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Fitch Affirms Canadian Imperial Bank of Commerce's Structured Covered Bonds at 'AAA'
April 14, 2017 / 2:35 PM / 8 months ago

Fitch Affirms Canadian Imperial Bank of Commerce's Structured Covered Bonds at 'AAA'

(The following statement was released by the rating agency) NEW YORK, April 14 (Fitch) Fitch Ratings has affirmed Canadian Imperial Bank of Commerce's (CIBC; 'AA-'/Outlook Stable/'F1+') CAD667,740,000 equivalent structured mortgage covered bonds at 'AAA' with a Stable Outlook. KEY RATING DRIVERS The 'AAA' rating of the covered bonds is based on CIBC's Long-Term Issuer Default Rating (IDR) of 'AA-', an IDR uplift of zero notches, a payment continuity uplift (PCU) of five notches and a recovery uplift of one notch. Fitch relies on CIBC's contractual asset percentage (AP) at 95.1%, which provides more protection than the 'AAA' breakeven AP at 95.5%. The 'AAA' breakeven AP supports timely payment in a stress scenario equivalent to 'AA+' and allows for one-notch recovery uplift to 'AAA'. The Stable Outlook reflects a three-notch cushion against downgrade of an issuer's IDR. The 'AAA' breakeven AP is unchanged at 95.5%. The credit loss at 'AA+', which is the rating stress scenario corresponding to the tested rating on a probability of default basis, has increased marginally to 0.4% from 0.3% in 2016's review. The higher credit loss is driven by the default variable introduced in the enhanced Canadian loan loss model to address borrower's refinancing risk upon the contractual maturity, which to a large extent was offset by an improvement in the WA sustainable loan to value ratio to 55.8% (2016: 62.3%) as the cover pool continues to season. The bank advanced resolution regime has not yet been adopted in Canada and therefore the programme's IDR uplift is zero notches. The PCU of five notches reflects the 12 months liquidity protection in place for the hard bullet bonds allowed by the 12-month pre-maturity test with a Short-term IDR trigger of 'F1+' on CIBC and a dynamic reserve to cover three-month senior expenses and interest payment, which will be funded when CIBC is rated below 'A' or 'F1'. The PCU is one notch lower than the registered programmes' to reflect the lack of a provision to repay the demand loan in kind. The demand loan is backed by excess cover pool mortgages that are not needed to pass the asset coverage test (ACT). Should the source of payments switch to the cover pool, the excess mortgages would need to be refinanced in order to repay the demand loan in cash. The demand loan is due from the covered bond guarantor to the issuer and ranks senior to the covered bonds in the priority of payment and therefore could exacerbate the liquidity shortfall. However, the cover pool securing the structured programme consists of mortgages insured by Canada Mortgage and Housing Corporation (CMHC), and Fitch took into account in its analysis the availability of refinancing for CMHC-insured collateral. In addition, the potential cost associated with the sale of insured mortgages to repay the demand loan in cash in the structured programme is not sized for in the 'AAA' breakeven AP given that the issuer is highly rated, at 'AA-'. Should the issuer rating be downgraded in the future, the agency will reassess this risk. The recovery uplift is capped at one notch due to the material downside foreign exchange (FX) risk in a recovery scenario post covered bond default as such risk arises due to the longer weighted average life of the assets compared to the liabilities. CAD denominated cover assets have a longer average life than the covered bonds, which are in other currencies and hedged by FX swaps until the extended maturity date. As such, the FX swaps offer no protection against currency mismatches in a recovery given default scenario following the extension date of the covered bonds. In the cash flow analysis, the agency did not model the impact of a structural feature 'Selected Assets Required Amounts' (SARA) in the program. SARA restricts the amount of assets sale such that the over-collateralisation before and after sale remains constant. In this program, there are two outstanding hard bullet bonds, one matures in June 2017 and another in February 2019. The one due in June 2017 is protected by the 12-month pre-maturity test and therefore the cash flow model assumes the cover pool is enforced post June 2017. As such, only one sale is simulated by the cash flow model and SARA no longer constrains the asset sale. Fitch has also assumed the assets amortise at period one instead of a shift in the asset amortisation profile in the first six quarters and the quarter the last bond is due. This is because the cover bond program is in wind-down and the cover pool is amortizing and not expected to be topped up. RATING SENSITIVITIES The 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) CIBC's IDR is downgraded by four notches or more to 'BBB+' or below; or (ii) the number of notches represented by the IDR uplift, the PCU and the RU is reduced by four notches or more; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven AP. The Fitch breakeven AP for the covered bond rating 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 issuance. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time. Contact: Primary Analyst Kate Lin Director +1-212-908-0757 Fitch Ratings 33 Whitehall Street New York NY 10004 Secondary Analyst Susan Hosterman Director +1-212-908-0670 Committee Chairperson Suzanne Mistretta Senior Director +1-212-908-0639 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email:; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available on Applicable Criteria Canadian Residential Mortgage Rating Criteria (pub. 23 Feb 2017) here Covered Bonds Rating Criteria (pub. 26 Oct 2016) here Criteria for Country Risk in Global Structured Finance and Covered Bonds (pub. 26 Sep 2016) here Fitch's Cover Assets Refinancing Spread Level (RSL) Assumptions - Excel file (pub. 20 Jan 2017) here Fitch’s Foreign-Currency Stress Assumptions for Residual Foreign-Exchange Exposures in Covered Bonds and Structured Finance – Excel File (pub. 26 Oct 2016) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Global Structured Finance Rating Criteria (pub. 27 Jun 2016) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 20 Mar 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 20 Mar 2017) here Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 17 Feb 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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