Fitch Affirms NBC's Mortgage Covered Bonds at 'AAA'
NEW YORK -- September 24, 2012
Fitch Ratings has affirmed National Bank of Canada's (NBC; rated 'A+'/'F1'
with a Stable Outlook by Fitch) mortgage covered bonds at 'AAA' with Stable
Outlook following a periodic review of the program.
The rating is based on NBC's Long-term Issuer Default Rating (IDR) of 'A+',
the Discontinuity Cap (D-Cap) of 3 (moderate-high risk) and the program's
contractual asset percentage (AP) of 93.2%, which is below Fitch's 'AAA'
breakeven AP of 93.5%.
In terms of the sensitivity of the covered bonds' rating, the 'AAA' rating
would be expected to be maintained, - all else being equal - even if one of
the following occurred: (i) the IDR was downgraded by one notch to 'A'; or
(ii) the D-Cap fell by one category to 2 (high risk); or (iii) the AP level
Fitch takes into account in its analysis increased up to the breakeven level
As Fitch considers the program to be in wind-down, since new covered bond
legislation prohibits issuance out of programs with insured mortgage assets,
the agency takes only the contractually committed AP into account in its
The D-Cap of 3 (moderate-high risk) is driven by the weakest risk assessment
of the five D-Cap components, which is for the systemic alternative management
component in line with all other Canadian programs. All of the other D-Cap
components are assessed as moderate risk from a discontinuity point of view.
For more details, reference 'Fitch Places BACBI's Covered Bonds on Negative
Watch; Assigns US and Canadian D-Caps & Outlooks' published on Sept. 12, 2012,
and available at www.fitchratings.com.
As of June 30, 2012, the cover pool consisted of 39,175 first-lien, Canada
Mortgage and Housing Corporation (CMHC)-insured residential mortgage loans
totaling CAD3.74 billion with a weighted-average (WA) original loan-to-value
(LTV) of 66.2% (as calculated by Fitch). In an 'AAA' scenario, Fitch has
calculated a cumulative weighted-average frequency of foreclosure (WAFF) of
33.0% and a weighted-average recovery rate (WARR) of 96.5%, which reflects the
benefit of the CMHC insurance on the loans.
If CMHC lost the full backing of the Government of Canada, or if the
Government of Canada's rating suffered a downgrade, Fitch would revise the
credit given to the insurance provided by CMHC on the mortgage loans in the
cover pool. This could lead to weaker liquidity assumed for the mortgage
assets as well as higher credit risk expectations for the cover assets. As a
result, the D-Cap would likely decrease and the AP supporting the current
covered bonds rating would also likely decrease.
The weighted average life (WAL) of the assets in the cover pool is
approximately 2.5 years, compared to the WAL of 3.25 years for the covered
bonds. Interest rate and currency risks on the covered bonds are hedged via
swaps with NBC as counterparty with collateral posting and replacement
provisions in line with Fitch criteria.
The rating action also incorporates a revision of refinancing spread
assumptions, which are used to estimate the stressed sale price for the cover
pool that an alternative manager would liquidate in the aftermath of an issuer
default. The net present value (NPV) of cover pools is determined by
discounting the value of the assets at a rate reflective of the revised
refinancing spreads. The NPV of the assets is consistent with previous
assumptions given the credit loss protection on the assets provided by the
CMHC insurance, which insulates a potential buyer from borrower default in the
event of increasing stress in the housing market.
The outstanding covered bonds total approximately CAD3 billion and are
guaranteed by NBC Covered Bond Guarantor LP, a special purpose company
established for the program with restricted permitted activities.
The Fitch AP in line with 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 issuances. Therefore,
it cannot be assumed to remain stable over time.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings
Applicable Criteria and Related Research:
--'Covered Bonds Rating Criteria' (Sept. 10, 2012);
--'Covered Bonds Counterparty Criteria' (July 25, 2012);
--'Resilogic Mortgage Loss Criteria' (Aug. 10, 2012);
--'Global Criteria for Lenders' Mortgage Insurance in RMBS' (Aug. 3, 2012).
Applicable Criteria and Related Research:
ResiLogic^TM Mortgage Loss Criteria
Covered Bonds Counterparty Criteria
Covered Bonds Rating Criteria - Amended
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PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
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Vanessa Purwin, +1-212-908-0269
One State Street Plaza
New York, NY 10004
Rachel Brach, +1-212-908-0224
Suzanne Mistretta, +1-212-908-0639
Sandro Scenga, New York, +1-212-908-0278
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