BMO Global Registered Covered Bond Series CBL29 is AAA rated by DBRS Morningstar

DBRS Limited (DBRS Morningstar) assigned a rating of AAA covered bonds, series CBL29 (series CBL29) issued under the Bank of Montreal (Global Registered Covered Bond Program) (the Program).

Series CBL29 covered bonds (USD 2.5 billion) have a coupon rate of 3.750% and a maturity date of July 25, 2025. All covered bonds issued under the Program (the Covered Bonds) rank pari passu with each other and are currently rated AAA by DBRS Morningstar.

The AAA ratings are based on the following analytical considerations:

A Covered bond attachment point of AA, which is the long-term senior debt rating of the Bank of Montreal (BMO). BMO is the reference entity for the program.

An assessment of Strong’s Legal and Structuring Framework (LSF) associated with the Program.

A coverage group credit rating of “A”.

An implicit likelihood LSF (LSF-L) of AAA.

Although not currently applicable, based on the recovery notch scale, up to two notches uplift of the LSF-L for high recovery prospects is possible.

An overcollateralisation (OC) level of 7.0% (based on the percentage of assets of 93.5% at June 30, 2022) to which DBRS Morningstar gives credit.

DBRS Morningstar considered the following factors in its analysis described above:

(1)	The Covered Bonds are senior unsecured direct-deposit obligations of BMO and are excluded from Canada's bank recapitalization (bail-in) regime.
(2)	In addition to a general recourse to BMO'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) ratio of 80.0% at origination (the Cover Pool). The Cover Pool was approximately $40.96 billion as at June 30, 2022.
(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 guaranteed deposit account provider.
(4)	Upon a default by BMO, the final maturity date on the 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 BMO, and a generally creditor-friendly legal environment in Canada.

Despite these strengths, covered bond ratings 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 in the Cover Pool's credit assessment. This risk is significantly reduced by the home equity available in relation to the portfolio's weighted-average LTV ratio of 45.4% (based on indexed property value) reported by BMO as at June 30, 2022.
(2)	BMO 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 that the OC available is commensurate with the ratings of the Covered Bonds. Based on the latest review of the Cover Pool, DBRS Morningstar considers 3.0% OC, corresponding to the Regulatory OC Minimum, to be commensurate with the AAA ratings.
(3)	There is an inherent liquidity gap between the scheduled repayments of the Covered Bonds and the repayment of the underlying mortgage loans over time. This risk is mitigated by OC, the buildup of a reserve fund if BMO is not rated at least A (low) or R-1 (middle), and the 12-month maturity extension upon default by BMO.

BMO is one of from Canada largest banks measured by assets at April 30, 2022with assets of $1,041.6 billion and the total equity of $65.6 billion. It is the initial mortgage manager in the Indoor swimming pool.

More details on the Indoor swimming pool and schedule are provided in the monthly Canadian Covered Bond Report, which is available at www.dbrsmorningstar.com or by contacting us at [email protected]

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

No environmental/social/governance factor had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors in the DBRS Morningstar Analytical Framework is available in DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/ research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Remarks:

Unless otherwise stated, all figures are in Canadian dollars.

The main methodology is the rating and monitoring of covered bonds (April 22, 2022), which can be found on dbrsmorningstar.com under Methodologies and Criteria.

DBRS Sovereign Morningstar group publishes reference macroeconomic scenarios for rated sovereigns. DBRS Morningstar’s analysis considered impacts consistent with baseline scenarios as set out in the following report: https://www.dbrsmorningstar.com/research/384482.

Related regulatory information pursuant to National Instrument 25-101 Designated Rating Organizations is incorporated by reference and may be viewed by clicking the link under Related Documents or by contacting us at [email protected]

The rated entity or its related entities participated in the rating process for this rating metric. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the relevant appendix for more information on the sensitivity of the assumptions used in the rating process.

This note is validated by DBRS Ratings Limited for use in the UKand by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory information applies to approved ratings:

The last rating action on this program took place on June 17, 2022when DBRS Morningstar ceased rating the covered bonds, series CBL17, as the series was fully redeemed.

For more information on DBRS Morningstar’s historical default rates published by the European titles and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands that further information about DBRS Morningstar’s historical default rates may be released by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Fanfei Gong, Vice President, Canadian Structured Finance

Chairman of the rating committee: Tim O’NeilManaging Director, Head of Canadian Structured Finance

Initial listing date: April 28, 2014

For more information on this credit or this industry, visit www.dbrsmorningstar.com or contact us at [email protected]

DBRS Limited

DBRS tower, 181 University Avenueoffice 700

Toronto, ON M5H 3M7 Canada

Such. +1 416 593-5577

Main methodology: rating and monitoring of covered bonds (April 22, 2022)

Link: https://www.dbrsmorningstar.com/research/395642

Predictive model: Canadian RMBS model (November 2021; Version 5.0.0.3)

Link: https://www.dbrsmorningstar.com/models/

Ratings

Date Issued	Debt Rated	Rating	Trend	Action	Attributesi

US = Lead Analyst based in the USA

CA = Lead Analyst based in Canada

EU = Lead Analyst based in EU

UK = Lead Analyst based in UK

E = EU approved

U= UK approved

Unsolicited participation with access

Unsolicited participation without access

Unsolicited Non Participating

25-Jul-22	Covered Bonds, Series CBL29	AAA	--	New Rating	CA

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E

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