TEXT-Fitch on D-Cap on Royal Bank of Canada mortgage covered bonds
Feb 14 - Fitch Ratings' current Discontinuity Cap (D-Cap) on Royal Bank of Canada's (RBC, rated 'AA'/Stable/'F1+') mortgage covered bonds remains at '3' (moderate-high risk). The ratings of the bonds are also unchanged at this time. RBC was to have changed the program documents to provide for repayment of the demand loan in-kind if cover assets could not be sold at par or higher by year-end 2012. (For more details, see 'Fitch Assigns RBC's Series CB8 Mortgage Covered Bonds 'AAA' Rating' published Sept. 19, 2012.) The timeline for the execution of the amended documents has now been extended to March 15, 2013. Despite the delayed timeframe, given RBC's strong Issuer Default Rating (IDR) of 'AA/F1+', Fitch views the likelihood of the demand loan being called for repayment before March 15, 2013 as remote. Therefore, there has been no impact on the existing D-Cap of '3' (moderate-risk) or the covered bonds' ratings. If the changed documents are not executed by March 15, 2013 Fitch may revise its analysis to take into account the existing provisions for the repayment of the demand loan. As a result, the D-Cap may be changed. In addition, a reduced price cap may be used to determine the distressed sales price of the assets to reflect the significant strain on liquidity in the event of an issuer default in the absence of an active market for the underlying assets, such as the Canada Mortgage Bond for Canadian insured residential mortgages. However, such changes would not be expected to impact the ratings of RBC's covered bonds given its strong IDR, which enables the covered bonds to be rated as high as 'AAA' only taking recoveries into account in Fitch's analysis. Currently, CAD-equivalent 10.6 billion of soft-bullet covered bonds are outstanding under RBC's covered bond program, which are guaranteed by RBC Covered Bond Guarantor LP, a limited liability partnership established for the program with restricted permitted activities. They are secured against a CAD 21.9 billion cover pool consisting of Canadian uninsured residential mortgage loans. In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating decision that is different than the original rating committee outcome. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Covered Bonds Rating Criteria' (Sept. 10, 2012); --'Covered Bonds Counterparty Criteria' (July 25, 2012); --'Resilogic Mortgage Loss Criteria' (Aug. 10, 2012). Applicable Criteria and Related Research: Covered Bonds Rating Criteria - Amended Covered Bonds Counterparty Criteria ResiLogic Mortgage Loss Criteria
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