Fitch Ratings has assigned an 'AAA(EXP)' rating with Stable Outlook to National Bank of Canada's ( NBC , 'A+'/F1', Stable Outlook) inaugural series of registered covered bonds issued under its newly established legislative program. Fitch's expected rating takes into account a EUR-denominated jumbo issuance with a soft bullet maturity of up five years. KEY RATING DRIVERS The rating of NBC's mortgage covered bonds is based on the issuer's Long-term Issuer Default Rating (IDR) of 'A+', Fitch Discontinuity-Cap (D-Cap) of 3 (moderate high risk) and the program's contractual asset percentage (AP) which is expected to be in line with Fitch's 'AAA' breakeven AP of 91.7 percent. The program D-Cap is driven by Fitch's moderate high risk assessment of the systemic alternative management component of its discontinuity analysis which is due to the significant roles performed post issuer default by the guarantor, or third parties acting on its behalf. The guarantor would likely seek bondholder approval for major decisions and need to contract other parties to perform important functions. This assessment is consistent across all Canadian mortgage covered bond programs. All other D-Cap components have been assessed as moderate risk. The inaugural covered bonds are expected to be secured by a cover pool drawn from an initial indicative portfolio consisting of 35,271 uninsured Canadian residential mortgages totaling approximately CAD5.5 billion . The portfolio had a weighted average (WA) original combined loan-to-value (LTV) of 70.3 percent, a non-zero WA credit score of 733, and was roughly 26 months seasoned, with a large percentage of loans concentrated in Quebec (61 percent) as of June 2013 . Fitch's 'AAA' breakeven AP of 90 percent is driven by a WA probability of default of 22.23 percent and a WA recovery rate of 57.8 percent on the cover pool in an 'AAA' scenario. The assets have a WA residual maturity of approximately 2.4 years while the first series of covered bonds are expected to have a WA residual maturity of up to seven years. RATING SENSITIVITIES NBC's covered bonds' rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by two notches to 'A-'; (ii) the D-Cap fell by two categories to 1 (very high risk); or (iii) the program's contractual AP that Fitch takes into account in its analysis exceeded 91.7 percent. Fitch's breakeven AP for a given covered bonds' ratings will be affected by, among others, the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore it cannot be assumed to remain stable over time. Additional information is available at 'fitchratings.com '. Applicable Criteria and Related Research : --'Covered Bonds Rating Criteria' (Sept. 4,); --'Counterparty Criteria for Structured Finance and Covered Bonds ' (May 13,); --'Covered Bond Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum' (June 3,); --'Canadian Residential Mortgage Loan Loss Model Criteria' (May 15,). Applicable Criteria and Related Research : National Bank of Canada (Legislative Mortgage Covered Bonds) http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=726315 Counterparty Criteria for Structured Finance and Covered Bonds http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=707155 Covered Bonds Rating Criteria http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=717321 Canadian Residential Mortgage Loan Loss Model http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=708242 Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=709665 Additional Disclosure Solicitation Status http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=811077 ((Comments on this story may be sent to email@example.com ))
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