DBRS Assigns Provisional Rating of AAA to TD Legislative Covered Bonds, Series CBL1

DBRS has today assigned a provisional rating of AAA to the Covered Bonds, Series CBL1 (the Covered Bonds) to be issued under The Toronto-Dominion Bank (TD) Global Legislative Covered Bond Programme (the Programme). The Programme was established after the enactment of the covered bond legislation in Canada and the guide issued by the Canada Mortgage and Housing Corporation. All covered bonds issued and to be issued under the Programme rank pari passu with each other.

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

The AAA rating is based on several factors:

(1) The Covered Bonds are senior, unsecured, direct deposit obligations of TD, which is the largest bank in Canada by assets and rated AA and R-1 (high) by DBRS.

(2) In addition to a general recourse to TD’s assets, the Covered Bonds are supported by a diversified pool of first-lien, conventional Canadian residential mortgages with a maximum loan-to-value (LTV) of 80% at origination (the Cover Pool). The Cover Pool was approximately $8.1 billion as of June 27, 2014. The initial cover pool contains only amortizing, single-tranche loans; however, future additions may include mortgages with amortizing and non-amortizing, revolving multi-tranche loans secured by the same first lien.

(3) The Covered Bonds benefit from several structural features, such as a reserve fund, when applicable, and rating thresholds for the swap counterparties, servicer, account bank, cash manager and GDA provider.

(4) Upon a default by TD, the final maturity date on the Series CBL1 Covered Bonds can be extended for 12 months, which increases the likelihood that the Covered Bonds can be fully repaid.

(5) There is a specific covered bond legislative framework in Canada. In addition, the contractual obligations of the transaction parties are supported by Canada’s well-developed commercial and bankruptcy laws, the satisfactory opinions provided by legal counsel to TD and a generally creditor-friendly legal environment in Canada.

Despite the above strengths, the Covered Bonds could face the following challenges:

(1) A weakened housing market in Canada could result in higher defaults and/or lower recoveries than the assumptions used for credit loss assessment. This risk is significantly reduced by the home equity available in relation to the portfolio weighted-average LTV of 68.3% as of June 27, 2014.

(2) TD may need to add mortgages to maintain the Cover Pool, incurring substitution and potential credit deterioration risk. These risks are mitigated by the ongoing monitoring of the Cover Pool to ensure the overcollateralization (OC) available is commensurate with the AAA rating of the Covered Bonds. Based on the latest review of the Cover Pool and the application of DBRS’s market value spread, DBRS considers 5.0% OC sufficient for a AAA rating, based on the latest cover pool assessment and current AA Issuer Rating of TD.

(3) The AAA rating on the Covered Bonds would not be maintained should the Issuer Rating of TD be downgraded below AA (low), as 5.0% OC only marginally reduces TD covered bond rating volatility compared with other Canadian covered bond programs. This risk is mitigated by the ability of TD to increase the OC for the Programme to reduce potential negative rating impact on the Covered Bonds.

(4) There is an inherent liquidity gap between the scheduled repayments of the Covered Bonds and the repayment of underlying mortgage loans over time. This risk is mitigated by the OC, the buildup of a reserve fund if TD is not rated at least A (low) or R-1 (middle) and the 12-month maturity extension upon default by TD.

DBRS's legal criteria expects regular swap payments to rank no higher in priority than interest payments on the Covered Bonds. Should interest rate swap payments (excluding termination payments) rank higher in priority than interest payments on the Covered Bonds, DBRS will assess the impact at that time and take appropriate rating action.

TD is Canada’s largest bank as measured by assets as at April 30, 2014, with assets of $896.5 billion and $53.8 billion in common equity. It is the initial servicer of the mortgages in the Cover Pool.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology applicable is Rating Canadian Covered Bonds, which can be found on www.dbrs.com.

The sources of information used for this rating include loan-level data provided by TD. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

More details on the Cover Pool and the Programme are provided in the Monthly Canadian Covered Bond Report, which is available by clicking on the link under Related Research or by contacting us at info@dbrs.com.