DBRS Assigns AAA Rating to NBC Legislative Covered Bonds, Series CBL5

DBRS Limited (DBRS) has today assigned a rating of AAA to the Series CBL5 covered bonds issued under the National Bank of Canada (NBC) Legislative Global Covered Bond Programme (the Legislative Programme). The Legislative 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 CBL5 (GBP 100 million) covered bonds have a coupon rate of 3-month GBP LIBOR + 0.37% and a maturity date of September 27, 2021. All covered bonds issued under the Legislative 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) NBC’s issuer rating of AA (low),
(2) The legal and structuring framework assessment of Strong and
(3) The cover pool credit assessment of at least AA (low).

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 NBC.

(2) In addition to a general recourse to NBC’s assets, the Covered Bonds are supported by 9.1% 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 91.7% as of August 31, 2016. The Cover Pool was approximately $8.5 billion as of August 31, 2016. 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, account bank, cash manager and GIC provider.

(4) Upon a default by NBC, 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 NBC and a generally creditor-friendly legal environment in Canada.

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

(1) The Cover Pool has a large concentration in Québec, exposing the Cover Pool to high geographic and regional economic risks. A weakened housing market in Canada, especially in Québec, 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 56.3% (based on indexed property value) reported by NBC as of August 31, 2016.

(2) NBC may need to add mortgages to maintain the Cover Pool, incurring substitution and potential credit deterioration risks. 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 7.0% OC, corresponding to an asset percentage of 93.5%, 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 NBC is not rated at least A (low) or R-1 (middle) and the 12-month maturity extension upon default by NBC.

There is no specific rating report for Series CBL5. Please refer to the Series CBL1 rating report dated December 17, 2013, for more details on the Legislative Programme.

DBRS's “Legal Criteria for Canadian Structured Finance” methodology 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 the appropriate rating action.

NBC is Canada’s sixth-largest bank as measured by assets, with $229.9 billion in assets and $9.6 billion in common equity as at July 31, 2016. 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 (April 2016), 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 Legislative 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.