Morningstar DBRS Assigns AAA Rating to TD Global Legislative Covered Bonds, Series CBL63

DBRS Limited (Morningstar DBRS) assigned a rating of AAA to the Covered Bonds, Series CBL63 (Series CBL63) issued under The Toronto-Dominion Bank (Global Legislative Covered Bond Programme) (the Programme). Series CBL63 (GBP 1.25 billion) has a coupon rate of Compounded Daily SONIA + 0.67% and a maturity date of January 18, 2027. All covered bonds issued under the Programme (the Covered Bonds) rank pari passu with each other and are currently rated AAA by Morningstar DBRS.

The AAA ratings are based on the following analytical considerations:

-- A Covered Bond Attachment Point of AA (high), which is the Long-Term Senior Debt rating of The Toronto-Dominion Bank (TD). TD is the Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) assessment of Strong associated with the Programme.
-- A Cover Pool Credit Assessment of A (low).
-- An LSF-Implied Likelihood (LSF-L) of AAA.
-- While not currently applicable, based on the recovery notching scale, up to two notches’ uplift from the LSF-L for high recovery prospects is possible.
-- A level of overcollateralization (OC) of 5.3% (based on the Asset Percentage of 95.0% as at November 30, 2023) to which Morningstar DBRS gives credit.

Morningstar DBRS considered the following factors in the analysis described above:

(1) The Covered Bonds are senior unsecured direct-deposit obligations of TD and are excluded from Canada’s bank recapitalization (bail-in) regime.

(2) In addition to a general recourse to TD’s assets, the Covered Bonds are supported by a diversified pool of first-lien conventional Canadian residential mortgages with a maximum loan-to-value (LTV) ratio of 80.0% at origination (the Cover Pool). The Cover Pool was approximately $86.3 billion as at November 30, 2023. The Cover Pool contains only amortizing single-tranche loans; however, future additions may include mortgages with amortizing and nonamortizing revolving multitranche loans secured by the same first lien.

(3) The Covered Bonds benefit from several structural features, such as a reserve fund, when applicable, and rating thresholds for the swap counterparties, servicer, account bank, cash manager, and guaranteed deposit account provider.

(4) Upon a default by TD, the final maturity date on the Covered Bonds can be extended for 12 months, which increases the likelihood that the Covered Bonds can be fully repaid.

(5) There is a specific covered bond legislative framework in Canada. In addition, the contractual obligations of the transaction parties are supported by Canada’s well-developed commercial and bankruptcy laws, the satisfactory opinions provided by legal counsel to TD, and a generally creditor-friendly legal environment in Canada.

Despite these strengths, the ratings on the Covered Bonds could face the following challenges:

(1) A weakened housing market in Canada could result in higher defaults and/or lower recoveries than the assumptions used in the Cover Pool’s credit assessment. This risk is significantly reduced by the home equity available in relation to the portfolio’s weighted-average LTV ratio of 48.2% (based on indexed property value) reported by TD as at November 30, 2023.

(2) TD may need to add mortgages to maintain the Cover Pool, incurring substitution and potential credit deterioration risk. These risks are mitigated by the ongoing monitoring of the Cover Pool to ensure that the OC available is commensurate with the ratings of the Covered Bonds. Based on the latest review of the Cover Pool, Morningstar DBRS considers 3.0% OC, corresponding to the Regulatory OC Minimum, to be commensurate with the AAA ratings.

(3) There is an inherent liquidity gap between the scheduled repayments of the Covered Bonds and the repayment of the underlying mortgage loans over time. This risk is mitigated by OC, the buildup of a reserve fund if TD is not rated at least A (low) or R-1 (middle), and the 12-month maturity extension upon default by TD.

Morningstar DBRS’ “Legal Criteria for Canadian Structured Finance” methodology expects regular swap payments to rank no higher in priority than interest payments on the Covered Bonds. Should interest rate swap payments (excluding termination payments) rank higher in priority than interest payments on the Covered Bonds, Morningstar DBRS will assess the impact at that time and take the appropriate rating action.

TD is one of Canada’s largest banks as measured by assets as at October 31, 2023, with assets of $1,957.0 billion and total equity of $112.1 billion. It is the initial servicer of the mortgages in the Cover Pool.

Morningstar DBRS’ credit ratings on the Covered Bonds addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

Morningstar DBRS’ credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

More details on the Cover Pool and the Programme are provided in the Monthly Canadian Covered Bond Report, which is available on dbrs.morningstar.com or by contacting us at [email protected].

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/416784 (July 4, 2023).

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

The principal methodology applicable to the credit rating is Global Methodology for Rating and Monitoring Covered Bonds (May 8, 2023; https://dbrs.morningstar.com/research/413651).

Other methodologies referenced in this transaction are listed at the end of this press release.

The Morningstar DBRS Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. Morningstar DBRS analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://dbrs.morningstar.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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The last credit rating action on this Programme took place on October 20, 2023, when Morningstar DBRS assigned a rating of AAA to the Covered Bonds, Series CBL62.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Tona Tang, Vice President, Canadian Structured Finance, Global Structured Finance
Rating Committee Chair: Tim O'Neil, Managing Director, Head of Canadian Structured Finance
Initial Rating Date: July 16, 2014

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

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

Operational Risk Assessments for Canadian Structured Finance (April 4, 2023; https://dbrs.morningstar.com/research/412270)

Legal Criteria for Canadian Structured Finance (June 20, 2023; https://dbrs.morningstar.com/research/416101)

Derivatives Criteria for Canadian Structured Finance (June 16, 2023; https://dbrs.morningstar.com/research/415974)

Predictive model: Canadian RMBS Model (Version 5.0.0.3 https://dbrs.morningstar.com/models)

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/410863.

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