Class B Notes)
– BBB (sf) to the Credit Card Receivables-Backed Class C Notes, Series 2013-1 (the Class C Notes)

The finalization of the ratings is contingent upon receipt of final documents conforming to information already received.

The ratings are based on the following factors:

(1) Credit enhancement provided by subordination of 6.25% and 2.75% for the Class A Notes and Class B Notes, respectively; excess spread; and the cash collateral account, which could build up to 5% of the initial invested amount.

(2) Over the past two years, three-month average payment rates have continued to increase, from 31% to 38% as of January 2013. Three-month average gross yields also remained strong over the same period, averaging 22.4%.

(3) The custodial pool is well-seasoned, with approximately 64% of the receivables arising from accounts greater than 84 months old.

The portfolio is largely concentrated in Québec, which is both positive and negative. From a positive perspective, the portfolio has been more insulated from competition than the rest of Canada. Notwithstanding the relative insulation, three-month average loss rates increased from 3.8% to a peak of 6.5% between 2008 and 2009, similar to the experience of the entire Canadian credit card industry. The loss level has since come back down to pre-recessionary levels and was 4.2% as of January 2013. This is further mitigated by increasing payment rates, stable portfolio yields and declining delinquencies. From a negative perspective, there is considerably more geographic and regional economic risk stemming from the portfolio’s concentration in Québec.

DBRS stress testing indicates 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.

The Trust has incorporated DBRS’s partial commingling policy for revolving asset pools. 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.

However, DBRS notes that the transaction documents do not require the remittance of collections into a Trust account within two business days when the servicer is no longer rated investment grade as expected in DBRS’s “Legal Criteria for Canadian Structured Finance.” Should the servicer be downgraded below investment grade, DBRS will assess the impact of partial commingling at the time and take appropriate rating action.

On January 18, 2013, National Bank of Canada (NBC) entered into a Series Enhancement Agreement with the Trust to mitigate the commingling risk at the request of another rating agency. Pursuant to the agreement, NBC will post eligible collateral in an investment account in the name of the Trust to be used to cover any shortfall in interest payments or principal accumulation amounts.

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

The applicable methodologies are DBRS Criteria for Canadian Credit Card Securitization (April 2011) and Legal Criteria for Canadian Structured Finance (September 2012), which are available on our website under Methodologies.

The Rule 17g-7 Report of Representations and Warranties is hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.