Fitch Affirms BMO's Registered Covered Bonds at 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'AAA' rating/Stable Outlook on the Bank of Montreal's (BMO; 'AA-'/'F1+'/Outlook Stable) legislative mortgage covered bonds.
KEY RATING DRIVERS
The 'AAA' rating of BMO's legislative mortgage covered bonds is based on the issuer's 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 93.5% that Fitch takes into account in its analysis, which equal's Fitch's 'AAA' breakeven AP. The Stable Outlook for the covered bonds rating 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 93.5% 'AAA' breakeven AP, corresponding to a breakeven overcollateralization (OC) of 7.0% is driven by the cover pool's credit loss component of 5.0%, followed by the asset disposal loss which increased the OC by 2.4%. The cash flow valuation component leads to an increase in the 'AAA' breakeven OC by 1.2%. The 5.0% 'AAA' credit loss represents the impact on the breakeven OC from the 12.3% weighted average (WA) default rate and the 61.3% 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. Fitch has considered the impact of this clause by modelling an issuer default in each of the first six quarters and before the first benchmark covered bond maturity and determined that the overcollateralization level is sufficient for all possible sale periods under a given rating scenario
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 93.5%.
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.