DBRS Limited (DBRS Morningstar) assigned a rating of AAA to the Covered Bonds, Series CBL37 (Series CBL37) issued under the Bank of Nova Scotia (Global Registered Covered Bond Program) (the Registered Program).
Series CBL37 (USD 3.5 billion) has a coupon rate of 1.188% and a maturity date of October 13, 2026. All covered bonds issued under the Registered 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 for The Bank of Nova Scotia (BNS). BNS is the Reference Entity for the Registered Program.
A Legal and Structuring Framework (LSF) assessment of Strong associated with the Registered Program.
A Cover Pool Credit Assessment of BBB (high).
An LSF-Implied Likelihood (LSF-L) of AA.
A two-notch uplift from the LSF-L for high recovery prospects to achieve the AAA ratings.
A level of overcollateralization (OC) of 5.5% (based on the Asset Percentage of 94.8% as at August 31, 2021) to which DBRS Morningstar gives credit.
DBRS Morningstar considered the following factors in its analysis described above, each of which include additional analysis and, where appropriate, adjustments to expected performance assumptions as a result of the global efforts to contain the spread of the Coronavirus Disease (COVID-19). For the ratings assigned, DBRS Morningstar's analysis considered the baseline macroeconomic scenarios for rated sovereign economies, available in its commentary 'Baseline Macroeconomic Scenarios For Rated Sovereigns,' published on September 8, 2021. These baseline macroeconomic scenarios replace DBRS Morningstar's moderate and adverse coronavirus pandemic scenarios, which were first published in April 2020. The baseline macroeconomic scenarios reflect DBRS Morningstar's view that, although the coronavirus remains a risk to the outlook, uncertainty around the macroeconomic effects of the pandemic has gradually receded. Current median forecasts considered in the baseline macroeconomic scenarios incorporate some risks associated with further outbreaks, but they remain fairly positive on recovery prospects given expectations of continued fiscal and monetary policy support. The policy response to the coronavirus may nonetheless bring other risks to the forefront in the coming months and years. For details see https://www.dbrsmorningstar.com/research/384482.
(1) The Covered Bonds are senior unsecured direct-deposit obligations of BNS and are excluded from Canada's bank recapitalization (bail-in) regime.
(2) In addition to a general recourse to BNS' 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 $58.6 billion as at August 31, 2021. The Scotia Total Equity Plan (STEP) loans may have amortizing and nonamortizing revolving loan parts secured by the same first lien. Only the amortizing loan parts of the STEP loans are in the Cover Pool.
(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 BNS, 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 BNS, and a generally creditor-friendly legal environment in Canada.
Despite these strengths, the ratings on 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 DBRS Morningstar 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 44.93% (based on indexed property value) reported by BNS as at August 31, 2021.
(2) BNS may need to add mortgages to maintain the Cover Pool, incurring substitution and potential credit deterioration risks. These risks are mitigated by the ongoing monitoring of the Cover Pool to ensure that the OC available is commensurate with the ratings on 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 BNS is not rated at least A (low) or R-1 (low), and the 12-month maturity extension upon default by BNS.
BNS is one of Canada's largest banks as measured by assets as at July 31, 2021, with assets of $1,163.4 billion and total equity of $72.1 billion. It is the initial servicer of the mortgages in the Cover Pool.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is Rating and Monitoring Covered Bonds (June 10, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.
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 under Related Documents or by contacting us at email@example.com.
The rated entity or its related entities did participate in the rating process for this rating action. 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 related appendix for additional information regarding the sensitivity of assumptions used in the rating process.
More details on the Cover Pool and the Registered Program are provided in the Monthly Canadian Covered Bond Report, which is available on https://www.dbrsmorningstar.com or by contacting us at firstname.lastname@example.org.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:
The last rating action on the Registered Program took place on October 4, 2021, when DBRS Morningstar discontinued its rating of the Covered Bonds, Series CBL17 as the series was fully repaid.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
Lead Analyst: Fanfei Gong, Assistant Vice President, Canadian Structured Finance, Global Structured Finance
Rating Committee Chair: Tim O'Neil, Managing Director, Head of Canadian Structured Finance
Initial Rating Date: March 25, 2014
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.
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Principal methodology: Rating and Monitoring Covered Bonds (June 10, 2021)
Predictive model: Canadian RMBS Model (October 2020; Version 126.96.36.199)
Date Issued Debt Rated Action Rating Trend Attributesi
US = Lead Analyst based in USA
CA = Lead Analyst based in Canada
EU = Lead Analyst based in EU
UK = Lead Analyst based in UK
E = EU endorsed
U = UK endorsed
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Unsolicited Participating Without Access
13-Oct-21 Covered Bonds, Series CBL37 New Rating AAA -- CA