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TEXT - Fitch says Canadian covered bond rules benefit bondholders
January 10, 2013 / 4:37 PM / 5 years ago

TEXT - Fitch says Canadian covered bond rules benefit bondholders

(The following statement was released by the rating agency)

Jan 10 - Fitch believes new rules governing Canadian covered bonds provide some increased protections for bondholders but are largely a confirmation of existing contractual agreements. On Dec. 17, 2012, Canada Mortgage and Housing Corporation (CMHC) published the Canadian Registered Covered Bond Programs Guide. CMHC is the administrator of the legislative framework that issuers must adhere to register their programs and sets the minimum standards for initial eligibility and ongoing maintenance of registered status. Just after the publication of the guide, the Bank of Canada (BOC) announced that Canadian dollar-denominated covered bonds would be accepted as collateral under its Standing Liquidity Facility (SLF). In our view, the guide’s requirement, when calculating the asset coverage test, is likely to protect bondholders in a declining home price environment. The guide requires property values to be indexed and caps credit for mortgage loans in cover pools at 80% of the indexed value when making this calculation. This effectively increases nominal overcollateralization (OC) levels when house prices fall. Unlike statutory requirements in some other legislative jurisdictions, the guide does not dictate a minimum level of OC that must be maintained. Instead they are set by the issuer, taking into account any applicable limits imposed by the primary regulator or other supervisory authority. However, bondholders are likely to have the benefit of ample OC amounts, since break-even OC levels supporting high covered bond ratings are often well above contractual floors. The guide also takes other positive steps, though it leaves room for further enhancements. It improves reporting requirements by including multidimensional loan attribute distributions for cover pools. But the availability of historical performance data remains extremely limited. We plan to continue to rely on issuers for static pool data on delinquencies and defaults while assessing credit risk and may apply conservative assumptions if that data are not available. While potentially beneficial to Canadian investors in domestic covered bond issuances, the BOC announcement does not aid the liquidity of the conventional mortgages eligible to serve as cover pool collateral under registered programs. As issuers cannot pledge their own covered bonds to the SLF, the BOC discount rates on covered bonds would not serve as an appropriate reference point for another bank buyer that would look to finance a portfolio purchase via covered bonds. For this reason, Fitch will need to consider unsecured debt spreads and other pricing information in its liquidation pricing assumptions. (Caryn Trokie, New York Ratings Unit)

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