DBRS Confirms Ratings of Master Credit Card Trust and Master Credit Card Trust II

DBRS has today confirmed the ratings of all the outstanding notes (the Notes) issued by Master Credit Card Trust (MCCT) and Master Credit Card Trust II (MCCT II). The notes issued by MCCT were assumed by MCCT II (the Trust) on September 28, 2012. The confirmation is part of DBRS’s continued effort to provide timely credit rating opinions and increased transparency to market participants.

-- AAA (sf) on the Credit Card Receivables-Backed Class A Floating Rate Notes, Series 2008-4
-- AA (sf) on the Credit Card Receivables-Backed Class B Floating Rate Notes, Series 2008-4
-- A (sf) on the Credit Card Receivables-Backed Class C Floating Rate Notes, Series 2008-4
-- BBB (sf) on the Credit Card Receivables-Backed Class D Floating Rate Notes, Series 2008-4

-- AAA (sf) on the Credit Card Receivables-Backed Class A Notes, Series 2011-1
-- BBB (sf) on the Credit Card Receivables-Backed Class B Notes, Series 2011-1

-- AAA (sf) on the Credit Card Receivables-Backed Class A Floating Rate Notes, Series 2011-2
-- BBB (sf) on the Credit Card Receivables-Backed Class B Floating Rate Notes, Series 2011-2

-- AAA (sf) on the Credit Card Receivables-Backed Class A Notes, Series 2012-1
-- BBB (sf) on the Credit Card Receivables-Backed Class B Notes, Series 2012-1

-- AAA (sf) on the Credit Card Receivables-Backed Class A Notes, Series 2012-2
-- AA (sf) on the Credit Card Receivables-Backed Class B Notes, Series 2012-2
-- BBB (sf) on the Credit Card Receivables-Backed Class C Notes, Series 2012-2

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

-- AAA (sf) on the Credit Card Receivables-Backed Class A Notes, Series 2013-2
-- AA (sf) on the Credit Card Receivables-Backed Class B Notes, Series 2013-2
-- BBB (sf) on the Credit Card Receivables-Backed Class C Notes, Series 2013-2

-- AAA (sf) on the Credit Card Receivables-Backed Floating Rate Class A Notes, Series 2013-3
-- AA (sf) on the Credit Card Receivables-Backed Class B Notes, Series 2013-3
-- BBB (sf) on the Credit Card Receivables-Backed Class C Notes, Series 2013-3

The rating confirmation is based on the following factors:

(1) For the AAA-rated notes, credit enhancement is available through subordination of 8.5% (for floating-rate notes) or 5.5% (for fixed-rate notes), in addition to excess spread, which is currently above 14% for all series and series-specific cash accounts, which could build up to 5% if three-month average excess spread for the series falls below 1.5%.

(2) For the AA-rated notes, credit enhancement is composed of subordination of 4.8% (for floating-rate notes) or 3.5% (for fixed-rate notes), in addition to excess spread and the series-specific cash accounts.

(3) For the A-rated notes, credit enhancement is composed of subordination of 1.1%, excess spread and series-specific cash accounts.

(4) For the BBB-rated notes, credit enhancement is composed of excess spread and the series-specific cash accounts.

(5) Over the past two years, the principal payment rate has remained above 35%, reaching 41% as of September 2013. The gross yield has also been very stable at around 23%. The one-month loss rate, after reaching a peak of 5.6% in February 2010, has been gradually decreasing and is among one of the lowest in Canada at 3.1% as at the end of September 2013.

(6) The Trust pool is a well-diversified and seasoned portfolio, composed of certain MasterCard credit card accounts originated, managed and designated by Bank of Montreal (BMO). BMO is the fourth-largest bank in Canada by assets, rated AA and R-1 (high) with Stable trends by DBRS.

The Trust is structured as a master trust. The proceeds of the Notes were used to purchase receivables arising in accounts from MasterCard credit card products originated and maintained by BMO. BMO, 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 assets for each series are not available to the noteholders of any other series. The Retained Interest is at least 8% for all series of Notes.

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.

Notwithstanding the stated expected principal 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 notes sequentially. Principal collections allocable to this series will be directed entirely to repay outstanding principal of the Class A 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 BMO 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 BMO, 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. Though 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, Derivatives Criteria for Canadian Structured Finance, Legal Criteria for Canadian Structured Finance and Canadian Structured Finance Surveillance, which are available on our website under Methodologies.