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Rating Action:

Moody's assigns provisional Aaa rating to Royal Bank of Canada's Series CB15 covered bonds

Global Credit Research - 12 Jun 2014

Toronto, June 12, 2014 -- Moody's Investors Service has today assigned a provisional (P)Aaa rating to the Series CB15 covered bonds issued by Royal Bank of Canada under the terms of its Global Covered Bond Programme. The series CB15 covered bonds are expected to be denominated in Euro, mature in five years and have a fixed interest rate.

Issuer: Royal Bank of Canada

Series CB15, Assigned (P)Aaa

RATINGS RATIONALE

A covered bond benefits from (1) the issuer's promise to pay interest and principal on the bonds; and (2) following a covered bond (CB) anchor event, the economic benefit of a collateral pool (the cover pool). The ratings therefore reflect the following factors:

(1) The credit strength of Royal Bank of Canada (RBC, deposits rating of Aa3 negative; bank financial strength rating C+/adjusted baseline credit assessment a2 negative, short-term deposit rating of P-1). The covered bonds are obligations of RBC and are also backed by a cover pool consisting of Canadian residential mortgage loans that conform to the eligibility criteria specified in Canada's covered bond legislation and the Canadian Registered Covered Bond Programs Guide (the Guide).

(2) Following a CB anchor event the value of the cover pool. The stressed level of losses on the cover pool assets following a CB anchor event (cover pool losses) for this transaction is 13.79%.

Moody's uses the CB anchor to determine the probability that the issuer will cease to make payments under the covered bonds. The CB anchor for this programme is the deposits rating + 0 notches. Moody's considered the following factors in its analysis of the cover pool's value:

a) The credit quality of the assets backing the covered bonds. The mortgages in the cover pool are high quality, conventional first lien Canadian residential mortgages originated by RBC. The collateral score for the cover pool is 8%. All of the loans have an original LTV of 80% or lower, and no loans are authorized to draw more than 80% of the property value. The current weighted average LTV, based on the amount that the borrowers are authorized to draw is 69%.

b) The program is subject to Canada's covered bond law. The law provides, among other things, protection of the cover pool against claims by creditors of the issuer and regulatory oversight by the Canada Mortgage and Housing Corporation (CMHC).

c) The exposure to market risk, which is 8.36% for this cover pool.

d) The over-collateralisation (OC) in the cover pool is about 41%, of which RBC provides 7.5% on a "committed" basis (see Key Rating Assumptions/Factors, below), corresponding to an asset percentage of 93%.

e) Swaps to mitigate interest rate and currency mismatches; and

f) A twelve-month extension period for soft bullet covered bonds.

The provisional rating that Moody's has assigned addresses the expected loss posed to investors. Moody's ratings address only the credit risks associated with the transaction. Moody's did not address other non-credit risks, but these may have a significant effect on yield to investors.

KEY RATING ASSUMPTIONS/FACTORS

Moody's determines covered bond ratings using a two-step process: an expected loss analysis and a TPI framework analysis.

EXPECTED LOSS: Moody's uses its Covered Bond Model (COBOL) to determine a rating based on the expected loss on the bond. COBOL determines expected loss as (1) a function of the probability that the issuer will cease making payments under the covered bonds (a CB anchor event); and (2) the stressed losses on the cover pool assets following a CB anchor event.

The cover pool losses for RBC's covered bonds are 13.79%. This is an estimate of the losses Moody's currently models following a CB anchor event. Moody's splits cover pool losses between market risk of 8.43% and collateral risk of 5.36%. Market risk measures losses stemming from 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 cover pool assets' credit quality. Moody's derives collateral risk from the collateral score, which for this programme is currently 8%. In addition, we have not received information relating to the deposit account balances held by cover pool borrowers at RBC, which would quantify the degree of potential set-off risk. However, based on the fact that the vast majority of loans in the cover pool contain set-off waivers and our experience with pools of comparable collateral, we believe the set-off risk is not material. Set-off risk is the risk that following an issuer default, a borrower would set-off amounts he owes on his mortgage loan against amounts in his bank accounts held by the issuer exceeding the Canada Deposit Insurance Corporation CAD100,000 limit.

TPI FRAMEWORK: Moody's assigns a TPI, which indicates the likelihood that covered bonds continue to receive timely payments following a CB anchor event. The TPI framework limits the covered bond rating to a certain number of notches above the CB anchor. The TPI assigned to this transaction is Probable.

FACTORS THAT WOULD LEAD TO A DOWNGRADE OF THE RATING:

An issuer downgrade to A1 or below would likely cause a downgrade of the covered bonds unless the issuer chose to commit more overcollateralization by contractually lowering the maximum asset percentage. In order to change the maximum asset percentage the issuer may have to amend the transaction documents. Moody's views the level of committed overcollateralization consistent with the contractual maximum asset percentage, which is currently 93%, and not by the fluctuating asset percentage stated by the issuer in its investor reports.

STRESS SCENARIOS:

The CB anchor is the main determinant of a covered bond rating's robustness. The TPI Leeway measures the number of notches by which Moody's might lower the CB anchor before the rating agency downgrades the covered bonds because of TPI framework constraints.

Based on the current TPI of "Probable", the TPI Leeway for RBC's covered bonds is three notches. This implies that Moody's might downgrade the covered bonds because of a TPI cap, if it lowers RBC's CB anchor, all other variables being equal.

A multiple-notch downgrade of the covered bonds might occur in certain limited circumstances, such as (1) a sovereign downgrade negatively affecting both the CB anchor and the TPI; (2) a multiple-notch lowering of the CB anchor; or (3) a material reduction of the value of the cover pool.

RATING METHODOLOGY

The principal methodology used in this rating was "Moody's Approach to Rating Covered Bonds" published in March 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Moody's describes the stress scenarios it has considered for this rating action in the section "Ratings Rationale" of this press release.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Moody's has not provided advisory services but may have provided Ancillary or Other Permissible Service(s) to the rated entity, its related third parties and/or the party that requested the rating within the past two years (including during the most recently ended fiscal year). Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's credit rating agency in Canada" on the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Raymond Lai
Asst Vice President - Analyst
Structured Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Linda A Stesney
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's assigns provisional Aaa rating to Royal Bank of Canada's Series CB15 covered bonds
No Related Data.
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