DBRS Assigns Provisional Rating of AAA to BMO Covered Bonds

DBRS has today assigned a provisional rating of AAA to the proposed Bank of Montreal (BMO) Global Covered Bond Programme, Series [1] (the Covered Bonds).

The finalization of the ratings is contingent upon receipt of final documents conforming to information already received.

The rating is based on several factors. First, the Covered Bonds are senior unsecured direct obligations of BMO, rated AA and R-1 (high) by DBRS. Second, in addition to a general recourse to BMO’s assets, the Covered Bonds are supported by a diversified collateral pool of first-lien prime conventional (uninsured) and insured residential mortgages in Canada. Third, the Covered Bonds benefit from several structural features, such as a reserve fund, when applicable, and a minimum rating requirement for swap counterparties, servicer and cash manager. Fourth, the underlying collateral originated by BMO is of a high credit quality with a low credit loss historically. And, lastly, the final maturity date on the Covered Bonds can be extended for an additional 12 months, if required, which increases the likelihood that the Covered Bonds can be fully repaid.

Despite the above strengths, the Covered Bonds have the following challenges. First, a weakened housing market in Canada could result in higher losses and lower recovery rates than those used for credit enhancement determinations. This is mitigated by the home equity available in conventional mortgages and conservative underlying asset values for all mortgages. Second, BMO may be required to add mortgages to maintain the collateral pool, incurring substitution and potentially credit deterioration risk. These risks are mitigated by the ongoing monitoring of the underlying assets to ensure the overcollateralization available is commensurate with the AAA rating assigned. Third, there is a liquidity gap between the scheduled payment of the Covered Bonds and the repayment of underlying mortgage loans over time. This risk is mitigated by the overcollateralized collateral pool through the monitoring of asset coverage and amortization tests, the build-up of a reserve fund if BMO’s rating falls below A (low) or R-1 (middle), and the extendible maturity date for an additional 12 months, if required. And lastly, there is no specific covered bond legislative framework in Canada, unlike in many European countries. This is mitigated by the contractual obligations of the transaction parties, supported by the opinions to be provided by legal counsel to BMO and a generally creditor-friendly legal environment in Canada.

BMO is one of Canada’s five largest banks with assets of $366.5 billion and $14.1 billion in common equity as at October 31, 2007. It acts as the servicer of the mortgages in the Portfolio.

Note:
All figures are in Canadian dollars unless otherwise noted.

Media contact
Patrick Evans
Citigate Dewe Rogerson, London
+44 (0) 20 7638 9571
patrick.evans@citigatedr.co.uk