DBRS Assigns Provisional Ratings to Fortified Trust, Series 2016-2 of AAA (sf), AA (high) (sf) and A (high) (sf)

DBRS Limited (DBRS) has today assigned provisional ratings to the Real Estate Secured Line of Credit-Backed Notes, Series 2016-2 (the Notes) to be issued by Fortified Trust (the Trust) as follows:

-- AAA (sf) to the Real Estate Secured Line of Credit-Backed Class A Notes, Series 2016-2 (the Class A Notes);
-- AA (high) (sf) to the Real Estate Secured Line of Credit-Backed Class B Notes, Series 2016-2 (the Class B Notes);
-- A (high) (sf) to the Real Estate Secured Line of Credit-Backed Class C Notes, Series 2016-2.

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) The levels of credit enhancement provided by subordination (3.9% and 1.9% for the Class A Notes and Class B Notes, respectively), the cash reserve account and excess spread of 1.35% annually (before credit losses).

(2) The very low and stable level of losses of Bank of Montreal’s (BMO) entire home equity line of credit (HELOC) portfolio is indicative of the high underwriting standards of BMO and excellent collateral quality. The pool has a balance-weighted credit score of 751 as of August 31, 2016.

(3) The Notes benefit from several structural elements typically found in securitizations in Canada that mitigate default risk and the risks related to the credit deterioration of associated counterparties.

(4) The assets in the pool are a well-diversified portfolio of HELOC accounts with a minimum 20% equity in each of the mortgaged properties, which secures the HELOC accounts.

DBRS uses the Canadian RMBS model to estimate default probability and loss severity on a loan-level basis. Certain assumptions and adjustments were made to reflect the nature of HELOC loans.

Based on the Canadian RMBS model outputs, DBRS ran a cash flow model of several scenarios to incorporate transaction-specific triggers, assumptions of default timing, potential interest mismatch and a variety of stressed monthly payment rates that are commensurate with the ratings assigned. The result was that the Notes with the proposed structure could withstand each stress scenario with no loss.

BMO is Canada’s fourth-largest bank measured by assets with assets of $691.7 billion and $40.7 billion in total equity as at July 31, 2016. It is the servicer of the assets in the 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 methodologies are Rating Canadian Residential Mortgages, Home Equity Lines of Credit and Reverse Mortgages (November 2015), Legal Criteria for Canadian Structured Finance (July 2016), Derivatives Criteria for Canadian Structured Finance (July 2016) and Operational Risk Assessments for Canadian Structured Finance (April 2016), 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.