DBRS Finalizes Provisional Ratings of AAA (sf) and BBB (sf) on CARDS II Trust, Series 2017-1

DBRS Limited (DBRS) has today finalized the provisional ratings on the Credit Card Receivables-Backed Floating Rate Notes, Series 2017-1 (the Notes) issued by CARDS II Trust (the Trust) as follows:

-- AAA (sf) on the Credit Card Receivables-Backed Class A Floating Rate Notes, Series 2017-1 (the Class A Notes)
-- BBB (sf) on the Credit Card Receivables-Backed Class B Floating Rate Notes, Series 2017-1 (the Class B Notes)

The Class A Notes are denominated in U.S. dollars and the Class B Notes in Canadian dollars. A cross-currency, interest rate swap is in place for the Class A Notes.

The Targeted Principal Distribution Date of the Notes is April 15, 2019.

The ratings are based on the following factors:

(1) For the Class A Notes, credit enhancement is available through subordination of 7.25%, excess spread and the series-specific cash reserve account, which could build up to 5% of the initial invested amount.

(2) For the Class B Notes, credit enhancement is available through excess spread and the series-specific cash reserve account.

(3) Since 2008, three-month average payment rates have remained strong at above 30%. While the one-month loss rate peaked at 7.3% in May 2009, loss rates and delinquencies have declined and stabilized, with the three-month average loss rate at 3.6% as of March 2017, similar to levels experienced prior to 2008. The removal of the 2% cap on interchange fees on June 25, 2009, also mitigated the impact of the increase in loss rates prior to May 2009 and increased protection for the investors.

(4) The custodial pool is a well-diversified, seasoned portfolio and is one of the largest in Canada.

DBRS stress testing indicates that simultaneous declines in yield and payment rates and increases in losses would not result in a failure of the Trust in repaying the Notes on a timely basis. The severity of the tests applied is commensurate with the respective ratings of the Notes.

DBRS notes that the program fees and expenses (which could include indemnity payments) that are payable to the Financial Services Agent are not subordinated to payments to Noteholders, as expected in DBRS’s “Legal Criteria for Canadian Structured Finance.” DBRS will monitor the monthly servicer reports and, to the extent that these fees and expenses may affect payments to Noteholders, DBRS will review and take appropriate rating action, if necessary.

DBRS also notes that a true sale opinion in respect of the co-ownership interests in any new accounts that may be added will not be delivered in connection with each account addition, as expected in DBRS’s “Legal Criteria for Canadian Structured Finance.” DBRS considers the risk minimal, as additional accounts are transferred to the Custodian infrequently, an officer’s certificate is provided by the Seller in connection with each additional account transfer and a true sale opinion in respect of the co-ownership interests in any new accounts that may be added will be delivered every six months, for any additions made within the previous six months.

Notes:
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 principal methodologies are Rating Canadian Credit Card and Personal Line of Credit Securitizations (November 2016), Legal Criteria for Canadian Structured Finance (July 2016) and Derivatives Criteria for Canadian Structured Finance (July 2016), which can be found 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.