DBRS Morningstar Finalizes Ratings of AAA (sf), A (sf), and BBB (sf) on Canadian Credit Card Trust II, Series 2020-1

DBRS Limited (DBRS Morningstar) finalized the following provisional ratings on the Credit Card Receivables-Backed Series 2020-1 Notes (the Notes) issued by Canadian Credit Card Trust II (the Trust):

-- AAA (sf) on the Credit Card Receivables-Backed Class A Notes, Series 2020-1 (the Class A Notes)
-- A (sf) on the Credit Card Receivables-Backed Class B Notes, Series 2020-1 (the Class B Notes)
-- BBB (sf) on the Credit Card Receivables-Backed Class C Notes, Series 2020-1 (the Class C Notes)

The Expected Final Payment Date of the Notes is May 24, 2023.

On June 1, 2020, the DBRS Morningstar sovereigns group published its outlook on the impact of the Coronavirus Disease (COVID-19) on key economic indicators for the 2020–22 time frame, which was updated from the initial outlook that was published on April 16, 2020. For details, please see https://www.dbrsmorningstar.com/research/361867. For the ratings assigned, DBRS Morningstar’s analysis considered adjustments to base-case assumptions as a result of the global efforts to contain the spread of the coronavirus. In connection with DBRS Morningstar’s sovereigns group's moderate economic scenario, DBRS Morningstar applied adjustments that caused an increase in the base-case net loss rate and decreases in the base-case yield and payment rate. The increase in unemployment will lead to increases in delinquencies and loss rates and decreases in payment rates as borrowers' ability to repay is reduced. In addition, the expected decline in spending during this time will result in lower interchange yield and payment rates.

DBRS Morningstar considered the following factors in its analysis:

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, gross yield, and net loss rates remained strong at 49.6%, 27.4%, and 4.0%, respectively, as of May 2020. Although performance is expected to be negatively affected by the coronavirus, the portfolio has seen an increased percentage of transactors (cardholders who pay their entire balance in full each month) in recent years and comprises a large percentage of prime borrowers (77% of borrowers have a credit score of 660 or higher), who typically demonstrate a stronger ability to meet their credit card obligations because of their credit quality and tendency to have more financial resources and funding options.

5. The custodial pool is well seasoned with approximately 72.6% 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 prerecessionary levels and was 4.0% as of May 2020. This is further mitigated by lower delinquencies, increased payment rates, and increased portfolio yields in recent years. From a negative perspective, there is considerably more geographic and regional economic risk stemming from the portfolio’s concentration in Québec.

DBRS Morningstar 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 Morningstar 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 Morningstar’s “Legal Criteria for Canadian Structured Finance” methodology. Should the servicer be downgraded below investment grade, DBRS Morningstar will assess the impact of partial commingling at the time and take appropriate rating action.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

Notes:
The principal methodology is Rating Canadian Credit Card and Personal Line of Credit Securitizations (November 6, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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