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Fitch Affirms Federation Des Caisses Desjardins Du Quebec's Covered Bonds at 'AAA'.

New York: Fitch Ratings has affirmed Federation Des Caisses Desjardins Du Quebec's (FCDQ; AA-/F1+/Stable) legislative mortgage covered bonds at 'AAA'/Stable Outlook, following the implementation of the March 2018 "Covered Bond Rating Criteria" and the "Canada Residential Mortgage Rating Criteria" updated in April 2018.


'AAA' Affirmed; 'AAA' Breakeven AP 93%

The 'AAA' rating of the covered bonds is based on FCDQ's Long-Term Issuer Default Rating (IDR) of 'AA-', an IDR uplift of zero notches, a payment continuity uplift (PCU) of six notches and a revised recovery uplift of two notches. The program's contractual AP of 90.5% provides sufficient protection to the 'AAA' breakeven AP at 93%, which supports a timely payment in a stress scenario equivalent to 'AA' and allows for a two-notch recovery uplift to 'AAA'. The Stable Outlook reflects a five-notch cushion against an issuer's IDR downgrade.

Recovery Uplift increased to 2

The 'AAA' breakeven AP increased to 93% from 90.5% due to the revision of the recovery uplift to two notches from one notch, and the resulting change in the tested rating on a probability of default basis to 'AA' from 'AA+'. Due to a five-year covered bond issuance in May 2018, the unstressed weighted average life (WAL) of the assets is now shorter than unstressed weighted average life (WAL) of the bonds, which mitigates FX risk in the recovery scenario and allows for a two-notch recovery uplift.

Smaller Credit Loss

The 'AAA' credit loss has decreased to 4.8% from 7.2%, reflecting the seasoning of the loans in the pool and the low 16% sustainable market value decline in Quebec, where 100% of the cover pool is located. The lower than peers' sustainable loan-to-value ratio and debt to income ratio results in a lower credit loss of FCDQ's cover pool.

Unchanged IDR Uplift and PCU

The programme's IDR uplift is unchanged at zero notches since the Canadian bank bail-in rules announced on April 18, 2018 are not applicable to FCDQ. Should FCDQ be subject to a similar set of bail-in rules set by its provincial regulator, Fitch will reassess the IDR uplift.

The unchanged PCU of six notches reflects the 12-months liquidity protection in place allowed by the 12-month maturity extension applying to the soft bullet bonds and a dynamic reserve to cover three-month senior expenses and interest payments, which will be funded when FCDQ is rated below 'A' or 'F1'.

AP Relied Upon

Fitch relies on the committed AP used in the ACT of each program in the analysis of the covered bond rating. The nominal OC cannot be relied upon due to the demand loan feature in the programs. The demand loan is backed by voluntary OC, which is not needed to maintain the ACT. The demand loan is owed by the covered bond guarantor to the issuer and ranks senior to covered bondholders, should recourse against the cover pool be enforced. In all registered covered bond programs rated by Fitch, the demand loan can be repaid in kind by mortgages. As such, the repayment of the demand loan does not trigger additional asset sales and therefore does not affect the PCU assessment.


For FCDQ, the 'AAA' rating would be vulnerable to downgrade if any of the following occurs: (i) the issuer IDR is downgraded by six or more notches to 'BBB-' or below; or (ii) the number of notches represented by the IDR uplift, the PCU and the RU is reduced by six notches or more; or (iii) the AP that Fitch considers in its analysis increases above Fitch's 'AAA' breakeven AP.

The Fitch breakeven AP for the covered bond rating will be affected, among other factors, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven AP to maintain the covered bond rating cannot be assumed to remain stable over time.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1CQUE
Date:Sep 28, 2018
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