DBRS Confirms Ratings of CARDS II Trust

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

-- AAA (sf) for Credit Card Receivables-Backed Class A Medium-Term Notes, Series 2010-3
-- BBB (sf) for Credit Card Receivables-Backed Class B Medium-Term Notes, Series 2010-3
-- AAA (sf) for Credit Card Receivables-Backed Class A Medium-Term Notes, Series 2011-4
-- BBB (sf) for Credit Card Receivables-Backed Class B Medium-Term Notes, Series 2011-4
-- AAA (sf) for Credit Card Receivables-Backed Class A Floating Rate Notes, Series 2012-1
-- BBB (sf) for Credit Card Receivables-Backed Class B Floating Rate Notes, Series 2012-1
-- AAA (sf) for Credit Card Receivables-Backed Class A Notes, Series 2013-1
-- BBB (sf) for Credit Card Receivables-Backed Class B Notes, Series 2013-1
-- AAA (sf) for Credit Card Receivables-Backed Class A Floating Rate Notes, Series 2015-1
-- BBB (sf) for Credit Card Receivables-Backed Class B Floating Rate Notes, Series 2015-1
-- AAA (sf) for Credit Card Receivables-Backed Class A Floating Rate Notes, Series 2015-2
-- BBB (sf) for Credit Card Receivables-Backed Class B Floating Rate Notes, Series 2015-2

The rating confirmation is based on the following factors:

(1) For the AAA-rated Class A Notes, credit enhancement is available through subordination, excess spread (currently in the range of 9.0% to 16.3% as of July 2015) and series-specific cash reserve accounts, which could build up to 5.0% of the initial invested amount if the three-month average excess spread falls to or below 1.5%. The AAA-rated Class A Notes with Canadian fixed rate exposures benefit from subordination offered by the Class B Notes, equivalent to 8.75% for Series 2010-3, 8.00% for Series 2011-4, Series 2012-1 and Series 2013-1, and 7.25% for Series 2015-2. While the Series 2012-1 and Series 2015-2 Class A Notes are denominated in USD with floating rate coupons, they have a cross-currency, interest rate swap in place that converts the obligation to Canadian dollar fixed rate. The AAA-rated Class A Notes with Canadian floating rate exposure benefit from subordination offered by the Class B Notes, equivalent to 9.50% (Series 2015-1).

(2) For the BBB-rated Class B Notes, credit enhancement is available through subordination (1.62% for Series 2010-3 and 1.60% for Series 2011-4, Series 2012-1 and Series 2013-1), excess spread and series-specific cash reserve accounts, which could build up to 5.0% of the initial invested amount if the three-month average excess spread falls to or below 1.5%.

(3) Since 2008, the three-month average payment rates have remained strong at above 30%. While the loss rate peaked at 7.3% in May 2009, loss rates and delinquencies have declined and stabilized, with the three-month average loss rate at 3.0% as of July 2015, similar to levels experienced prior to 2008. The removal of the 2% cap on interchange fees on June 25, 2009, also helped mitigate the impact of the increase in loss rates prior to May 2009 and increased the protection for the investors.

(4) The experience of Canadian Imperial Bank of Commerce (CIBC) in managing one of the largest credit card portfolios in Canada.

The Trust participates in a co-ownership structure, meaning the proceeds from each series of Notes were used to purchase an undivided co-ownership interest in the receivables of the designated accounts in the custodial pool. Each co-ownership interest is separate from, and in addition to, co-ownership interests previously created. CIBC, as the seller, retains the residual undivided co-ownership interest (Retained Interest) in the custodial pool. The receivables include all amounts to be collected under the designated accounts, such as finance charges, cash advance fees, annual fees, interchange fees and principal receivables billed to cardholders. The custodial pool must be at least 103% of the Initial Invested Amount, or 107% of the Unadjusted Invested Amount.

As the accounts are sold on a fully serviced basis, no servicing fee will be paid to CIBC as long as CIBC remains as the servicer. CIBC may remit collections on each Transfer Date (or such other date as set forth in the Series Purchase Agreement) 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 CIBC fails to maintain this rating, remittance of collections 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 the “Legal Criteria for Canadian Structured Finance” (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.

Notwithstanding the stated expected principal payment dates of the Notes, certain events may result in early repayment or delays in principal payment of one or more series; such events are called amortization events. Following the occurrence of a series-specific amortization event, collections allocable to this series will be directed first to pay Trust expenses and interest on the series notes sequentially, and then to repay outstanding principal of the Class A Notes, until nil. Principal repayments of Class B Notes will be made only after Class A Notes have been repaid in full. Essentially, this provides the Class A Notes preferential access to the cash flows generated from the receivables for principal repayments, in an amount equal to the subordination available for this class of notes.

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

As the Trust participates in a co-ownership structure, all series of Notes are supported by the same pool of receivables and generally issued under the same requirements regarding 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 custodial pool and the Notes are available and updated each month in the Monthly Canadian ABS Report (see Related Research, below). DBRS conducts a monthly stress testing of each rated class of the Trust, with the result indicating 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:
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 Rating Canadian Credit Card and Personal Line of Credit Securitizations, Legal Criteria for Canadian Structured Finance, Derivatives Criteria for Canadian Structured Finance and Master Canadian Structured Finance Surveillance, which are available on our website under Methodologies.