Fitch Affirms BMO's Structured Covered Bonds at 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'AAA' rating on the Bank of Montreal (BMO; rated
'AA-'/'F1+'/Outlook Stable) structured mortgage covered bonds. The Rating Outlook is Stable.
BMO's structured program remains in wind-down following the introduction of covered bond legislation in 2012 which prohibits issuance of covered bonds secured by insured mortgages. The outstanding bond in this program is due to mature in January 2017.
KEY RATING DRIVERS
The 'AAA' rating of BMO's structured mortgage covered bonds is based on the issuer's Long-Term Issuer Default Rating (IDR) of 'AA-', Fitch's unchanged Discontinuity Cap (D-Cap) of 3 (moderate high risk), and the program's contractual asset percentage (AP) of 95.0% that Fitch takes into account in its analysis, which is equal to Fitch's 'AAA' breakeven AP of 95%. The Stable Outlook for the covered bonds is due to the Stable Outlook on the Canadian sovereign and on BMO's IDR. 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.
The 95% 'AAA' breakeven AP, corresponding to a breakeven overcollateralization (OC) of 5.3% is driven by the cover pool's asset disposal loss of 5.3% followed by the credit loss which increased the OC by .4%. The cash flow valuation component leads to a decrease in the 'AAA' breakeven OC by .3%. The .41% 'AAA' credit loss represents the impact on the breakeven OC from the 11.75% weighted average (WA) default rate and the 96.5% WA average recovery rate for the mortgage cover assets. The breakeven AP considers whether timely payments are met in an 'AA' scenario and tests for recoveries given default of at least 91% in an 'AAA' scenario, this is why the sum of the breakeven OC drivers is higher than BMO's 'AAA' breakeven OC.
Canadian covered bond program documents include a feature called the Selected Assets Required Amount (SARA) clause, which places some conditions on the sale of assets in the event of an issuer default. Due to the fact that there is only one bond outstanding and the program is in wind-down, Fitch has not considered the impact of the SARA clause. Rather, Fitch modelled an issuer default in the remaining two quarters and before the final covered bond's maturity and determined that the overcollateralization level is sufficient for all possible sale periods under a given rating scenario.
The following criteria variations were applied during the analysis of this program. Fitch utilized the Canadian Residential Mortgage Loan Loss Model Criteria for the asset analysis of the BMO structured covered pool and assumed that the defaults on the assets occurred in the first year.
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 'AAA' breakeven level of 95%.
The Fitch breakeven AP for the covered bond rating will be affected, amongst 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.