DBRS Assigns AAA Rating to RBC Covered Bonds, Series CB21

DBRS Limited (DBRS) has today assigned a rating of AAA to the Series CB21 covered bonds issued under the Royal Bank of Canada (RBC) Global Covered Bond Programme (the Programme). The Series CB21 (EUR 1 billion) covered bonds have a coupon rate of 0.875% and a maturity date of June 17, 2022. 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 AAA ratings are based on three building blocks:

(1) RBC’s issuer rating of AA;
(2) The legal and structuring framework assessment of Strong;
(3) The cover pool credit assessment of at least “A”.

The following factors were considered in the analysis for the three building blocks above:

(1) The Covered Bonds are senior, unsecured, direct deposit obligations of RBC.

(2) In addition to a general recourse to RBC’s assets, the Covered Bonds are supported by 7.5% overcollateralization (OC) in a diversified collateral pool of first-lien, conventional residential mortgages with maximum loan-to-values (LTVs) of 80.0% at origination in Canada (the Cover Pool), based on the asset percentage of 93.0% as of April 30, 2015. The Cover Pool of approximately $34.4 billion as of April 30, 2015, has experienced low credit losses historically. The mortgages may have amortizing and non-amortizing revolving loan parts secured by the same first lien. Only the amortizing loan parts are in the Cover Pool.

(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 a 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.

(5) There is a specific covered bond legislative framework in Canada. In addition, the contractual obligations of the transaction parties are supported by Canada’s well-developed commercial and bankruptcy laws, the satisfactory opinions provided by legal counsel to RBC and a generally creditor-friendly legal environment in Canada.

Despite the above strengths, the rating could face the following challenges:

(1) A weakened housing market in Canada could result in higher defaults and/or lower recoveries than the assumptions used in the cover pool credit assessment. This risk is significantly reduced by the home equity available in relation to the portfolio weighted-average LTV of 52.5% (based on indexed property value) reported by RBC as of April 30, 2015.

(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 OC available is commensurate with the rating of the Covered Bonds. Based on the latest review of the Cover Pool, DBRS considers 5.0% OC, corresponding to an asset percentage of 95.2%, commensurate with the AAA rating.

(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 OC, 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 default by RBC.

DBRS notes that there is no cap on indemnity amounts payable to service providers in the payment waterfalls following the issuer default or acceleration of the covered bond payments as expected in DBRS’s Legal Criteria for Canadian Structured Finance methodology. Should the indemnity be above a reasonable amount, DBRS will assess the impact of uncapped cash outflow at the time and take appropriate rating action. In addition, DBRS’s Legal Criteria for Canadian Structured Finance methodology indicates that DBRS expects to be an addressee of all legal opinions; however, DBRS will not be an addressee of a foreign legal opinion in this case.

There is no specific rating report for Series CB21; however, the rating report for the Programme was last updated on July 24, 2013, to reflect changes since the enactment of the legislation and the guide issued by the Canada Mortgage and Housing Corporation.

RBC is one of Canada’s largest banks as measured by assets, with assets of $1,032.2 billion and $51.8 billion in common equity as at April 30, 2015. It is also the servicer of the mortgages in the Cover Pool.

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 methodology is Rating Canadian Covered Bonds, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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.