DBRS Confirms Ratings of AAA (sf), AA (high) (sf) and A (high) (sf) on Fortified Trust, Series 2016-2 Post Re-Opening

DBRS Limited (DBRS) has today confirmed the ratings on the Real Estate Secured Line of Credit-Backed Notes, Series 2016-2 (the Notes) issued by Fortified Trust (the Trust) following the re-opening of Series 2016-2 as indicated below:

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

The Trust re-opened Series 2016-2 by issuing an additional $1.0 billion Class A Notes, $21.1 million Class B Notes and $20.0 million Class C Notes with the same coupons (1.208%, 1.558% and 1.858% for Class A, Class B and Class C, respectively) and Expected Final Payment Date (April 23, 2018) as the initial offering. The total amount of Notes outstanding after the re-opening is $2.55 billion.

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 that 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 $687.9 billion and $42.3 billion in total equity as at October 31, 2016. It is the servicer of the assets in the pool.

Please refer to the Series 2016-2 rating report dated October 27, 2016 for more details. The report will not be updated to reflect the re-opening of the series.

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), 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.