DBRS Morningstar Finalizes Ratings of AAA (sf), A (sf), and BBB (sf) on Canadian Credit Card Trust II, Series 2021-1

DBRS Limited (DBRS Morningstar) finalized the following provisional ratings on Series 2021-1 (the Notes) issued by Canadian Credit Card Trust II (the Trust):

-- AAA (sf) on the Credit Card Receivables-Backed Class A Notes, Series 2021-1 (the Class A Notes)
-- A (sf) on the Credit Card Receivables-Backed Class B Notes, Series 2021-1 (the Class B Notes)
-- BBB (sf) on the Credit Card Receivables-Backed Class C Notes, Series 2021-1 (the Class C Notes)

The Expected Final Payment Date of the Notes is November 24, 2024.

DBRS Morningstar considered the following factors in its analysis, each of which includes 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/384150.

(1) For the Class A Notes, credit enhancement is available through subordination of 5.75%, excess spread, and the cash collateral account, which could build up to 5.0% of the initial invested amount.

(2) For the Class B Notes, credit enhancement is available through subordination of 2.75%, excess spread, and the cash collateral account.

(3) For the Class C Notes, credit enhancement is available through excess spread and the cash collateral account.

(4) Three-month average payment rates, gross yield, and net loss rates remained strong at 65.7%, 26.9%, and 1.6%, respectively, as of August 2021. Although performance is expected to be negatively affected by the coronavirus, the portfolio has increased the percentage of transactors (cardholders who pay their entire balance in full each month) in recent years and comprises a large percentage of prime borrowers (80.7% of borrowers have a credit score of 660 or higher), who typically demonstrate a stronger ability to meet their credit card obligations because of their credit quality and tendency to have more financial resources and funding options.

(5) The custodial pool is well seasoned with approximately 73.0% of the receivables arising from accounts at least 60 months old.

The portfolio is largely concentrated in Québec, which has both positive and negative implications. From a positive perspective, the portfolio has been more insulated from competition than the rest of Canada. Notwithstanding the relative insulation, three-month average loss rates increased to a peak of 6.5% between 2008 and 2009, similar to the experience of the entire Canadian credit card industry. Prior to the pandemic, losses had come back down to pre-recessionary levels and reported a 12-month average of 3.8% as of March 2020. This is further mitigated by lower delinquencies, increased payment rates and increased portfolio yields in recent years. From a negative perspective, there is considerably more geographic and regional economic risk stemming from the portfolio’s concentration in Québec.

DBRS Morningstar stress testing indicates that simultaneous declines in yield and payment rates and increases in losses would not result in a failure of the Trust in repaying the Notes on a timely basis. The severity of the tests applied is commensurate with the respective ratings of the Notes.

DBRS Morningstar notes that the transaction documents do not require the remittance of collections into a Trust account within two business days when the servicer is no longer rated investment grade, as expected in DBRS Morningstar’s “Legal Criteria for Canadian Structured Finance” methodology. Should the servicer be downgraded below investment grade, DBRS Morningstar will assess the impact of partial commingling at the time and take appropriate rating action.

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.

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

The principal methodology is Rating Canadian Credit Card and Personal Line of Credit Securitizations (November 4, 2020), 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 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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