Fitch Assigns 'AAA(EXP)' Rating to NBC's Inaugural Legislative Mortgage
NEW YORK -- December 9, 2013
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%.
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%, a
non-zero WA credit score of 733, and was roughly 26 months seasoned, with a
large percentage of loans concentrated in Quebec (61%) as of June 2013.
Fitch's 'AAA' breakeven AP of 90% is driven by a WA probability of default of
22.23% and a WA recovery rate of 57.8% 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.
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%.
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 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Covered Bonds Rating Criteria' (Sept. 4, 2013);
--'Counterparty Criteria for Structured Finance and Covered Bonds ' (May 13,
--'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: National Bank of Canada (Legislative
Mortgage Covered Bonds)
Counterparty Criteria for Structured Finance and Covered Bonds
Covered Bonds Rating Criteria
Canadian Residential Mortgage Loan Loss Model
Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress
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Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Brian Bertsch, New York, +1 212-908-0549
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