DBRS Morningstar Finalizes Provisional Ratings of AAA (sf), AA (high) (sf), and A (high) (sf) on Fortified Trust, Series 2023-1

DBRS Limited (DBRS Morningstar) finalized its provisional ratings on the Real Estate Secured Line of Credit-Backed Notes, Series 2023-1 (the Notes) issued by Fortified Trust as follows:

-- AAA (sf) on the Real Estate Secured Line of Credit-Backed Class A Notes, Series 2023-1,
-- AA (high) (sf) on the Real Estate Secured Line of Credit-Backed Class B Notes, 2023-1, and
-- A (high) (sf) on the Real Estate Secured Line of Credit-Backed Class C Notes, 2023-1.

The Expected Final Payment Date of the Notes is December 23, 2027.

DBRS Morningstar considered the following factors in its analysis:

(1) The levels of credit enhancement provided by subordination (3.90% and 1.90% for the 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 the excess spread of 1.35% annually (after the swap) are commensurate with the ratings assigned.

(2) The collateral is a diversified pool of 57,852 real estate-secured, line of credit accounts with a pool balance of $3.9 billion, a weighted-average (WA) Limit-to-Value Ratio of 58% and a WA credit score of 814. The pool also benefits from the WA 96 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) The loss levels of the pool and 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 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 indicated 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 of $1,139.2 billion and total equity of $71.0 billion as at October 31, 2022. It is the servicer of the assets in the pool.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

Notes:
The principal methodology applicable to the rating is Rating Canadian Residential Mortgages, Home Equity Lines of Credit and Reverse Mortgages (November 3, 2022; https://www.dbrsmorningstar.com/research/404833).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

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 .

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].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

Operational Risk Assessments for Canadian Structured Finance (December 13, 2022; https://www.dbrsmorningstar.com/research/407358)
Legal Criteria for Canadian Structured Finance (June 22, 2022; https://www.dbrsmorningstar.com/research/398729)

Derivatives Criteria for Canadian Structured Finance (June 22, 2022; https://www.dbrsmorningstar.com/research/398728)

Predictive model: Canadian RMBS Model (Version 5.0.0.3; https://www.dbrsmorningstar.com/models/)
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].