DBRS Publishes Updated Methodology “Rating Canadian Covered Bonds”

DBRS has today published an update to its methodology, “Rating Canadian Covered Bonds.” The updated version is based on the similar layout of another DBRS methodology, “Rating European Covered Bonds” (European Methodology).

While the presentation format of the updated version is substantially different from the previous version, the fundamental DBRS rating approach to Canadian covered bonds remains unchanged and based on three building blocks: the issuer rating, the legal and structuring framework (LSF) and the cover pool credit assessment. In addition, DBRS expects Canadian covered bond programs to continue to meet the criteria discussed in the related DBRS methodologies, “Legal Criteria for Canadian Structured Finance” and “Derivatives Criteria for Canadian Structured Finance Transactions.”

The updated version adopts the covered bond rating tables used in the European Methodology, which generally provide more rating uplifts for lower-rated issuers or cover pool assessments. Under a Strong LSF, which is the DBRS assessment for Canadian covered bonds, AAA covered bonds issued by a AA-rated issuer can now be maintained with an “A” cover pool credit assessment (two notches lower than the AA (low) assessment in the previous version). Similarly, AAA covered bonds issued by a AA (low)-rated issuer can now be maintained with a AA (low) cover pool credit assessment (also two notches lower than the AA (high) assessment in the previous version).

As current available overcollateralization levels of all outstanding Canadian covered bond programs are higher than the minimum levels commensurate with a AAA rating, there is no rating impact on outstanding Canadian covered bonds.