DBRS Morningstar Assigns AAA Rating to TD Global Legislative Covered Bonds, Series CBL35

DBRS Limited (DBRS Morningstar) assigned a rating of AAA to the Covered Bonds, Series CBL35 (Series CBL35) issued under The Toronto-Dominion Bank (Global Legislative Covered Bond Programme) (the Programme). The Series CBL35 (USD 2.0 billion) covered bonds have a coupon rate of 3.301% and a maturity date of April 20, 2027. All covered bonds issued under the Programme (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 (high), which is the Long-Term Senior Debt rating of The Toronto-Dominion Bank (TD). TD is the Reference Entity for the Programme.
-- A Legal and Structuring Framework (LSF) assessment of Strong associated with the Programme.
-- A Cover Pool Credit Assessment of A (low).
-- An LSF-Implied Likelihood (LSF-L) of AAA.
-- While not currently applicable, based on the recovery notching scale, up to two notches’ uplift from the LSF-L for high recovery prospects is possible.
-- A level of overcollateralization (OC) of 5.3% (based on the Asset Percentage of 95.0% as at February 28, 2022) to which DBRS Morningstar gives credit.

DBRS Morningstar considered the following factors in the analysis described above:

(1) The Covered Bonds are senior unsecured direct-deposit obligations of TD and are excluded from Canada’s bank recapitalization (bail-in) regime.

(2) In addition to a general recourse to TD’s assets, the Covered Bonds are supported by a diversified pool of first-lien conventional Canadian residential mortgages with a maximum loan-to-value (LTV) ratio of 80.0% at origination (the Cover Pool). The Cover Pool was approximately $56.2 billion as at February 28, 2022. The Cover Pool contains only amortizing single-tranche loans; however, future additions may include mortgages with amortizing and nonamortizing revolving multitranche loans secured by the same first lien.

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

(4) Upon a default by TD, the final maturity date on the Covered Bonds can be extended for 12 months, which increases the likelihood that the Covered Bonds can be fully repaid.

(5) There is a specific covered bond legislative framework in Canada. In addition, the contractual obligations of the transaction parties are supported by Canada’s well-developed commercial and bankruptcy laws, the satisfactory opinions provided by legal counsel to TD, and a generally creditor-friendly legal environment in Canada.

Despite these strengths, the ratings on the Covered Bonds 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 in the Cover Pool’s credit assessment. This risk is significantly reduced by the home equity available in relation to the portfolio’s weighted-average LTV ratio of 44.5% (based on indexed property value) reported by TD as at February 28, 2022.

(2) TD may need to add mortgages to maintain the Cover Pool, incurring substitution and potential credit deterioration risk. These risks are mitigated by the ongoing monitoring of the Cover Pool to ensure that the OC available is commensurate with the ratings of the Covered Bonds. Based on the latest review of the Cover Pool, DBRS Morningstar considers 3.0% OC, corresponding to the Regulatory OC Minimum, to be commensurate with the AAA ratings.

(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 OC, the buildup of a reserve fund if TD is not rated at least A (low) or R-1 (middle), and the 12-month maturity extension upon default by TD.

DBRS Morningstar’s “Legal Criteria for Canadian Structured Finance” methodology expects regular swap payments to rank no higher in priority than interest payments on the Covered Bonds. Should interest rate swap payments (excluding termination payments) rank higher in priority than interest payments on the Covered Bonds, DBRS Morningstar will assess the impact at that time and take the appropriate rating action.

TD is one of Canada’s largest banks as measured by assets as at January 31, 2022, with assets of $1,778.6 billion and total equity of $102.0 billion. It is the initial servicer of the mortgages in the Cover Pool.

More details on the Cover Pool and the Programme are provided in the Monthly Canadian Covered Bond Report, which is available on www.dbrsmorningstar.com or by contacting us at info@dbrsmorningstar.com.

ESG CONSIDERATIONS

There were no environmental, social, or governance factors or consideration with a significant or relevant impact on the credit rating.

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 and Monitoring Covered Bonds (June 10, 2021), 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.

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.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this Programme took place on April 8, 2022, when DBRS Morningstar confirmed the ratings of the outstanding series issued under the Programme.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published 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
Rating Committee Chair: Tim O'Neil, Managing Director, Head of Canadian Structured Finance
Initial Rating Date: July 16, 2014

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

Principal methodology: Rating and Monitoring Covered Bonds (June 10, 2021)
Link: https://www.dbrsmorningstar.com/research/379983/rating-and-monitoring-covered-bonds

Predictive model: Canadian RMBS Model (November 2021; Version 5.0.0.3)
Link: https://www.dbrsmorningstar.com/models/