KEY RATING DRIVERS
The rating is based on
The 93% 'AAA' breakeven AP, corresponding to a breakeven overcollateralization (OC) of 7.5% is driven by the cover pool's credit loss of 7.9% in an 'AAA' scenario, followed by the asset disposal loss component of 3.8% due to the refinancing spreads applied. The cash flow valuation component leads to a lower 'AAA' breakeven OC by 1.6% primarily due to the short weighted average life of the mortgages, generally three to five years, which results in a high value for the cover pool.
For this rating that considers both an uplift on a probability of default basis and for recoveries given default, the asset disposal loss component is in line with the rating scenario that is tested for timely payments (i.e. 'AA' scenario on a probability of default [PD] basis), while the other breakeven OC components represent 'AAA' stresses. This, plus Fitch's testing for at least 91% recoveries rather than 100% to assign 2-notches credit for recoveries given default, is why the sum of the breakeven OC drivers is higher than
The 7.9% 'AAA' credit loss represents the impact on the breakeven OC from the 16.03% weighted average default rate and the 54.14% weighted average recovery rate for the mortgage cover assets. As of
The unchanged D-Cap of 3 is due to the weak-link assessment of systemic alternative management as moderate high risk, which is consistent across all Canadian covered bond programs. Fitch has revised the assessment of the liquidity gap and systemic risk component of
Since bail-in is not an explicit provision under the current Canadian framework, in Fitch's view, the IDR remains a satisfactory indicator of the likelihood that the recourse against the cover pool would be enforced, and no IDR uplift is applicable.
Fitch takes into account the contractual AP maintained in the program, since amounts in excess of the contractual commitment are secured back to
The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by three or more notches to 'A-' or below; or (ii) the number of notches represented by the D-Cap is reduced to 0; or (iii) the AP that Fitch considers in its analysis increases above Fitch's '[CVB Rating]' breakeven level of 93%.
The Fitch breakeven AP for the covered bond rating 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 issuance. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.
More details on the portfolio and Fitch's analysis will be available in a credit update report, which will be available shortly at www.fitchratings.com.
In the report Breaking Down Breakeven Overcollateralisation, published 8
Additional information is available at 'www.fitchratings.com'.
Covered Bonds Rating Criteria (
Counterparty Criteria for Structured Finance and Covered Bonds (
Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (
Covered Bonds Rating Criteria - Mortgage Liquidity and Refinancing Stress Addendum (
Canadian Residential Mortgage Loan Loss Model Criteria (
Canadian Residential Mortgage Loan Loss Model
Covered Bonds Rating Criteria - Mortgage Liquidity and Refinancing Stress Addendum
Counterparty Criteria for Structured Finance and Covered Bonds
Covered Bonds Rating Criteria
Source: Fitch Ratings
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