DBRS Morningstar Finalizes Provisional Rating of AAA on LBC Legislative Covered Bonds, Series CBL1

DBRS Limited (DBRS Morningstar) finalized its provisional rating of AAA on the Covered Bonds, Series CBL1 issued under the Laurentian Bank of Canada (LBC) Legislative Covered Bond Programme (the Programme). Series CBL1 (CAD 250 million) has a coupon rate of 1.603% and a maturity date of May 6, 2026. All covered bonds issued and to be issued under the Programme (the Covered Bonds) rank pari passu with each other.

The AAA rating is based on the following analytical considerations:

-- A Covered Bond Attachment Point of A (low), which is the Long-Term Senior Debt rating of LBC. LBC is the Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) assessment of Strong associated with the Programme.
-- A Cover Pool Credit Assessment of AA (low).
-- An LSF-Implied Likelihood (LSF-L) of AA.
-- A two-notch uplift from the LSF-L for high recovery prospects to achieve the AAA rating. Based on the recovery notching scale, an uplift of up to two notches from the LSF-L is possible.
-- A level of overcollateralization (OC) of 15.5% (based on the Asset Percentage of 86.58% as at May 6, 2021) to which DBRS Morningstar gives credit.

DBRS Morningstar considered the following factors in its analysis described above, each of which includes additional analysis and, where appropriate, adjustments to expected performance assumptions as a result of the global efforts to contain the spread of the Coronavirus Disease (COVID-19). On March 17, 2021, the DBRS Morningstar Sovereigns group published its outlook on the impact on key economic indicators for the 2021–22 time frame, which was updated from the initial outlook that was published on April 16, 2020, and has been updated periodically since. For details, see https://www.dbrsmorningstar.com/research/375376. For the rating assigned, DBRS Morningstar’s analysis considered impacts consistent with the moderate scenario in the referenced commentary.

(1) The Covered Bonds are senior unsecured direct deposit obligations of LBC.

(2) In addition to a general recourse to LBC’s assets, the Covered Bonds are supported by a diversified collateral pool of first-lien conventional Canadian residential mortgages with a maximum loan-to-value (LTV) ratio of 80.0% at origination (the Cover Pool). The Cover Pool was approximately $331 million as at March 31, 2021. The mortgages may have amortizing and nonamortizing revolving loan parts secured by the same first lien. Only the amortizing loan parts are in the Cover Pool.

(3) The Covered Bonds benefit from several structural features, such as a yield supplement fund, excess spread created through the swaps (following a Covered Bond Guarantee Activation Event), a reserve fund (when applicable), and rating thresholds for the swap providers, servicer, account bank, cash manager, and guaranteed investment contract provider.

(4) Upon a default by LBC, the final maturity date on the Covered Bonds can be extended for 12 months, which increases the likelihood that the Covered Bonds can be fully repaid.

(5) There is a specific covered bond legislative framework in Canada. In addition, the contractual obligations of the transaction parties are supported by Canada’s well-developed commercial and bankruptcy laws, the satisfactory opinions provided by legal counsel to LBC, and a generally creditor-friendly legal environment in Canada.

Despite these strengths, the rating on the Covered Bonds could face the following challenges:

(1) A weakened housing market in Canada could result in higher defaults and/or lower recoveries than the assumptions used in the Cover Pool Credit Assessment. This risk is significantly reduced by the home equity available in relation to the Cover Pool’s weighted-average LTV of 65.2% (based on indexed property value) reported by LBC as of February 26, 2021.

(2) LBC may need to add mortgages to maintain the Cover Pool, incurring substitution and potentially credit deterioration risk. These risks are mitigated by the ongoing monitoring of the Cover Pool to ensure the OC available is commensurate with the ratings on the Covered Bonds. Based on the latest review of the Cover Pool, DBRS Morningstar considers 15.5% OC to be commensurate with the AAA rating.

(3) There is an inherent liquidity gap between the scheduled repayments of the Covered Bonds and the repayment of the underlying mortgage loans over time. This risk is mitigated by the OC, the excess spread created through the swaps, the buildup of a reserve fund if LBC is not rated at least A (low) or R-1 (low), and the 12-month maturity extension upon default by LBC.

DBRS Morningstar's “Legal Criteria for Canadian Structured Finance” expects regular swap payments to rank no higher in priority than interest payments on the Covered Bonds. Should interest rate swap payments (excluding termination payments) rank higher in priority than interest payments on the Covered Bonds, DBRS Morningstar will assess the impact at that time and take the appropriate rating action.

LBC is Canada’s seventh-largest bank as measured by assets, with $45.2 billion in assets and $2.4 billion in common equity as of January 31, 2021. LBC is the servicer of the mortgages in the Cover Pool.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating and Monitoring Covered Bonds (April 27, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

More details on the Cover Pool and the Programme are provided in the Monthly Canadian Covered Bond Report, which is available by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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