DBRS Assigns Ratings of AAA (sf), AA (sf) and BBB (sf) to Master Credit Card Trust II, Series 2018-2

DBRS Limited (DBRS) assigned ratings to the Credit Card Receivables-Backed Notes, Series 2018-2 (the Notes) issued by Master Credit Card Trust II (the Trust) as follows:

-- AAA (sf) to the Credit Card Receivables-Backed Class A Notes, Series 2018-2 (the Class A Notes)
-- AA (sf) to the Credit Card Receivables-Backed Class B Notes, Series 2018-2 (the Class B Notes)
-- BBB (sf) to the Credit Card Receivables-Backed Class C Notes, Series 2018-2 (the Class C Notes)

As the Notes represent part of the seller’s interest in the custodial pool of credit card receivables, the rating on the Class A Notes is an opinion on the risk that the Trust will fail to satisfy its financial obligations with respect to the Class A Monthly Interest and the Class A Allocated Amount as defined in the Series 2018-2 Supplement.

The ratings are based on the following factors:

(1) For the Class A Notes, credit enhancement is available through subordination of at least 5.5%, excess spread and the Cash Collateral Account, which could build up to 5.0% of the Maximum Allocated Amount (as defined in the Series 2018-2 Supplement).

(2) For the Class B Notes, credit enhancement is available through subordination of at least 3.5%, excess spread and the Cash Collateral Account.

(3) For the Class C Notes, credit enhancement is available through excess spread and the Cash Collateral Account.

(4) Over the past three years, payment rates and gross yields have been strong, averaging about 47% and 25%, respectively, and showing increasing trends. While the three-month average loss rate peaked at 5.0% in March 2010, it has since declined and stood at 2.7% as at December 2017, one of the lowest in Canada. While current loss rates remain above levels experienced prior to the economic downturn in 2008 and 2009, this is mitigated by excess spread, which is expected to provide a solid first line of defence against credit losses.

(5) Bank of Montreal, as the seller, offers a successful loyalty program and has the experience and demonstrated ability to manage the largest MasterCard portfolio in Canada.

(6) The receivables are seasoned and well diversified.

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 satisfying its financial obligations with respect to the Notes. The severity of the tests applied is commensurate with the respective ratings of the Notes.

DBRS notes that the transaction documents do not require the remittance of collections into a Trust account within two business days when the servicer is no longer rated investment grade, as expected in DBRS’s “Legal Criteria for Canadian Structured Finance.” Should the servicer be downgraded to below investment grade, DBRS will assess the impact of partial commingling at the time and take appropriate rating action.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities participated in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The principal methodologies are Rating Canadian Credit Card and Personal Line of Credit Securitizations (November 2017) and Legal Criteria for Canadian Structured Finance (July 2017), which can be found on dbrs.com under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.