News Column

Fitch Assigns 'AAA'(EXP) Rating to BMO's Inaugural Global Registered Covered Bonds

April 28, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA'(EXP) rating with Stable Outlook to Bank of Montreal (BMO; 'AA-'/Outlook Stable/'F1+') inaugural series of global registered covered bonds issued under its newly established legislative program. Fitch's expected rating takes into account a hypothetical EUR-denominated jumbo issuance with a soft bullet maturity of up to seven years.

KEY RATING DRIVERS

Rating Rationale: The expected 'AAA' rating on BMO's legislative mortgage covered bonds is based on BMO's long-term Issuer Default Rating (IDR) of 'AA-', a Discontinuity Cap (D-Cap) of 3 (Moderate High Risk) and an asset percentage (AP) expected to be in line with Fitch's 'AAA' breakeven level of 93.5%.

Alternative Management Drives D-Cap: The D-Cap of 3 (moderate-high risk) is driven by Fitch's assessment of systemic alternative management which reflects the significant roles being performed post issuer default by the trustee, acting on behalf of the guarantor, which 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.

Cover Pool Credit Risk: The greatest contributor to the 'AAA' breakeven AP of 93.5% is the expected loss on the mortgage loans included in the initial cover pool. As of March 2014, the pool consisted of 42,424 first lien residential mortgage loans totaling CAD8.3 billion. It had a weighted average (WA) original combined loan-to-value (LTV) of 69.7%, a non-zero WA credit score of 751 and was primarily concentrated in Ontario (44%).

In an 'AAA' scenario, Fitch calculated a cumulative WA probability of default (PD) of 14.1%, a WA recovery rate (RR) of 55.2% and a WA expected loss of 7.8%, which incorporates an additional 1.4% loss attributable to interest accrued on defaulted loans from initial delinquency through liquidation.

RATING SENSITIVITIES

BMO's covered bonds' rating would be vulnerable to a downgrade if: BMO's IDR were to be downgraded to 'AA-' or lower; the D-Cap fell by at least two categories to 1 (very high risk); or the program's contractual AP increased above 93.5%.

Fitch breakeven AP for a given covered bonds' ratings will be affected, among others, by 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 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Covered Bonds Rating Criteria' (March 10, 2014);

--'Counterparty Criteria for Structured Finance and Covered Bonds ' (May 13, 2013);

--'Covered Bond Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum' (June 3, 2013);

--'Canadian Residential Mortgage Loan Loss Model Criteria' (May 15, 2013).

Applicable Criteria and Related Research: Bank of Montreal

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744701

Covered Bonds Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=738975

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707155

Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709665

Canadian Residential Mortgage Loan Loss Model

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708242

Additional Disclosure

Solicitation Status

https://www.fitchratings.com/creditdesk/press_releases/null/gws/en/disclosure/solicitation?pr_id=827866

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Vanessa Purwin

Senior Director

+1-212-908-0269

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

Roger Lin

Director

+1-212-908-0778

or

Committee Chairperson

Suzanne Mistretta

Senior Director

+1-212-908-0639

or

Media Relations

Sandro Scenga, New York, +1 212-908-0278

sandro.scenga@fitchratings.com

Source: Fitch Ratings


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