Toronto, January 24, 2011 -- Moody's has assigned the provisional long-term rating of (P)Aaa
to the U.S. dollar-denominated Series CB9 covered
bonds to be issued by Canadian Imperial Bank of Commerce (CIBC,
rated Aa2, Prime-1) under the terms of its EUR 10 billion
Global Public Sector Covered Bond Programme.
Issuer: CIBC, issuance through Global Public Sector Covered
Bond Programme
Public Sector Series CB9 , Assigned (P)Aaa
RATING RATIONALE
The covered bonds are obligations of CIBC and are also backed by a cover
pool consisting of Canadian residential mortgage loans insured by the
Canada Mortgage and Housing Corporation (CMHC, rated Aaa,
Prime-1), CMHC insured NHA MBS and eligible substitute assets.
Since the covered bondholders first have recourse to the issuer,
we assume that the issuer will continue to make all payments due to covered
bond holders while it remains solvent. We use the senior unsecured
debt rating of the issuer as a means to determine the likelihood of default
for a typical covered bond. The issuing bank, CIBC,
is a bank with a long term rating of Aa2, and thus the likelihood
of default by the issuer is very low.
Additionally, we analyze the cover pool to determine the potential
severity of loss on the covered bonds in the event that investors need
to rely on the cover pool to generate payments on the bonds after an issuer
default. Our analysis of losses on the cover pool focuses on losses
due to credit risk and market risks. Credit risk is the risk of
actual losses due to asset defaults. The market risks that can
arise are due to currency and interest rate mismatches between the cover
pool assets and the covered bonds, as well as refinance risk.
Refinance risk arises due to the fact that there is typically a maturity
mismatch between the assets in the cover pool and the covered bonds,
which necessitates a sale of all or a part of the cover pool in order
to pay off a maturing series of covered bonds. This sale could
result in a discounted price on the assets being sold.
The structure of this programme addresses cover pool losses with the following
attributes:
1. Cover pool assets: Each mortgage loan in the cover pool
is required to be insured by the Canada Mortgage and Housing Corporation
(CMHC, rated Aaa, P-1), a Canadian federal Crown
corporation, wholly owned by the Government of Canada, whose
obligations carry the full faith and credit of the Government of Canada.
CMHC insurance covers the principal balance of the loan and up to 12 months
of accrued and unpaid interest in full. CMHC insurance not only
strengthens the credit quality of the loans, but also should improve
their liquidity in the event they need to be sold.
2. Overcollateralization
3. Swaps to mitigate interest rate and currency mismatches
4. A twelve month extension period for soft bullet covered bonds
and a "Pre-Maturity Test" designed to require the buildup
of sufficient liquidity to pay off any series of covered bonds that mature
within 12 months if the short term rating of the issuer drops below Prime-1
for hard bullet covered bonds
Moody's rating addresses the expected loss posed to investors.
Moody's rating addresses only the credit risks associated with the transaction;
non-credit risks have not been addressed, but may have a
significant effect on the yield to investors.
KEY RATING ASSUMPTIONS/FACTORS
Moody's determines its covered bond ratings by applying a two-step
process: an expected loss analysis and a TPI framework analysis.
EXPECTED LOSS
Moody's determines a rating based on the expected loss on the bond.
The primary model used is Moody's Covered Bond Model (COBOL) which
determines expected loss as a function of the issuer's probability
of default, measured by its rating of Aa2, and the stressed
losses on the cover pool assets following issuer default. As a
result, the provisional ratings for the Series CB9 covered bonds
and the existing series of covered bonds is (P)Aaa.
The cover pool losses for this programme are 9.07%.
This is an estimate of the losses Moody's currently models in the
event of issuer default. Moody's splits cover pool losses
between losses due to market risk of 8.57% and collateral
risk of 0.50%. Market risk measures losses as a result
of refinancing risk and risks related to interest rate and currency mismatches
(these losses may also include certain legal risks). Collateral
risk measures losses resulting directly from the credit quality of the
assets in the cover pool. Collateral risk is derived from Moody's
Collateral Score which is currently 0.50% for this programme.
The low level of credit risk on the CMHC insured mortgages primarily drives
the low Collateral Score.
TPI Framework: Moody's assigns a "timely payment indicator"
(TPI) which indicates the likelihood that covered bondholders will receive
timely payments following issuer default. The effect of the TPI
framework is to limit the covered bond rating to a certain number of notches
above the issuer's rating. Moody's has assigned a TPI
of Probable to this programme.
SENSITIVITY ANALYSIS
The robustness of a covered bond rating largely depends on the credit
strength of the issuer. The number of notches by which the issuer's
rating may be downgraded before the covered bonds are downgraded under
the TPI framework is measured by the TPI Leeway. Based on the current
TPI of Probable, the TPI Leeway for this programme is 4 notches,
meaning that the covered bonds could no longer maintain a Aaa rating if
the issuer's rating were downgraded to Baa1 .
RATING METHODOLOGY
The principal methodology used in rating this transaction was Moody's
Rating Approach to Covered Bonds rating methodology published in March
2010.
In addition, Moody's publishes a weekly summary of structured finance
credit, ratings and methodologies, available to all registered
users of our website, at http://www.moodys.com/SFQuickCheck
REGULATORY DISCLOSURES
Information Sources used to prepare the credit rating are the following:
parties involved in the ratings and public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purpose of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Toronto
Karandeep Bains
Asst Vice President - Analyst
Structured Finance Group
Moody's Canada Inc.
(416) 214-1635
New York
Linda Stesney
MD - Structured Finance
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Canada Inc.
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Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635
Moody's Assigns (P)Aaa Rating to CIBC's Series CB9 $USD-denominated Covered Bonds
