DBRS Confirms Ratings of Canadian Credit Card Trust

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

-- AAA (sf) for Credit Card Receivables-Backed Class A Notes, Series 2010-1
-- A (sf) for Credit Card Receivables-Backed Class B Notes, Series 2010-1
-- BBB (sf) for Credit Card Receivables-Backed Class C Notes, Series 2010-1
-- AAA (sf) for Credit Card Receivables-Backed Class A Notes, Series 2012-1
-- A (sf) for Credit Card Receivables-Backed Class B Notes, Series 2012-1
-- BBB (sf) for Credit Card Receivables-Backed Class C Notes, Series 2012-1
-- AAA (sf) for Credit Card Receivables-Backed Class A Notes, Series 2013-1
-- A (sf) for Credit Card Receivables-Backed Class B Notes, Series 2013-1
-- BBB (sf) for Credit Card Receivables-Backed Class C Notes, Series 2013-1

The rating confirmation is based on the following factors:

(1) For the AAA (sf)-rated Class A Notes, credit enhancement is available through subordination, excess spread (which is currently in the range of 11.8% to 14.8%), and series-specific cash collateral accounts, which could build up to 5% if the three-month average excess spread falls below 2.0%. The subordination level is 6.25%.

(2) For the A (sf)-rated Class B Notes, credit enhancement is available through subordination of 2.75%, excess spread and series-specific cash collateral accounts.

(3) For the BBB (sf)-rated Class C Notes, credit enhancement is composed of excess spread and series-specific cash collateral accounts.

(4) Over the past two years, three-month average gross yields have remained stable at around 22.5% and payment rates have gradually improved to around 35.6%. While the one-month loss rate reached a peak of 7.2% in October 2009, it has since moderated to 5.5% as of February 28, 2013.

(5) The Trust pool is diversified, albeit concentrated in Québec, and well-seasoned. It is composed of certain credit card accounts originated, managed and designated by National Bank of Canada (NBC), rated AA (low) and R-1 (middle) by DBRS.

DBRS considers the portfolio concentration in Québec as both positive and negative. From a positive perspective, the portfolio has been comparatively insulated from the competition in the rest of Canada. From a negative perspective, there is considerably more geographic and regional economic risk.

The Trust is structured as a master trust. Proceeds from the Notes are used by the Trust to purchase receivables (the Receivables) arising in accounts from MasterCard credit card products originated and maintained by NBC. Each series of notes is issued under a Certificate of Issuance Agreement. NBC, as the seller, retains a residual interest (Retained Interest) in the Trust pool.

The assets of the Trust 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 collections for each series are not available to the noteholders of any other series unless there is an excess amount, which can then be allocated to a series with a shortfall. The Retained Interest is at least 7% for all series of Notes, which may be reduced to 2%, subject to satisfaction of the Rating Agency Condition.

As the accounts are sold on a fully serviced basis, no servicing fee will be paid to NBC as long as NBC remains servicer. NBC may remit collections on each distribution day with no obligation to segregate the collections from its general funds, as long as it maintains a minimum short-term rating of R-1 (low). If the servicer fails to maintain this rating, remittance of collections to the account in the name of the Custodian will be required within two business days of processing. The Trust has incorporated DBRS’s partial commingling policy for revolving asset pools as outlined in DBRS’s Legal Criteria for Canadian Structured Finance (DBRS Legal Criteria; see Related Research below). 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 stated in DBRS Legal Criteria. Should the servicer be downgraded below investment grade, DBRS will assess the impact of partial commingling at the time and take appropriate action.

On January 18, 2013, 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.

Notwithstanding the stated expected final 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 of finance charges allocable to this series will be directed first to pay Trust expenses and interest on the series notes sequentially. Principal collections allocable to this series will be directed entirely to repay outstanding principal of the most senior class of notes until nil. 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 principal collections from the receivables, in an amount equal to the subordination available for this class of notes.

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

Because the Trust is a master trust, all series of Notes are supported by the same pool of receivables and although each series is issued under a separate Certificate of Issuance Agreement, they are 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 Trust 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 to repay 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 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.

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