DBRS Finalizes Ratings on Bicentennial Trust, Series 2017-1

DBRS Limited (DBRS) has today finalized the provisional ratings on the Mortgage Pass-Through Certificates, Series 2017-1 issued by Bicentennial Trust as follows:

-- AAA (sf) on the Class A Certificates
-- AA (sf) on the Class B Certificates
-- A (sf) on the Class C Certificates
-- BBB (sf) on the Class D Certificates
-- BBB (low) (sf) on the Class E Certificates
-- BB (sf) on the Class F Certificates
-- B (sf) on the Class G Certificates (collectively, the Rated Certificates)

The Rated Final Distribution Date is July 17, 2047.

The Class H Certificates and Class Z Certificates (collectively with the Rated Certificates, the Certificates) are not rated by DBRS.

The ratings are based on the following factors:

(1) The collateral is a diversified pool of $2.0 billion first-lien, fixed-rate, conventional Canadian residential mortgages with a maximum loan-to-value (LTV) of 80% originated by Bank of Montreal (BMO). The weighted-average LTV was 66.5% as of the cut-off date based on indexed property value.

(2) The experience of BMO in the residential mortgage market with strong performance history and servicing capability.

(3) Pass-through structure increases subordination over time.

(4) BMO provides lifetime representations and warranties.

DBRS uses the Canadian RMBS model to estimate default frequency, loss severity and expected loss on a loan-level basis. The RMBS model output does not include the risk of mortgage default at maturity (i.e., balloon risk). Balloon risk is considered to be low in this transaction due to strong asset quality, the financial strength of the Seller, proven refinancing liquidity during the financial crisis and if the Seller does not offer to renew a performing mortgage (at a rate consistent with Seller’s then prevailing posted mortgage rates) and the mortgage has not been renewed by any other lender prior to its maturity date, the Administrator (including a Replacement Administrator) will extend the maturity date up to five years (to no later than the Rated Final Distribution Date) and maintain the same interest rate that was in effect prior to extension in order to prevent the mortgage from becoming delinquent or defaulted at maturity. To assess the balloon risk, DBRS nevertheless considers the probability of no lender liquidity at the end of the loan tenure and a hypothetic percentage of loan defaults as a result of non-renewal. The balloon risk is in addition to the credit risk estimated by the RMBS model. When determining the loss severity of loans that default as a result of non-renewal, since such borrowers have been current on their mortgage payments and the timing of default is known, DBRS considers scheduled mortgage payments and a certain level of house price appreciation during the mortgage term.

With the RMBS model results and adjustment for balloon risk, DBRS runs a proprietary cash flow model incorporating the transaction structure and assumptions for timing of default, interest rates and prepayments. The result was that the Rated Certificates with the proposed structure could withstand each stress scenario with no loss. The ability of the Issuer to repay interest and principal of the Rated Certificates is consistent with the respective ratings.

The Seller and Administrator, BMO, is rated AA/R-1 (high) with Negative trends by DBRS as of July 28, 2016, and is the fourth-largest Schedule I bank in Canada as measured by assets with approximately $692.4 billion assets as of January 31, 2017.

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 Operational Risk Assessments for Canadian Structured Finance (April 2016), which are available on dbrs.com 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.