DBRS Morningstar Finalizes Provisional Ratings on Prime Structured Mortgage (PriSM) Trust, Series 2021-1

DBRS Limited (DBRS Morningstar) finalized the provisional ratings on the Mortgage-Backed Certificates, Series 2021-1 issued by Prime Structured Mortgage (PriSM) Trust (the Issuer) as follows:

-- AAA (sf) on the Mortgage-Backed Certificates, Class A (the Class A Certificates)
-- AAA (sf) on the Mortgage-Backed Certificates, Class VFC (the Class VFC Certificates)
-- AAA (sf) on the Mortgage-Backed Certificates, Class IO (the Class IO Certificates)
-- AA (sf) on the Mortgage-Backed Certificates, Class B (the Class B Certificates)
-- A (sf) on the Mortgage-Backed Certificates, Class C (the Class C Certificates)
-- BBB (sf) on the Mortgage-Backed Certificates, Class D (the Class D Certificates)
-- BB (sf) on the Mortgage-Backed Certificates, Class E (the Class E Certificates)
-- B (sf) on the Mortgage-Backed Certificates, Class F (the Class F Certificates; together with the Class A Certificates, the Class VFC Certificates, the Class IO Certificates, the Class B Certificates, the Class C Certificates, the Class D Certificates, and the Class E Certificates, the Rated Certificates)

The ratings assigned to the Class A Certificates, the Class VFC Certificates (together, the Senior Principal Certificates), the Class B Certificates, the Class C Certificates, the Class D Certificates, the Class E Certificates, and the Class F Certificates (collectively with the Senior Principal Certificates, the Rated Principal Certificates) represent the timely payment of interest to the holders thereof and the ultimate payment of principal by the Rated Final Distribution Date under the respective rating stress. The rating assigned to the Class IO Certificates is an opinion that addresses the likelihood of the Notional Amount of the Class IO Certificates’ applicable reference certificates (i.e., the Senior Principal Certificates) being adversely affected by credit losses.

The Mortgage-Backed Certificates, Series 2021-1, Class G (the Class G Certificates) and Mortgage-Backed Certificates, Series 2021-1, Class R (collectively with the Class G Certificates and the Rated Certificates, the Certificates) are not rated by DBRS Morningstar.

The ratings incorporate the following considerations:

(1) The level of credit enhancement provided by subordination is commensurate with the respective rating levels of each class of the Rated Principal Certificates.

(2) The collateral comprises a pool of approximately $674.3 million first-lien fixed-rate prime conventional Canadian residential mortgages underwritten to The Toronto-Dominion Bank’s (TD Bank; rated AA (high)/R-1 (high) with Stable trends by DBRS Morningstar) third-party lender underwriting policies and compliant with the Office of the Superintendent of Financial Institutions’ Guideline B-20, with a weighted-average loan-to-value ratio of 65.1% and a weighted-average credit score of 793, in each case, as of the Cut-Off Date.

(3) TD Securities Inc. (TDSI), a wholly owned subsidiary of TD Bank, is the Seller and Master Servicer and provides representations and warranties and is ultimately responsible for all the servicing obligations of the mortgages. First National Financial LP, CMLS Financial Ltd., Paradigm Quest Inc., and MCAP Service Corporation, together ultimately servicing the Mortgage Loans as either Sub-Servicers or sub-sub-servicers, have extensive servicing experience in the Canadian residential mortgage market.

(4) The transaction has a bankruptcy-remote structure with swap arrangements to mitigate interest rate mismatch and negative carry risk and a highly rated Class VFC Committed Purchaser to fully repay the Class A Certificates on the Targeted Final Distribution Date.

DBRS Morningstar uses the Canadian residential mortgage-backed securities (RMBS) model that calculates estimated default frequency (more than 90 days in arrears), loss severity, and expected loss on a loan-level basis. The RMBS model output does not include the risk of mortgage default at maturity (i.e., balloon risk). DBRS Morningstar views balloon risk for prime mortgages to be small, and the program documents incorporate renewal and extension features that reduce the balloon risk. If a Mortgage Loan is renewed by the Seller (or the related Originator), including loans that are renewed prior to their maturity date, the Seller is obligated to purchase (or cause the related Originator to purchase) such Mortgage Loan on its maturity date. If the Seller (or the related Originator) does not offer to renew a performing mortgage (at a rate consistent with the Seller’s or related Originator’s then-prevailing posted mortgage rates) and the mortgage has not been renewed by any other lender prior to its maturity date, the Master Servicer (including a Replacement Master Servicer) will extend the maturity date for up to five years (to no later than the Rated Final Distribution Date) at a rate equal to the greater of (1) the Master Servicer’s then-prevailing posted rate and (2) the mortgage rate that was in effect prior to extension, in order to prevent the mortgage from becoming delinquent or defaulted at maturity. To assess balloon risk, DBRS Morningstar nevertheless considers the probability of no lender liquidity at the end of the loan tenure and a hypothetical percentage of loan defaults as a result of non-renewal. The balloon risk is in addition to the credit risk estimated by the RMBS model. When determining the loss severity of loans that default as a result of non-renewal, because such borrowers have been current on their mortgage payments and the timing of default is known, DBRS Morningstar considers scheduled mortgage payments and a certain level of house price appreciation during the mortgage term.

With the RMBS model results and adjustment for balloon risk, DBRS Morningstar runs a proprietary cash flow engine that incorporates the transaction structure and assumptions for timing of default, interest rates, and prepayments. The result was that the Rated Principal Certificates, with the proposed structure, could withstand each stress scenario with no loss. The Issuer’s ability to repay interest and principal of the Rated Principal Certificates is consistent with the respective ratings. The rating assigned to the Class IO Certificates is an opinion that addresses the likelihood of the Notional Amount of the Class IO Certificates’ applicable reference certificates (i.e., the Senior Principal Certificates) being adversely affected by credit losses.

The Seller and Master Servicer, TDSI, is a wholly owned subsidiary of TD Bank. TD Bank ranked as one of the largest banks in Canada as measured by both assets and deposits as of October 31, 2021, with $1.729 trillion in assets and $99.8 billion in total equity.

The ratings assigned to the Class C Certificates, Class D Certificates, Class E Certificates, and the Class F Certificates materially deviate from a higher rating implied by the quantitative results. DBRS Morningstar considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative results that is a substantial component of a rating methodology. The deviations are warranted as DBRS Morningstar recognizes the structural subordination of the Class C Certificates to the Class B Certificates, the structural subordination of the Class D Certificates to the Class C Certificates, the structural subordination of the Class E Certificates to the Class D Certificates, and the structural subordination of the Class F Certificates to the Class E Certificates.

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 4, 2021), 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.

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

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