DBRS Morningstar Finalizes Provisional Ratings on Genesis Trust II, Series 2020-1

DBRS Limited (DBRS Morningstar) finalized its provisional ratings on the Real Estate Secured Line of Credit-Backed Notes, Series 2020-1 (the Notes) issued by Genesis Trust II as follows:

-- AAA (sf) on the Real Estate Secured Line of Credit-Backed Class A Notes, Series 2020-1 (the Class A Notes)
-- AA (high) (sf) on the Real Estate Secured Line of Credit-Backed Class B Notes, Series 2020-1 (the Class B Notes)
-- A (high) (sf) on the Real Estate Secured Line of Credit-Backed Class C Notes, Series 2020-1 (the Class C Notes)

The Class A Notes have an aggregate principal amount of $2,750,000,000 and a coupon rate of 1.636%. The Class B Notes have an aggregate principal amount of $57,232,050 and a coupon rate of 2.086%. The Class C Notes have an aggregate principal amount of $54,370,447 and a coupon rate of 2.286%. The expected final payment date of the Notes is April 17, 2023.

The ratings are based on the following factors, each of which include additional analysis and, where appropriate, additional stresses to expected performance as a result of the global efforts to contain the spread of the Coronavirus Disease (COVID-19). On April 16, 2020, the DBRS Morningstar Sovereigns group published its outlook on the impact on key economic indicators for the 2020–22 time frame. For details see https://www.dbrsmorningstar.com/research/359679. For the ratings assigned, DBRS Morningstar’s analysis considered impacts consistent with the moderate scenario in the referenced commentary.

(1) The levels of credit enhancement provided by subordination (3.90% and 1.90% for the Class A Notes and the Class B Notes, respectively), a Cash Reserve Account that builds up after the occurrence of a Cash Reserve Event, and excess spread of 1.35% annually (after the swap) are commensurate with the ratings assigned.

(2) The collateral is a diversified pool of 56,357 real estate secured line of credit accounts with a pool balance of $4.3 billion, a weighted-average limit-to-value ratio of 64.4%, and a weighted-average credit score of 771 as of January 31, 2020. The pool also benefits from a weighted-average 154 months of seasoning since origination.

(3) A bankruptcy-remote structure that includes several structural elements, typically found in securitizations in Canada, that mitigate default risk and the risks related to the credit deterioration of associated counterparties.

(4) Low historical loss levels of the pool, reflecting The Toronto-Dominion Bank’s (TD) strong underwriting standards and excellent collateral performance. TD is regulated by the Office of the Superintendent of Financial Institutions and is subject to the requirements of Guideline B-20.

DBRS Morningstar uses the Canadian RMBS model to estimate default probability and loss severity on a loan-level basis. Certain assumptions and adjustments were made to reflect the nature of HELOC loans and the potential negative effects from certain credit lines that are secured by second- or third-lien mortgages. As of January 31, 2020, 11.2% of loans (by outstanding balance) were secured by second- or third-lien mortgages.

Based on the Canadian RMBS model outputs, DBRS Morningstar runs a proprietary cash flow engine of several scenarios to incorporate transaction-specific triggers, assumptions of default timing, potential interest mismatch, and a variety of stressed monthly payment rates that are commensurate with the ratings assigned. The result was that, with the proposed structure, the Notes could withstand each stress scenario with no loss.

DBRS Morningstar notes that the fee and indemnity amounts payable to service providers in priority to the Notes in the payment waterfalls are not capped as expected in DBRS Morningstar’s “Legal Criteria for Canadian Structured Finance” methodology. If the fee and/or indemnity is above a reasonable amount, DBRS Morningstar will assess the impact of uncapped cash outflow at the time and take appropriate rating action.

TD is one of Canada’s largest banks by assets, with $1,457.4 billion assets and $88.8 billion total equity as at January 31, 2020. It is the servicer of the assets in the custodial pool.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Residential Mortgages, Home Equity Lines of Credit and Reverse Mortgages (November 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 info@dbrsmorningstar.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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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