DBRS Assigns Provisional Ratings to Fortified Trust, Series 2017-1 of AAA (sf), AA (high) (sf) and A (high) (sf)

DBRS Limited (DBRS) assigned provisional ratings to the Real Estate Secured Line of Credit-Backed Notes, Series 2017-1 (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 2017-1 (the Class A Notes);
-- AA (high) (sf) to the Real Estate Secured Line of Credit-Backed Class B Notes, Series 2017-1 (the Class B Notes);
-- A (high) (sf) to the Real Estate Secured Line of Credit-Backed Class C Notes, Series 2017-1.

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 801 as of August 31, 2017, and has not experienced any losses since it was established in January 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 residential mortgage-backed securities (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 $708.6 billion and total equity of $42.9 billion as at July 31, 2017. 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 principal methodologies are Rating Canadian Residential Mortgages, Home Equity Lines of Credit and Reverse Mortgages (November 2016), Legal Criteria for Canadian Structured Finance (July 2017), Derivatives Criteria for Canadian Structured Finance (July 2017) and Operational Risk Assessments for Canadian Structured Finance (April 2017), which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities

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.