DBRS Assigns AAA Rating to TD Legislative Covered Bonds, Series CBL12

DBRS Limited (DBRS) has today assigned a rating of AAA to the Series CBL12 covered bonds issued under The Toronto-Dominion Bank (TD) Global Legislative Covered Bond Programme (the Programme). The Programme 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 CBL12 (USD 1.75 billion) covered bonds have a coupon rate of 2.25% and a maturity date of March 15, 2021. All covered bonds issued under the Programme (the Covered Bonds) rank pari passu with each other and are currently rated AAA by DBRS.

The AAA ratings are based on three building blocks:

(1) TD’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 TD.

(2) In addition to a general recourse to TD’s assets, the Covered Bonds are supported by 5.3% overcollateralization (OC) in a diversified pool of first-lien conventional Canadian residential mortgages with a maximum loan-to-value (LTV) of 80.0% at origination (the Cover Pool), based on the asset percentage of 95.0% as of January 29, 2016. The Cover Pool was approximately $29.3 billion as of January 29, 2016. The Cover Pool contains only amortizing single-tranche loans; however, future additions may include mortgages with amortizing and non-amortizing revolving multi-tranche loans secured by the same first lien.

(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 TD, 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 TD 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 62.2% (based on indexed property value) reported by TD as of January 29, 2016.

(2) TD 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 5.3% OC, corresponding to an asset percentage of 95.0%, commensurate with the AAA rating.

(3) The AAA rating on the Covered Bonds would not be maintained should the issuer rating of TD be downgraded below AA (low), as 5.3% OC only marginally reduces TD covered bond rating volatility compared with other Canadian covered bond programs. This risk is mitigated by TD’s ability to increase the OC for the Programme to reduce the potential negative rating impact on the Covered Bonds.

(4) There is an inherent liquidity gap between the scheduled repayments 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 TD is not rated at least A (low) or R-1 (middle) and the 12-month maturity extension upon default by TD.

DBRS’s legal criteria expects regular swap payments to rank no higher in priority than interest payments on the Covered Bonds. Should interest rate swap payments (excluding termination payments) rank higher in priority than interest payments on the Covered Bonds, DBRS will assess the impact at that time and take appropriate rating action.

There is no rating report specific to Series CBL12. Please refer to the Series CBL1 rating report dated July 29, 2014, for more details on the Programme.

TD is one of Canada’s largest banks as measured by assets as at January 31, 2016, with assets of $1,173.6 billion and $71.7 billion in total equity. It is the initial 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.

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

The applicable methodology is Rating Canadian Covered Bonds (April 2015), which can be found on our website under Methodologies.

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.