DBRS Finalizes Ratings of AAA (sf), A (sf) and BBB (sf) on Canadian Credit Card Trust II, Series 2018-1

DBRS Limited (DBRS) finalized the provisional ratings on the Credit Card Receivables-Backed Notes, Series 2018-1 (the Notes) issued by Canadian Credit Card Trust II (the Trust) as indicated below:

-- AAA (sf) on the Credit Card Receivables-Backed Class A Notes, Series 2018-1 (the Class A Notes)
-- A (sf) on the Credit Card Receivables-Backed Class B Notes, Series 2018-1 (the Class B Notes)
-- BBB (sf) on the Credit Card Receivables-Backed Class C Notes, Series 2018-1 (the Class C Notes)

The Expected Final Payment Date of the Notes is November 24, 2021.

The ratings are based on the following factors:

(1) For the Class A Notes, credit enhancement is available through subordination of 5.75%, excess spread and the cash collateral account, which could build up to 5.0% of the initial invested amount.

(2) For the Class B Notes, credit enhancement is available through subordination of 2.75%, 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) Three-month average payment rates and three-month average gross yields have continued to experience an upward trend, reaching 50% and 27%, respectively, as of October 2018.

(5) The custodial pool is well seasoned with approximately 69% of the receivables arising from accounts at least 60 months old.

The portfolio is largely concentrated in Québec, which has both positive and negative implications. From a positive perspective, the portfolio has been more insulated from competition than the rest of Canada. Notwithstanding the relative insulation, three-month average loss rates increased to a peak of 6.5% between 2008 and 2009, similar to the experience of the entire Canadian credit card industry. The loss level has since come back down to pre-recessionary levels and was 3.5% as of October 2018. This is further mitigated by stabilizing delinquencies, increasing payment rates and increasing portfolio yields. From a negative perspective, there is considerably more geographic and regional economic risk stemming from the portfolio’s concentration in Québec.

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 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” methodology. Should the servicer be downgraded below investment grade, DBRS will assess the impact of partial commingling at the time and take appropriate rating action.

Notes:
The principal methodology is Rating Canadian Credit Card and Personal Line of Credit Securitizations (November 2018), which can be found on dbrs.com under Methodologies.

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 did participate 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below 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.