DBRS Assigns Provisional Ratings of AAA (sf) and BBB (sf) to CARDS II Trust, Series 2016-1

DBRS Limited (DBRS) has today assigned provisional ratings to the Credit Card Receivables-Backed Floating Rate Notes, Series 2016-1 (the Notes) to be issued by CARDS II Trust (the Trust) as follows:

-- AAA (sf) to the Credit Card Receivables-Backed Class A Floating Rate Notes, Series 2016-1 (the Class A Notes)
-- BBB (sf) to the Credit Card Receivables-Backed Class B Floating Rate Notes, Series 2016-1 (the Class B Notes)

The Class A Notes are expected to be denominated in U.S. dollars and the Class B Notes in Canadian dollars. A cross-currency, interest rate swap is expected to be in place for the Class A Notes.

The finalization of the ratings is contingent upon receipt of final documents conforming to information already received.

The ratings are based on the following factors:

(1) For the Class A Notes, credit enhancement will be available through subordination of 7.25%, excess spread and the series-specific cash reserve account, which could build up to 5% of the initial invested amount.

(2) For the Class B Notes, credit enhancement will be available through excess spread and the series-specific cash reserve account.

(3) Since 2008, three-month average payment rates have remained strong at above 30%. While the one-month 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 3.6% as of May 2016, similar to levels experienced prior to 2008. The removal of the 2% cap on interchange fees on June 25, 2009, also mitigated the impact of the increase in loss rates prior to May 2009 and increased protection for the investors.

(4) The custodial pool is a well-diversified, seasoned portfolio and is one of the largest in Canada.

DBRS stress testing indicates that simultaneous declines in yield and payment rates and increases in losses would not result in a failure of the Trust in repaying the Notes on a timely basis. The severity of the tests applied is commensurate with the respective ratings of the Notes.

DBRS notes that a true sale opinion in respect of the co-ownership interests in any new accounts that may be added will not be delivered in connection with each account addition, as expected in DBRS’s “Legal Criteria for Canadian Structured Finance.” DBRS considers the risk minimal, as additional accounts are transferred to the Custodian infrequently, an officer’s certificate is provided by the Seller in connection with each additional account transfer, and a true sale opinion in respect of the co-ownership interests in any new accounts that may be added will be delivered every six months, for any additions made within the previous six months.

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 (November 2015), Legal Criteria for Canadian Structured Finance (August 2015) and Derivatives Criteria for Canadian Structured Finance (August 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.