Fitch Ratings has assigned Bank of Nova Scotia's
(BNS;'AA-'/Stable/'F1+') Series 7 USD1.25bn 3-year soft bullet, Series 8
USD1.5bn 5-year soft bullet and Series 9 USD250mn 5-year hard bullet
mortgage covered bonds a 'AAA' rating. The bonds are guaranteed by
Scotia Covered Bond Trust, a special purpose vehicle established for the
program. Fitch has also affirmed the 'AAA' rating on the other
outstanding series for a total balance of CAD-equivalent 15.5bn.
The rating is based on BNS's Long-term Issuer Default Rating (IDR) of
'AA-' and a Discontinuity Factor (D-Factor) of 22.2%. This combination
enables the covered bonds to reach 'AAA' on a probability-of-default
(PD) basis because the overcollateralisation (OC) is sufficient to
sustain this level of stress. The program's contractual asset percentage
(AP) is equal to Fitch's supporting AP of 95%. All else equal, the
covered bonds could be rated 'AAA' so long as the issuer's long-term IDR
does not fall below 'BBB+'.
As of February 29, the cover pool consisted of 87,140 first-lien, Canada
Mortgage and Housing Corporation (CMHC)-insured residential mortgage
loans totaling CAD13.1bn with a WA remaining term of 32 months The WA
remaining term of the covered bonds is approximately 42 months. Fitch
expects additional loans, with attributes comparable to those already in
the pool, to be added in conjunction with the new issuances in order to
maintain the program's AP of 95%.
Given the program's dynamic nature, the composition and credit quality
of the cover pool may change over time. In a 'AAA' scenario, Fitch has
calculated a cumulative WA frequency of foreclosure (WAFF) for the cover
assets of 12.4% and a WA recovery rate (WARR) of 96.5%, which reflects
the benefit of the CMHC insurance on the loans. Fitch's analysis of the
cover pool relies on state- and MSA-level risk multipliers which reflect
1Q2010 University Financial Associates, LLC's (UFA) data rather than the
three-quarter average stipulated in the 'ResiLogic: U.S. Residential
Mortgage Loss Model Criteria' to further mitigate fluctuations in credit
enhancement as a result of quarterly updates.