DBRS Finalizes Provisional Rating of AAA (sf) on CHIP Mortgage Trust, Series 2016-1 Medium Term Notes

DBRS Limited (DBRS) has today finalized the provisional rating of AAA (sf) on the Series 2016-1 Medium Term Notes (the Notes) issued by CHIP Mortgage Trust (the Trust). The Notes have a coupon rate of 2.981% and an expected final payment date of November 15, 2021. All senior notes issued by the Trust rank pari passu with each other.

If the Notes are not fully repaid on the expected final payment date, the Notes will pay the interest of one-month Canadian Dollar Offered Rate plus 2.5% per annum thereafter until they are fully repaid. DBRS’s rating is an opinion on risk of default by the legal maturity date, which is November 15, 2041.

The AAA (sf) rating is based on the following factors:

(1) Protection from (a) a minimum cash reserve equal to six months of interest on the Notes to mitigate cash flow irregularity and (b) the limit on senior debt issuance of up to 95% of the aggregate balance of reverse mortgages in the Trust. Following the issuance of the Notes, the senior debt issuance ratio is 89.3%.

(2) The conservative underwriting standards associated with the origination of the reverse mortgages, including (a) the use of qualified appraisers; (b) the reduction of appraised values by region, property quality, property type and potential market illiquidity adjustments in specific locations; and (c) the use of conservative actuarial tables in determining the expected occupancy term.

(3) A large, diversified portfolio with residential real estate situated in or near major urban centres across Canada with expected concentration in Ontario.

(4) The extensive experience of HomEquity Bank in originating and underwriting reverse mortgages, along with the level of ongoing review and reappraisal of the properties. Reappraisal of properties occurs on a formal basis at least every five years.

(5) A first-ranking charge on all the assets and undertakings of the Trust.

In addition, there is spread between the reverse mortgage rate and the cost of funds of the Notes and at least 40% equity in each individual underlying property at origination. As of June 30, 2016, the average loan-to-value ratio of the portfolio was 41.0%.

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 2016), Legal Criteria for Canadian Structured Finance (July 2016) and Derivatives Criteria for Canadian Structured Finance (July 2016), which are available 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.