DBRS Morningstar Assigns Provisional Ratings to Fortified Trust, Series 2021-1 of AAA (sf), AA (high) (sf) and A (high) (sf)

DBRS Limited (DBRS Morningstar) assigned provisional ratings to the Real Estate Secured Line of Credit-Backed Notes, Series 2021-1 (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 2021-1 (the Class A Notes),
-- AA (high) (sf) to the Real Estate Secured Line of Credit-Backed Class B Notes, 2021-1 (the Class B Notes) and
-- A (high) (sf) to the Real Estate Secured Line of Credit-Backed Class C Notes, 2021-1.

The finalization of the ratings is contingent upon receipt of final documents conforming to information already received.

DBRS Morningstar considered the following factors in its analysis described below, each of which include additional analysis and, where appropriate, adjustments to expected performance assumptions as a result of the global efforts to contain the spread of the Coronavirus Disease (COVID-19). For the ratings assigned, DBRS Morningstar’s analysis considered the baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios For Rated Sovereigns,” published on September 8, 2021. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse coronavirus pandemic scenarios, which were first published in April 2020. The baseline macroeconomic scenarios reflect DBRS Morningstar’s view that, although the coronavirus remains a risk to the outlook, uncertainty around the macroeconomic effects of the pandemic has gradually receded. Current median forecasts considered in the baseline macroeconomic scenarios incorporate some risks associated with further outbreaks, but they remain fairly positive on recovery prospects given expectations of continued fiscal and monetary policy support. The policy response to the coronavirus may nonetheless bring other risks to the forefront in the coming months and years. For details, see https://www.dbrsmorningstar.com/research/384150.

(1) The levels of credit enhancement provided by subordination (3.90% and 1.90% for AAA (sf) and AA (high) (sf) rated notes, respectively), a Cash Reserve Account that builds up after the occurrence of a Cash Reserve Event and excess spread of 1.35% annually (after the swap) are commensurate with the ratings assigned.

(2) The collateral is a diversified pool of 53,269 real estate secured line of credit accounts with a pool balance of $3.9 billion, a weighted-average Limit-to-Value Ratio of 61% and a weighted-average credit score of 813. The pool also benefits from a weighted-average 100 months of seasoning since origination.

(3) A bankruptcy-remote structure that includes 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) Loss levels of the pool and the Bank of Montreal’s (BMO) entire home equity line of credit (HELOC) portfolio have been extremely low and very stable, reflecting BMO’s strong underwriting standards and excellent collateral performance. BMO is regulated by the Office of the Superintendent of Financial Institutions (OSFI) and is subject to the requirements of Guideline B-20.

DBRS Morningstar 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 Morningstar runs a proprietary cash flow engine 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 $971.4 billion and total equity of $57.7 billion as at July 31, 2021. It is the servicer of the assets in the pool.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Residential Mortgages, Home Equity Lines of Credit and Reverse Mortgages (November 3, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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