Fitch left its Discontinuity Cap assigned to Royal Bank of Canada covered bonds unchanged after the issuer appealed a rating committee’s original decision, with the rating agency also saying that changes to documentation relating to a demand loan would not be expected to have an impact on ratings even if they are not implemented in time to meet an extended deadline.

According to Fitch, RBC was previously due by the end of 2012 to have changed documents to provide for repayment of the demand loan in-kind if cover assets could not be sold at par or higher. However, the timeline for this amendment has been extended to 15 March.

“Despite the delayed timeframe, given RBC’s strong Issuer Default Rating (IDR) of AA/F1+, Fitch views the likelihood of the demand loan being called for repayment before March 15, 2013 as remote,” it said. “Therefore, there has been no impact on the existing D-Cap of ‘3’ (moderate risk) or the covered bonds’ ratings.”

Fitch said that the issuer appealed and provided additional information to Fitch that resulted in a rating decision different to “the original rating committee outcome”.

The rating agency said that if the documentation changes are not made by 15 March, it could revise its analysis to take into account existing provisions for the repayment of the demand loan, with the D-Cap possibly being changed as a result of this.

“In addition, a reduced price cap may be used to determine the distressed sales price of the assets to reflect the significant strain on liquidity in the event of an issuer default in the absence of an active market for the underlying assets, such as the Canada Mortgage Bond for Canadian insured residential mortgages,” said Fitch.

However, Fitch said that given RBC’s strong IDR – which enable its covered bonds to be rated as high as AAA only taking into account recoveries – it would not expect any change in the D-Cap to affect the rating of RBC’s covered bonds.