DBRS Assigns Provisional Rating of AAA to CIBC Covered Bonds

DBRS has today assigned a provisional rating of AAA to the proposed Canadian Imperial Bank of Commerce (CIBC) Global Public Sector 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 CIBC, rated AA and R-1 (high) by DBRS. Second, in addition to a general recourse to CIBC’s assets, the Covered Bonds are supported by a diversified collateral pool of first-lien prime credit Canada Mortgage & Housing Corp. (CMHC) insured residential mortgages in Canada. Third, CMHC is an agency of the Canadian government and acts as agent for Her Majesty in Right of Canada, rated AAA by DBRS. Fourth, 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. And, lastly, either 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, or a pre-maturity test for fund accumulation based on CIBC’s rating will exist if hard-bullet Covered Bonds are issued.

Despite the above strengths, the Covered Bonds have the following challenges:

(1) 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 mortgage insurance provided by AAA-rated CMHC.

(2)CIBC may be required to add mortgages to maintain the collateral pool, incurring substitution and potential 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 and by the mortgage insurance provided by CMHC.

(3)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 the asset coverage test and amortization test, the buildup of a reserve fund if CIBC’s rating falls below A (low) or R-1 (middle) and either the extendible maturity date for an additional 12 months, if required, or the funding of pre-maturity liquidity if hard-bullet Covered Bonds are issued.

(4) 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 CIBC and a generally creditor-friendly legal environment in Canada.

CIBC is Canada’s fifth largest bank with assets of $343.1 billion and $11.0 billion in common equity as at April 30, 2008. It is also the initial servicer of the mortgages in the Portfolio.

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

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.

Media contact
Caroline Creighton
Senior Vice President – Communications
+1 416 597 7317
ccreighton@dbrs.com