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Fitch: Credit Loss Key Drivers of Canadian Legislative Covered Bond Programs
June 12, 2017 / 2:59 PM / 6 months ago

Fitch: Credit Loss Key Drivers of Canadian Legislative Covered Bond Programs

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Canadian Legislative Covered Bonds: Peer Review here NEW YORK, June 12 (Fitch) Fitch Ratings has published a peer review report for the six Canadian legislative mortgage covered bonds programs rated by the agency. The 'AAA' breakeven asset percentage (AP) of the six Canadian legislative mortgage covered bonds programs on average has declined to 92.2% from 93.3% following the review based on updates to Fitch's 'Covered Bond Rating Criteria' (October 2016) and 'Canadian Residential Mortgage Rating Criteria' (February 2017). No ratings are affected since the AP relied upon for each program provides support to the updated 'AAA' breakeven APs. The lower 'AAA' breakeven APs are generally driven by a higher credit loss at the tested rating on a probability of default scenario. The higher credit loss reflects a new adjustment added to Fitch's mortgage analysis to reflect borrower refinancing risk upon the loans' contractual maturity and a higher portion of newly originated loans in the cover pool versus the 2016 review. The impact on each cover pool varies and depends on the proportion of unseasoned mortgages in the pool. Apart from a higher credit loss, the 'AAA' breakeven AP for one program is also affected by a higher asset disposal loss due to a concentrated liability profile with 68% of the bonds maturing within 12 months of each other. The rating cushion of the covered bond rating against a downgrade of the Issuer Default Rating (IDR) of the issuer has increased to 4.5 notches on average (former criteria: two notches) as a result of a higher rating uplift afforded by the payment continuity uplift of six notches. However, the cushion between the committed AP and the 'AAA' breakeven AP is limited in general. Three out of six programs have no AP cushion. As a result, the covered bond ratings are more sensitive to an adverse change in the 'AAA' breakeven AP than the downgrade of an IDR. The forthcoming Canadian advanced bank resolution regime is generally positive to the covered bond programs in Canada. Currently, no Canadian covered bond programs enjoy an IDR uplift because the final rules of the Canadian advanced bank resolution regime is yet to be finalized. Should the final rules confirm that covered bonds are exempt from bail-in, and Fitch views the cover pool as unlikely to be enforced at the point of an issuer resolution; the risk of covered bond under-collateralization is low; and the IDR is not support driven, Fitch could assign an IDR uplift of up to two notches to the covered bond programs for issuers subject to the bail-in regime. Should an IDR uplift of two notches be assigned, the 'AAA' breakeven AP could potentially increase to the legal maximum AP for issuers rated at least 'AA-'. The report, Canadian Legislative Covered Bonds Peer Review is available at or by clicking on the link above. Contact: Kate Lin Director +1-212-908-0757 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Susan Hosterman Director +1-212-908-0670 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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