DBRS Assigns AAA Rating to BMO Global Registered Covered Bonds, Series CBL4

DBRS Limited (DBRS) has today assigned a rating of AAA to the Series CBL4 covered bonds issued under the Bank of Montreal (BMO) Global Registered Covered Bond Program (the Registered Program). The Registered Program was established after the enactment of the covered bond legislation in Canada and the guide issued by the Canada Mortgage and Housing Corporation. The Series CBL4 (EUR 1.5 billion) covered bonds have a coupon rate of 0.375% and a maturity date of August 5, 2020. As all covered bonds issued under the Registered Program (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) BMO’s issuer rating of AA;
(2) The legal and structuring framework assessment of Strong; and
(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 BMO.

(2) In addition to a general recourse to BMO’s assets, the Covered Bonds are supported by 7.0% overcollateralization (OC) in a diversified pool of first-lien conventional Canadian residential mortgages with a maximum loan-to-value (LTV) of 80% at origination (the Cover Pool), based on the asset percentage of 93.5% as of June 30, 2015. The Cover Pool was approximately $14.5 billion as of June 30, 2015.

(3) The Covered Bonds benefit from several structural features, such as a reserve fund, when applicable, and rating thresholds for the swap counterparties, servicer, account bank, cash manager and GDA provider.

(4) Upon a default by BMO, 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 BMO 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 54.4% (based on indexed property value) reported by BMO as of June 30, 2015.

(2) BMO 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 that the OC available is commensurate with the rating of the Covered Bonds. Based on the latest review of the Cover Pool, DBRS considers 6.0% OC, corresponding to an asset percentage of 94.3%, to be commensurate with the AAA rating.

(3) There is an inherent liquidity gap between the scheduled repayments of the Covered Bonds and the repayment of underlying mortgage loans over time. This risk is mitigated by the OC, the buildup of a reserve fund if BMO is not rated at least A (low) or R-1 (middle), and the 12-month maturity extension upon default by BMO.

There is no rating report specific to Series CBL4. Please refer to the Series CBL1 rating report dated May 7, 2014, for more details on the Registered Program.

BMO is Canada’s fourth-largest bank as measured by assets, with assets of $633.3 billion and $33.3 billion in common equity as at April 30, 2015. It is 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 Registered Program 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.