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09 Mar 2009
Toronto, March 09, 2009 -- Moody's Investors Service announced today that it will assign backed-Aaa
and backed Prime-1 ratings to eligible long- and short-term
debt securities, respectively, that are covered by the Canadian
Lenders Assurance Facility (CLAF), a guarantee program established
by the Canadian government, which is itself rated Aaa / Prime-1.
The outlook on the backed long-term rating will be stable,
consistent with the outlook for the ratings of Canada. The backed-Aaa
and backed Prime-1 ratings that will be assigned to guaranteed
notes are based on the unconditional and irrevocable guarantee from Canada,
which is rated Aaa/Prime-1 with a stable outlook.
The guarantee will be available for eligible senior, unsecured obligations
of eligible institutions, and issued in 2009 with a term to maturity
no less than three months. Eligibility criteria are defined in
the Participation Agreement authored by the Canadian Department of Finance
(and available at its website).
Moody's will assign backed-Aaa with a stable outlook and backed
Prime-1 ratings to CLAF-guaranteed debt securities,
unless issued by an institution itself already rated Aaa/P-1 with
a stable outlook (there are no such institutions in Canada currently).
The maximum term of the guarantee is three years from the issue date.
As such, backed ratings will only be assigned to those guaranteed
instruments with maturities ranging from three months to three years,
with backed Prime-1 ratings assigned to securities with maturities
less than one-year and backed-Aaa ratings assigned to guaranteed
instruments of one to three years.
Ratings will be assigned after Moody's reviews applicable documentation
including the participation agreement, the guarantee certificate,
and the participation limit worksheet. To reflect the stand-alone
credit profile of the issuers, Moody's will maintain the stand-alone
(i.e., non-CLAF) ratings of the rated issuers.
Within the legal framework of the CLAF, the Canadian government
unconditionally and irrevocably undertakes to pay such guaranteed obligations
upon demand, but only after demand has been made of the issuer.
A demand will be valid provided it is made in the form of Schedule 3.1
of the CLAF Guarantee.
A guaranteed obligation under the CLAF includes any principal and accrued
interest that have become due and payable on a scheduled payment date,
at maturity or on default, acceleration, enforcement,
or otherwise on or prior to the expiry date. Thus, the Canadian
government will satisfy its obligation under the CLAF by making scheduled
interest and principal payments under the terms of the guaranteed debt
instrument, and / or by making any payments triggered by events
of default, acceleration, enforcement, or otherwise.
The terms of instruments issued under a CLAF guarantee will determine
whether the government will pay continuing, scheduled interest and
principal payments under its guarantee, or instead, pay an
accelerated amount upon demand.
Moody's also notes that the guarantee includes an Alternative Purchase
Commitment (APC) to cover all draws on the guarantee if delivered to the
guarantor by a beneficiary when an appropriation for this guarantee programme
under the Appropriation Act is not in force. As of March 9,
2009, an appropriation under Appropriation Act pertaining to the
CLAF is not in force. Moody's expects, however,
that such an act will come in force permanently following Royal Assent
for Bill C-10 and a subsequent order-in-council.
While the APC, in Moody's view, adequately addresses
the lack of relevant appropriation authority for the CLAF, the rating
agency also points out that the Canadian government has stated publicly
that the guarantee is payable on demand and, therefore, Moody's
expects any claims to be paid in a timely manner.
In Moody's view, the Canadian government's intent for
the CLAF is clear -- to bolster confidence in the financial system.
Thus, the CLAF provides positive support to the Bank Financial Strength
Ratings of Moody's rated deposit-taking institutions in Canada.
The CLAF should strengthen market confidence in the liquidity of eligible
institutions during the guarantee period. The liquidity positions
of the rated Canadian banks, before the impact of CLAF, are
sound, in Moody's view, supported by the Bank of Canada's
Term Purchase and Resale Agreements (Term PRAs) and the federal government's
Insured Mortgage Purchase Program (IMPP). The Term PRAs provides
the banks access to secured, short-term funding while the
IMPP enables the banks to fund their insured residential mortgages for
five-year terms. The CLAF will further enhance liquidity
in the Canadian banking system, in Moody's view.
The limit of the CLAF programme is a function of the size of the eligible
institution, and Moody's estimates the aggregate CLAF guarantee
could reach $200 billion at the upper end; although the actual
amount guaranteed could be much lower depending on issuer usage.
However, implementation of the CLAF programme does not threaten
the Aaa rating of the Canadian government. The likelihood that
a situation could unfold where a large-scale activation of the
CLAF would materially impair the Canadian government's balance sheet is
sufficiently remote as not to weigh on its Aaa rating. Please see
Moody's 2009 annual report on Canada published January 28,
2009 for more information and analysis on the country's financial
The principal methodologies to be used in rating the rated Canadian deposit-taking
institutions affected by the Canadian Lenders Assurance Facility are "Bank
Financial Strength Ratings: Global Methodology", February
2007, and "Incorporation of Joint-Default Analysis into Moody's
Bank Ratings: A Refined Methodology", March 2007, which
can be found at www.moodys.com in the Credit Policy &
Methodologies directory, in the Ratings Methodologies subdirectory.
Other methodologies and factors that may have been considered in the process
of rating these institutions can also be found in the Credit Policy &
Details of the Canadian Government's Canadian Lenders Assurance Facility
are available at www.fin.gc.ca .
Financial Institutions Group
Moody's Investors Service
Moody's to rate debt covered by Canadian guarantee Aaa/P-1
VP - Senior Credit Officer
Financial Institutions Group
Moody's Canada Inc.
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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