Fitch Assigns Final 'AAA' Rating to RBC's Series CB10 Registered Mortgage Covered Bond

Business Wire

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a final 'AAA' rating with Stable Outlook to Royal Bank of Canada's (RBC; 'AA'/'F1+', Stable Outlook) series CB10 USD-1.75 billion three-year soft bullet mortgage covered bonds. Series CB10 is RBC's first registered covered bond issuance following the registration of its program earlier this month with the Canada Mortgage and Housing Corporation (CMHC).

The issuance re-opened the Canadian covered bond market which had been dormant since the CMHC's December 2012 release of its guide for registered programs established under the new legislative framework.

Changes to RBC's program to comply with the terms of the legislation include provisions for a security sharing agreement for the multi-component mortgages pledged to the cover pool confirming the guarantor's interest in the underlying security and priority of loan proceeds ahead of other creditors, the monthly performance of a market value calculation, and the disclosure of cover pool attributes on a multi-dimensional basis, among others. RBC's program now also provides for repayment of the demand loan in kind in the event assets cannot be sold at par in order to mitigate any potential strain on liquidity post issuer default.

KEY RATING DRIVERS

The rating of RBC's mortgage covered bonds is based on the issuer's Long-term Issuer Default Rating (IDR) of 'AA', Fitch Discontinuity Cap (D-Cap) of 3 (moderate high risk) and the program's contractual asset percentage (AP) of 91.1%, which provides more protection than Fitch's 'AAA' breakeven AP of 95%. The contractual AP is sufficient to support the rating on an 'AAA' probability of default (PD) basis.

As of June 2013, CAD-equivalent 10.6 billion soft bullet bonds were outstanding under the program. They are secured by a CAD18.9 billion cover pool consisting of uninsured Canadian residential mortgages. Fitch's 'AAA' breakeven AP is driven by a weighted average (WA) PD of 14.9% and a WA recovery rate (RR) of 68.1% on the cover pool in an 'AAA' scenario. The assets have a WA residual maturity of approximately 2.4 years while the covered bonds, including series CB10, have a WA residual maturity of 3.7 years.

RATING SENSITIVITIES

RBC's covered bonds' rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by four notches to 'A-', or (ii) the AP that Fitch takes into account in its analysis exceeded 95%. The covered bonds' rating could be maintained even if the D-Cap was reduced to 0 (full discontinuity), subject to a satisfactory level of AP, given the issuer's current IDR of 'AA' which enables the bonds to reach 'AAA' taking only recoveries into account.

Fitch breakeven AP for a given covered bond's 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.

A full rating report is available on Fitch's website at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Covered Bonds Rating Criteria' (Sept. 10, 2012);

--'Counterparty Criteria for Structured Finance and Covered Bonds ' (May 13, 2013);

--'Covered Bonds 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:

Canadian Residential Mortgage Loan Loss Model

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708242

Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709665

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707155

Covered Bonds Rating Criteria - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688092

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=797448

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