Bank of Nova Scotia Registered Global Covered Bond, Series CBL48 rated AAA by DBRS Morningstar


DBRS Limited (DBRS Morningstar) assigned a rating of AAA covered bonds, series CBL48 (series CBL48) issued under the Bank of Nova Scotia (Global Registered Covered Bond Program) (the Registered Program).

Series CBL48 (USD 1.5 billion) has a coupon rate of 3.186% and a maturity of June 3, 2025. 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 senior long-term debt rating for The Bank of Nova Scotia (SNB). BNS is the reference entity for the recorded program.

An assessment of Strong’s legal and structuring framework (LSF) associated with the recorded program.

A credit rating of the cover pool of A (low).

An LSF implied probability (LSF-L) of AA (high).

A one-notch increase in LSF-L for high recovery prospects to reach the AAA odds.

An overcollateralization (OC) level of 5.5% (based on the percentage of assets of 94.8% at April 28, 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 bonds of BNS and are excluded from from Canada bank recapitalization regime (bail-in).

(2) In addition to a general use of SNB assets, the covered bonds are backed by a diversified portfolio of Canadian conventional residential first mortgages with a maximum loan-to-value (LTV) ratio of 80.0% at the origin (the Indoor swimming pool). The cover pool was approximately $65.4 billion like a April 28, 2022. Scotia Total Equity Plan (STEP) loans may have revolving, amortizing and non-amortizing loan portions secured by the same first lien. Only the depreciable portions of STEP loans are included in the Indoor swimming pool.

(3) Covered Bonds benefit from several structural features, such as a reserve fund, where applicable, and rating thresholds for swap counterparties, servicer, account bank, cash manager and supplier guaranteed deposit account.

(4) In the event of default by the SNB, the final maturity date of the covered bonds can be extended by 12 months, which increases the likelihood that the covered bonds can be fully repaid.

(5) There is a specific legislative framework for covered bonds in Canada. In addition, the contractual obligations of the parties to the transaction are supported by from Canada well-developed commercial and bankruptcy laws, satisfactory advice provided by SNB legal advisers 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 by DBRS Morningstar in Pool cover Credit assessment. This risk is significantly reduced by the equity in the available home compared to the weighted average LTV of the portfolio of 43.12% (based on the indexed land value) reported by BNS as at April 28, 2022.

(2) BNS may need to add mortgages to maintain the Indoor swimming pool, leading to substitution risks and potential credit deterioration. These risks are mitigated by the continuous monitoring of Indoor swimming pool to ensure that the available overcollateralization is commensurate with the ratings of the Covered Bonds. According to the latest review of the Indoor swimming poolDBRS Morningstar considers an OC of 3.0%, corresponding to the minimum regulatory OC, to be proportional to the AAA odds.

(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 overcollateralisation, the constitution of a reserve fund if the SNB is not rated at least A (low) or R-1 (low) and the extension of the maturity by 12 months in the event of default of the SNB.

BNS is one of from Canada largest banks measured by assets at April 30, 2022with assets of $1,288.5 billion and the total equity of $72.0 billion. It is the initial mortgage manager in the Indoor swimming pool.

More details on the Indoor swimming pool and the registered program are provided in the monthly Canadian covered bond report, which is available at www.dbrsmorningstar.com or by contacting us at [email protected]

ESG 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 the recorded program was on April 26, 2022when DBRS Morningstar assigned a AAA Covered Bond Rating, Series CBL47.

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, Global Structured Finance

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

Initial listing date: March 25, 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	Action	Rating	Trend	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

03-Jun-22	Covered Bonds, Series CBL48	New Rating	AAA	--	CA

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