New York, March 30, 2011 -- Moody's has assigned the definitive long-term rating of Aaa to
the series CB6 covered bonds issued by Royal Bank of Canada (RBC,
rated Aa1, Prime-1) under the terms of its EUR 15 billion
Global Covered Bond Programme.
Issuer: RBC Global Covered Bond Programme
CAD 1.1Billion Series CB6 Due 3/30/2018, Assigned Aaa
RATING RATIONALE
The covered bonds are obligations of RBC and are also backed by a cover
pool consisting of Canadian conventional residential mortgage loans.
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, RBC,
is a Aa1 rated bank, and thus the likelihood of default by the sponsor
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 collateral risk and market risks. Collateral 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. The value of the cover pool. The cover pool is made up
of high quality conventional mortgages originated by RBC
2. 3% committed overcollateralization, corresponding
to a maximum asset percentage of 97%
3. Swaps to mitigate interest rate and currency mismatches
4. A twelve months 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 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 Aa1, and
the stressed losses on the cover pool assets following issuer default.
Moody's splits cover pool losses between losses due to market risk and
losses due to collateral risk. Market risk measures losses as a
result of refinancing risk and risks related to interest rate and currency
mismatches. Collateral risk measures losses resulting directly
from the credit quality of the assets in the cover pool. The Aa1
rating of the bank results in a low probability of issuer default.
In addition, the structural protections, including overcollateralization
and interest rate and currency hedges mitigate this risk of losses on
the cover pool assets.
TPI Framework: Moody's has assigned a "Timely Payment Indicator"
(TPI) of Probable to this programme. Moody's assigns a 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.
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 transactions were Moody's
Rating Approach to Covered Bonds rating methodology published in March
2010. Other methodologies and factors that may have been considered
in the process of rating this issuer can also be found on Moody's website.
In addition, Moody's publishes a weekly summary of structured finance
credit, ratings and methodologies, available to all registered
users of our website, at www.moodys.com/SFQuickCheck
REGULATORY DISCLOSURES
Information Sources used to prepare the credit rating are the following:
parties involved in the ratings, public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory of the purposes 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.
New York
Todd Swanson
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Kruti Muni
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's assigns Aaa rating to Royal Bank of Canada's Canadian dollar-denominated Series CB6 covered bonds
