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As filed with the Securities and Exchange Commission on October 18, 2013

Registration No. 333-189814

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT No. 2

to

FORM F-3

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Bank of Montreal

BMO Covered Bond Guarantor Limited Partnership

(Exact name of Registrant as specified in its charter)

CANADA

(State or other jurisdiction of incorporation or organization)

13-4941092

(I.R.S. Employer Identification No.)

100 King St. West

1 First Canadian Place

Toronto, Ontario

Canada M5X 1A1

(416) 867-6785

(Address and telephone number of Registrant’s principal executive offices)

 

 

Colleen Hennessy

Bank of Montreal

111 West Monroe Street, P.O. Box 755

Chicago, Illinois 60690

(312) 461-7745

(Name, address and telephone number of agent for service)

 

 

 

Please send copies to:
Lawton M. Camp		Jerry R. Marlatt
Allen & Overy LLP		Morrison & Foerster LLP
1221 Avenue of the Americas		1290 Avenue of the Americas
New York, New York 10020		New York, New York 10104
(212) 610-6300		(212) 468-8000

 

 

Approximate date of commencement of proposed sale to the public: At such time or times on or after the effective date of this registration statement as the Registrants shall determine.

If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box.  ¨

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box.  x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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If this Form is a registration statement pursuant to General Instruction I.C. or a post-effective amendment thereto that shall become effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act, check the following box.  ¨

If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction I.C. filed to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box.  ¨

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of securities to be registered		Amount to be registered (1)		Proposed maximum aggregate price per security		Proposed maximum aggregate offering price (2)(3)		Amount of registration fee (1)
Covered Bonds		U.S. $10,000,000,000		100%		U.S. $10,000,000,000		U.S. $1,288,000

(1)

This Registration Statement also includes an indeterminate amount of securities of the classes specified above that may be reoffered and resold on an ongoing basis after their initial sale in market-making transactions by affiliates of the Registrant. These securities consist of an indeterminate amount of such securities that are initially being registered, and will initially be offered and sold, under this Registration Statement. All such market-making reoffers and resales of these securities that are made pursuant to a registration statement after the effectiveness of this registration statement are being made solely pursuant to this Registration Statement.

(2)	Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act.

(3)	Separate consideration may not be received for registered securities that are issuable on exercise, conversion or exchange of other securities.

The Registrants hereby amend this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a) of the Act, may determine.

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion, Dated October [—], 2013

 

Bank of Montreal

unconditionally and irrevocably guaranteed by

BMO Covered Bond Guarantor Limited Partnership

 

 

Covered Bonds

up to an aggregate initial offering price of U.S.$10,000,000,000

or the equivalent thereof in other currencies under the global registered covered bond program

 

 

This prospectus describes some of the general terms that may apply to these covered bonds and the related guarantee and the general manner in which they may be offered. We will give you the specific prices and other terms of the covered bonds we are offering in supplements to this prospectus. You should read this prospectus and the applicable prospectus supplement carefully before you invest. We may sell the covered bonds to or through one or more dealers or agents. The names of the dealers or agents will be set forth in supplements to this prospectus.

Prospective investors should be aware that the acquisition of the covered bonds described herein may have tax consequences both in the United States and in Canada. Such consequences may not be described fully herein or in any applicable prospectus supplement.

Investing in the covered bonds involves risks. See “Risk Factors” beginning on page 25 of this prospectus.

The enforcement by investors of civil liabilities under United States federal securities laws may be affected adversely by the fact that Bank of Montreal is a Canadian bank, that many of its officers and directors are residents of Canada, that BMO Covered Bond Guarantor Limited Partnership is a limited partnership existing under the laws of the Province of Ontario, that some or all of the dealers or experts named in the registration statement may be residents outside of the United States, and that all or a substantial portion of the assets of Bank of Montreal, BMO Covered Bond Guarantor Limited Partnership and such persons may be located outside the United States.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The covered bonds described herein will not constitute deposits that are insured under the Canada Deposit Insurance Corporation Act (Canada) or by the United States Federal Deposit Insurance Corporation.

THE COVERED BONDS HAVE NOT BEEN APPROVED OR DISAPPROVED BY CANADA MORTGAGE AND HOUSING CORPORATION (“CMHC”) NOR HAS CMHC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. THE COVERED BONDS ARE NEITHER INSURED NOR GUARANTEED BY CMHC OR THE GOVERNMENT OF CANADA OR ANY OTHER AGENCY THEREOF.

 

 

Arrangers for the Program

 

Barclays				BMO Capital Markets

The date of this prospectus is             , 2013

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		Page
ABOUT THIS PROSPECTUS			1
SUMMARY			7
PROGRAM STRUCTURE DIAGRAM			10
SUMMARY OF THE COVERED BOND PROGRAM			11
RISK FACTORS			20
USE OF PROCEEDS			49
CONSOLIDATED EARNINGS RATIOS			50
CONSOLIDATED CAPITALIZATION OF THE BANK			51
BANK OF MONTREAL			52
BMO COVERED BOND GUARANTOR LIMITED PARTNERSHIP			55
DESCRIPTION OF THE COVERED BONDS			58
TERMS AND CONDITIONS OF THE COVERED BONDS			65
SUMMARY OF THE PRINCIPAL DOCUMENTS			109
CASHFLOWS			169
PORTFOLIO			184
LOAN ORIGINATION AND LENDING CRITERIA			186
THE SERVICER			190
DESCRIPTION OF THE CANADIAN REGISTERED COVERED BOND PROGRAMS REGIME			194
PLAN OF DISTRIBUTION (AND CONFLICTS OF INTEREST)			197
TAXATION			201
BENEFIT PLAN INVESTOR CONSIDERATIONS			215
OWNERSHIP AND BOOK-ENTRY			218
EXPERTS			222
LEGAL MATTERS			223
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION			224
GLOSSARY			225

 

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In this prospectus, unless the context otherwise indicates, the “Bank” means Bank of Montreal, and “Guarantor” means BMO Covered Bond Guarantor Limited Partnership, and “we”, “us” or “our” means the Bank and Guarantor collectively. In this prospectus and any prospectus supplement, currency amounts are stated in Canadian Dollars (“$”), unless specified otherwise.

ABOUT THIS PROSPECTUS

This document is called a prospectus and is part of a registration statement that we filed with the Securities and Exchange Commission (the “SEC”) using a “shelf” registration or continuous offering process. The registration statement containing this prospectus, including exhibits to the registration statement, provides additional information about us and the covered bonds and related guarantee offered under this prospectus. The registration statement can be accessed at the SEC’s website at www.sec.gov or inspected at the offices of the SEC.

This prospectus provides you with a general description of the covered bonds the Bank may offer and the Guarantor may guarantee. Each time the Bank offers covered bonds pursuant to this prospectus, it will provide a prospectus supplement containing specific information about the terms of the covered bonds being offered. A prospectus supplement may include a discussion of any risk factors or other special considerations applicable to those covered bonds or to us. A prospectus supplement may also add, update or change information in this prospectus. If there is any inconsistency between the information in this prospectus and the applicable prospectus supplement, you should rely on the information in the prospectus supplement. You should read both this prospectus and any applicable prospectus supplement together with additional information described under the heading “Where You Can Find More Information” on page 7 of this prospectus.

The Bank may sell covered bonds to dealers who will sell the covered bonds to the public on terms fixed at the time of sale. In addition, the covered bonds may be sold by the Bank directly or through agents designated from time to time. If the Bank, directly or through agents, solicits offers to purchase the covered bonds, it reserves the sole right to accept and, together with any agents, to reject, in whole or in part, any of those offers.

Any prospectus supplement will contain the names of the dealers or agents, if any, together with the terms of offering, the compensation of those dealers and the net proceeds to us. Any dealers or agents participating in the offering may be deemed “underwriters” within the meaning of the Securities Act.

DOCUMENTS INCORPORATED BY REFERENCE

The SEC allows us to “incorporate by reference” into this prospectus the information in documents we file with it. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this prospectus and should be read with the same care. When we update the information contained in documents that have been incorporated by reference by making future filings with the SEC the information incorporated by reference in this prospectus is considered to be automatically updated and superseded. The modifying or superseding statement need not state that it has modified or superseded a prior statement or include any other information set forth in the document that it modifies or supersedes. In other words, in the case of a conflict or

 

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inconsistency between information contained in this prospectus and information incorporated by reference into this prospectus, you should rely on the information contained in the document that was filed later. The making of a modifying or superseding statement will not be deemed an admission for any purposes that the modified or superseded statement, when made, constituted a misrepresentation, an untrue statement of a material fact or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made. Any statement so modified or superseded will not be deemed, except as so modified or superseded to constitute a part of this prospectus.

The Bank incorporates by reference into this prospectus its annual report on Form 40-F for the fiscal year ended October 31, 2012 (the “2012 Annual Report”), the Bank’s reports filed on Form 6-K filed on February 26, 2013 and May 29, 2013, and each of the Bank’s reports on Form 6-K after that date in which the Bank states that such report is also incorporated by reference into one or more of the Bank’s registration statements filed under the U.S. Securities Act of 1933, as amended (the “Securities Act”). In addition, the Bank will incorporate by reference into this prospectus all documents that it has filed under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and, to the extent, if any, the Bank designates therein, reports on Form 6-K it furnishes to the SEC after the date of this prospectus and prior to the termination of any offering contemplated in this prospectus.

The Guarantor will file ongoing disclosure regarding the Covered Bond Guarantee (as defined below) and the Portfolio in reports on Form 10-K, Form 8-K, and Form 10-D. The Guarantor incorporates by reference its annual report on Form 10-K filed after the date of this prospectus and each Form 10-D filed with the SEC. In addition, the Guarantor will incorporate by reference into this prospectus all documents that it has filed under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and prior to the termination of every offering contemplated in this prospectus.

Upon a new annual report and the related annual financial statements being filed by the Bank with, and, where required, accepted by, the SEC, the previous annual report will be deemed no longer incorporated by reference into this prospectus for purposes of future offers and sales of covered bonds under this prospectus.

Upon a new annual report being filed by the Guarantor with, and, where required, accepted by, the SEC, the previous annual report will be deemed no longer incorporated by reference into this prospectus for the purposes of further offers and sales of covered bonds under this prospectus.

All documents incorporated by reference, or to be incorporated by reference, have been filed with or furnished to, or will be filed with or furnished to, the SEC.

You may request a copy of these filings, other than an exhibit to a filing unless that exhibit is specifically incorporated by reference into that filing, at no cost, by writing to or telephoning us at the following address:

Bank of Montreal

Corporate Secretary’s Department

100 King Street West 1

First Canadian Place

Toronto, Ontario

Canada M5X 1A1

Telephone: (416) 867-6785

 

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WHERE YOU CAN FIND MORE INFORMATION

In addition to the continuous disclosure obligations under the securities laws of the provinces and territories of Canada, the Bank and the Guarantor are subject to the informational reporting requirements of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in accordance therewith files reports and other information with the SEC. Under a multijurisdictional disclosure system adopted by the United States and Canada, such reports and other information may be prepared in accordance with the disclosure requirements of the provincial and territorial securities regulatory authorities of Canada, which requirements are different from those of the United States. These reports and other information, when filed or furnished by us in accordance with such requirements, can be inspected and copied by you at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. You can get further information about the SEC’s Public Reference Room by calling 1-800-SEC-0330. The Bank’s and the Guarantor’s filings with the SEC are also available to the public through the SEC’s website at www.sec.gov. The Bank’s common shares are listed on the New York Stock Exchange, and reports and other information concerning the Bank can be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.

The Bank and the Guarantor have filed with the SEC a registration statement on Form F-3 with respect to the covered bonds and related guarantee covered by this prospectus. This prospectus does not contain all of the information that is set forth in the registration statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. Statements made in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and in each instance, you should refer to the exhibits that are a part of the registration statement for a copy of the contract, agreement or other document for a more complete description of the matter. For further information with respect to the Bank, the Guarantor, the covered bonds and the related guarantee, reference is made to the registration statement and the exhibits thereto, which are publicly available as described in the preceding paragraph.

Additional information with respect to the Bank, the Guarantor, the Portfolio and certain other matters, together with copies of each of the Transaction Documents and the Investor Reports filed by the Bank from time to time, is also available on the Bank’s website at www.bmo.com/home/about/banking/investor-relations/financial-information/covered-bonds and through the CMHC’s covered bond registry (the “Registry”) at www.cmhc-schl.gc.ca/coveredbonds. Information on or accessible through the Bank’s website does not form part of this prospectus and should not be relied upon.

FORWARD-LOOKING STATEMENTS

Our public communications often include oral or written forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the SEC, or in other communications. All such statements by the Bank (but not the Guarantor) are made pursuant to the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives and priorities for 2013 and beyond, our strategies or future actions, our targets, expectations for our financial condition or share price, and the results of or outlook for our operations or for the Canadian and U.S. economies.

 

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By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that our assumptions may not be correct and that actual results may differ materially from such predictions, forecasts, conclusions or projections. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.

The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic and market conditions in the countries in which we operate; weak, volatile or illiquid capital and/or credit markets; interest rate and currency value fluctuations; changes in monetary, fiscal or economic policy; the degree of competition in the geographic and business areas in which we operate; changes in laws or in supervisory expectations or requirements, including capital, interest rate and liquidity requirements and guidance; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; our ability to execute our strategic plans and to complete and integrate acquisitions; critical accounting estimates and the effect of changes to accounting standards, rules and interpretations on these estimates; operational and infrastructure risks; changes to our credit ratings; general political conditions; global capital markets activities; the possible effects on our business of war or terrorist activities; disease or illness that affects local, national or international economies; natural disasters and disruptions to public infrastructure, such as transportation, communications, power or water supply; technological changes; and our ability to anticipate and effectively manage risks associated with all of the foregoing factors.

We caution that the foregoing list is not exhaustive of all possible factors. Other factors could adversely affect our results. For more information, please see the discussion in our 2012 Annual Report and the Bank’s reports filed on Form 6-K on February 26, 2013 and May 29, 2013, which are incorporated by reference herein and which outlines in detail certain key factors that may affect the Bank’s future results. When relying on forward-looking statements to make decisions with respect to the Bank, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. The Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by the Bank or on its behalf, except as required by law. The forward-looking information contained or incorporated by reference into this prospectus is presented for the purpose of assisting investors in understanding our operations, prospects, risks and other extreme factors that impact us specifically as of and for the periods ended on the dates presented, as well as certain strategic priorities and objectives, and may not be appropriate for other purposes.

PRESENTATION OF FINANCIAL INFORMATION

The Bank prepares its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”), which replaced Canadian generally accepted accounting principles (“GAAP”) for publicly accountable enterprises beginning in 2011. IFRS became effective for the Bank for its interim and annual periods commencing November 1, 2011 (adoption date), and includes the preparation and reporting of one year of comparative figures, including an opening balance sheet as of November 1, 2010 (transition date). For additional information regarding the Bank’s adoption of IFRS, see Note 30 “Transition to International Financial Reporting Standards” in the Bank’s 2012 Annual Report.

 

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Additionally, we publish our consolidated financial statements in Canadian Dollars. In this prospectus and any applicable supplement, currency amounts are stated in Canadian Dollars ($), unless specified otherwise. As indicated in the table below, the Canadian Dollar has fluctuated in value compared to the U.S. Dollar over time.

The tables below set forth the high and low daily noon exchange rates, the average yearly rate and the rate at period end between Canadian Dollars and U.S. Dollars (in U.S. Dollars per Canadian Dollar) for the five-year period ended October 31, 2012 and the high and low daily noon exchange rates for the three months ended January 31, 2013, the three months ended April 30, 2013, the three months ended July 31, 2013 and for the period August 1, 2013 through October 18, 2013. On October 18, 2013, the daily noon exchange rate was U.S.$0.9721 = $1.00. Our reference to the “daily noon exchange rate” is the daily noon exchange rate as reported by the Bank of Canada.

 

Year Ended October 31,		High				Low				Average Rate(1)				At Period End
2008			1.0905				0.7726				0.9718				0.8220
2009			0.9716				0.7692				0.8603				0.9282
2010			1.0039				0.9278				0.9605				0.9815
2011			1.0583				0.9430				1.0164				1.0065
2012			1.0299				0.9536				0.9968				1.0004
Three months ending										High				Low
January 31, 2013											1.0164				0.9923
April 30, 2013											1.0040				0.9696
July 31, 2013											0.9977				0.9455
Period of										High				Low
August 1, 2013 through October 18, 2013											0.9768				0.9476

 

(1)	The average of the daily noon exchange rates on the last business day of each full month during the relevant period.

LIMITATIONS ON THE ENFORCEMENT OF U.S. LAWS

AGAINST THE BANK, OUR MANAGEMENT AND OTHERS

The Bank is incorporated under the federal laws of Canada under the Bank Act (Canada) (the “Bank Act”). The Guarantor is an Ontario limited partnership. Substantially all of the Bank’s directors and executive officers, including many of the persons who signed the Registration Statement on Form F-3, of which this prospectus forms a part, and some or all of the experts named in this document, reside outside the United States, and all or a substantial portion of the Bank and the Guarantor’s assets and the assets of such persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon such persons, or to realize upon judgments rendered against the Bank or such persons by the courts of the United States predicated upon, among other things, the civil liability provisions of the federal securities laws of the United States. In addition, it may be difficult for you to enforce, in original actions brought in courts in jurisdictions located outside the United States, among other things, civil liabilities predicated upon such securities laws.

 

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The Bank has been advised by our Canadian counsel, Osler, Hoskin & Harcourt LLP, that a judgment of a United States court predicated solely upon civil liability under such laws and that would not be contrary to public policy would probably be enforceable in Canada if the United States court in which the judgment was obtained has a basis for jurisdiction in the matter that was recognized by a Canadian court for such purposes. The Bank has also been advised by such counsel, however, that there is some residual doubt whether an original action could be brought successfully in Canada predicated solely upon such civil liabilities.

 

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RISK FACTORS

Investment in the covered bonds is subject to various risks including those risks inherent in conducting the business of a diversified financial institution. Before deciding whether to invest in the covered bonds, you should consider carefully the risks described in the documents incorporated by reference in this prospectus (including subsequently filed documents incorporated by reference) and, if applicable, those described in a prospectus supplement, as the case may be, relating to a specific offering of covered bonds.

Risks relating to the covered bonds generally

The covered bonds may not be a suitable investment for all investors

The purchase of covered bonds involve substantial risks and are suitable only for investors who have the knowledge and experience in financial and business matters necessary to enable them to evaluate the risks and the merits of an investment in the covered bonds. Prior to making an investment decision, prospective investors should consider carefully, in light of their own financial circumstances and investment objectives, (i) all the information set forth in this prospectus and, in particular, the considerations set forth below and (ii) all the information set forth in the applicable prospectus supplement. Prospective investors should make such inquiries as they deem necessary without relying on us or any arranger or dealer.

Each potential investor in the covered bonds must determine the suitability of its investment in light of its own circumstances. In particular, each potential investor should:

 

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have sufficient knowledge and experience to make a meaningful evaluation of the covered bonds, the merits and risks of investing in the covered bonds and the information contained in this prospectus or incorporated herein by reference or any applicable supplement;

 

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have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the covered bonds and the impact the covered bonds will have on its overall investment portfolio;

 

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have sufficient financial resources and liquidity to bear all of the risks of an investment in the covered bonds, including covered bonds with principal or interest payable in one or more currencies, or where the currency for principal or interest payments is different from the currency in which the potential investor’s financial activities are principally denominated;

 

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understand thoroughly the terms of the covered bonds and be familiar with the behavior of any relevant indices and financial markets; and

 

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be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.

Covered bonds are complex financial instruments. Sophisticated institutional investors generally do not purchase complex financial instruments as stand-alone investments. They

 

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purchase complex financial instruments as a way to reduce risk or enhance yield with an understood, measured, appropriate addition of risk to their overall portfolios. A potential investor should not invest in covered bonds, which are complex financial instruments, unless it has the expertise (either alone or with a financial adviser) to evaluate how the covered bonds will perform under changing conditions, the resulting effect on the value of the covered bonds and the impact this investment will have on the potential investor’s overall investment portfolio.

Certain issues of covered bonds involve a high degree of risk and potential investors should be prepared to sustain a loss of all or part of their investment.

The covered bonds will constitute unsecured and uninsured deposit obligations of the Bank

The covered bonds will constitute deposit liabilities of the Bank for purposes of the Bank Act, however the covered bonds will not be insured under the Canada Deposit Insurance Corporation Act (Canada), and will constitute legal, valid and binding direct, unconditional, unsubordinated and unsecured obligations of the Bank and rank pari passu with all deposit liabilities of the Bank without any preference among themselves and at least pari passu with all other unsubordinated and unsecured obligations of the Bank, present and future, except as prescribed by law and in certain limited circumstances described in Conditions 9.1 (Issuer Events of Default) and 14 (Meetings of Covered Bondholders, Modification, Waiver and Substitution). If the Bank enters into any bankruptcy, liquidation, rehabilitation or other winding-up proceedings and there is a default in payment under any of the Bank’s secured or unsecured indebtedness or if there is an acceleration of any of the Bank’s indebtedness, the value of the covered bonds may decline. Further, the occurrence of an Issuer Event of Default alone does not constitute a Guarantor Event of Default and does not entitle the Bond Trustee to accelerate payment of the Guaranteed Amounts. The Guarantor has no obligation to pay the Guaranteed Amounts payable under the Covered Bond Guarantee until service on the Guarantor of (i) a Notice to Pay following service of an Issuer Acceleration Notice on the Bank following the occurrence of an Issuer Event of Default, or (ii) a Guarantor Acceleration Notice following the occurrence of a Guarantor Event of Default However, failure by the Guarantor to pay amounts when Due for Payment under the Covered Bond Guarantee constitutes a Guarantor Event of Default (subject to any applicable grace periods) and following service of a Guarantor Acceleration Notice, the covered bonds will become immediately due and payable against the Bank and the obligations of the Guarantor under the Covered Bond Guarantee will be accelerated.

The covered bonds are obligations of the Bank and the Guarantor only and do not extend to any of their affiliates or the other parties to the Program, including the Bond Trustee

The payment obligations in relation to the covered bonds will be solely obligations of the Bank and, subject to the terms of the Covered Bond Guarantee, obligations of the Guarantor. Accordingly, the payment obligations under the covered bonds will not be obligations of, or guaranteed by, any other affiliate of the Bank. In particular, the covered bonds will not be obligations of, and will not be guaranteed by, any of the Arrangers, the Dealers, the Bond Trustee, the Cash Manager, the Custodian, any Swap Provider, any of their agents, any company in the same group of companies as such entities or any other party to the Transaction Documents relating to the Program. Any failure by the Bank or the Guarantor to pay any amount due under the covered bonds will not result in any liability whatsoever in respect of such failure being accepted by any of the Arrangers, any of the Dealers, the Bond Trustee, the Custodian, any Swap Provider, any of their agents, the Partners, any company in the same group of companies as such entities or any other party to the Transaction Documents relating to the Program.

 

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The obligations under the Covered Bond Guarantee may be subject to an Extended Due for Payment Date and payment on the Final Redemption Amount may be deferred beyond the Final Maturity Date

The prospectus supplement for a Series of covered bonds may specify that they are subject to an Extended Due for Payment Date. If specified in the applicable prospectus supplement, in circumstances where neither the Bank nor the Guarantor has sufficient funds available to pay in full the Final Redemption Amount due on a Series of covered bonds on the relevant Final Maturity Date or within the relevant grace period, then the Final Maturity Date of the relevant Series of covered bonds may be deferred to an Extended Due for Payment Date. If payment has been deferred as discussed below, failure by the Guarantor to make payment in respect of all or any portion of the Final Redemption Amount on the Final Maturity Date (or such later date within any applicable grace period) will not constitute a Guarantor Event of Default.

If and to the extent that the Guarantor has sufficient funds available to partially redeem the relevant Series of covered bonds, either on the Final Maturity Date or on the applicable Original Due for Payment Dates for that Series of covered bonds up to and including the Extended Due for Payment Date, then (assuming that the Guarantee Acceleration Notice and Notice to Pay for the relevant amount have been served on the Guarantor within the relevant timeframes) the Guarantor will make such partial redemption in accordance with the Guarantee Priorities of Payments and as described in Condition 6.1 (Final redemption) of the Terms and Conditions of the Covered Bonds.

Interest will continue to accrue and be payable on the unpaid amount of the relevant Series of covered bonds in accordance with Condition 4 (Interest) of the Terms and Conditions of the Covered Bonds, and at the rate of interest specified in the applicable prospectus supplement and the Guarantor will pay Guaranteed Amounts constituting Scheduled Interest on each Original Due for Payment Date and the Extended Due for Payment Date.

Failure by the Guarantor to pay Guaranteed Amounts corresponding to the unpaid portion of the Final Redemption Amount or the balance thereof, as the case may be, on the Extended Due for Payment Date and/or pay Guaranteed Amounts constituting Scheduled Interest on any Original Due for Payment Date or the Extended Due for Payment Date will in each case (subject to any applicable grace period) constitute a Guarantor Event of Default.

Covered bonds issued under the Program will rank pari passu with each other and will accelerate at the same time

Covered bonds issued under the Program (except for the first issue of the covered bonds) will either be fungible with an existing Series of covered bonds or have different terms from an existing Series of covered bonds (in which case they will constitute a new Series). All covered bonds issued under the Program from time to time will rank pari passu with each other in all respects and, as obligations of the Bank, pari passu with covered bonds issued previously under the Bank’s Global Public Sector Covered Bond Programme. Following the occurrence of an Issuer Event of Default and service by the Bond Trustee of an Issuer Acceleration Notice, all outstanding covered bonds issued under the Program will accelerate against the Bank but will be subject to, and have the benefit of, the Guaranteed Amounts under the Covered Bond Guarantee (following a Notice to Pay having been served by the Bond Trustee on the Guarantor).

Following the occurrence of a Guarantor Event of Default and service by the Bond Trustee of a Guarantor Acceleration Notice, all outstanding covered bonds will accelerate against the Bank (if not already accelerated following service of an Issuer Acceleration Notice) and the obligations of the Guarantor under the Covered Bond Guarantee will accelerate.

 

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All covered bonds issued under the Program will share pari passu in the Security granted by the Guarantor under the Security Agreement on a pro rata basis. Accordingly, the holders of each Series of covered bonds issued under the Program will be required to share recovery proceeds from the Security with all other holders of each other Series of the covered bonds issued under the Program on a pro rata and pari passu basis. However, holders of covered bonds issued under the Program will not share in the security granted under the Bank’s Global Public Sector Covered Bond Programme, which is guaranteed by a different guarantor entity and secured by a different pool.

Credit ratings assigned to the covered bonds may not reflect all risks

The credit rating assigned to the covered bonds may not reflect the potential impact of all risks related to structure, market, and other factors that may affect the value of the covered bonds. The ratings assigned to the covered bonds with respect to Fitch address the following: the likelihood of full and timely payment to covered bondholders of all payments of interest on each Interest Payment Date; and the likelihood of ultimate payment of principal in relation to covered bonds on (a) their applicable Final Maturity Date, or (b) if the covered bonds are subject to an Extended Due for Payment Date in respect of the Covered Bond Guarantee in accordance with the applicable prospectus supplement, the applicable Extended Due for Payment Date. With respect to DBRS Limited and its successors (“DBRS”), the ratings assigned to the covered bonds address the risk that the issuer will fail to satisfy its financial obligations in accordance with the terms under which the covered bonds have been issued and are based on quantitative and qualitative considerations relating to the issuer and the relevant ranking of claims. With respect to Moody’s, the ratings assigned to the covered bonds address the expected loss posed to investors.

Any Rating Agency may lower or withdraw its credit rating if, in the sole judgment of the Rating Agency, the credit quality of the covered bonds has declined or is in question. If any rating assigned to the covered bonds is lowered or withdrawn, the market value of the covered bonds may be reduced. A downgrade or potential downgrade in these ratings, the assignment of new ratings that are lower than existing ratings, or a downgrade or potential downgrade in the ratings assigned to the Bank or any other securities of the Bank could reduce the number of potential investors in the covered bonds and adversely affect the price and liquidity of the covered bonds. A rating is based upon information furnished by the Bank or obtained by the rating agency from its own sources and is subject to revision, suspension or withdrawal by the rating agency at any time. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time.

Modifications, waivers and substitution under the covered bonds may, in certain circumstances, be made without consent of the covered bondholders

The Terms and Conditions contain provisions for calling meetings of covered bondholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all covered bondholders including covered bondholders who did not attend and vote at the relevant meeting and covered bondholders who voted in a manner contrary to the majority. Except to the extent the Trust Indenture Act applies, an individual covered bondholder may not be in a position to affect the outcome of the resolutions adopted by the meetings of covered bondholders.

 

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The Terms and Conditions of the covered bonds also provide that the Bond Trustee may, without the consent of covered bondholders, (a) agree to any modification, waiver or authorization, of any breach, or proposed breach, of any of the provisions of the covered bonds, (b) determine that any Issuer Event of Default or Guarantor Event of Default will not be treated as such, (c) agree to the substitution of another company as principal debtor under any covered bonds in place of the Bank or the Guarantor or (d) agree to any modification which is of a formal, minor or technical nature or to correct a manifest error or an error which, in the opinion of the Bond Trustee, is proven, in the circumstances described in Condition 14 (Meetings of Covered Bondholders, Modification, Waiver and Substitution) of the Terms and Conditions of the Covered Bonds. The covered bondholders will not be in a position to give instructions to the Bond Trustee in relation to the matters set out above.

The Guarantor’s ability to make payments under the Covered Bond Guarantee will depend primarily on the Portfolio

The Guarantor’s ability to meet its obligations under the Covered Bond Guarantee will depend primarily on the realizable value of Loans and Substitution Assets in the Portfolio, the amount of Revenue Receipts and Principal Receipts generated by the Portfolio and the timing thereof, amounts received from, and payable to, the Swap Providers and the receipt by it of credit balances and interest on credit balances in the GDA Account and the other Guarantor Accounts. The Guarantor will not have any other source of funds available to meet its obligations under the Covered Bond Guarantee. In addition, the Security granted pursuant to the Security Agreement may not be sufficient to meet the claims of all the Secured Creditors, including the covered bondholders. Following enforcement of the Security, Secured Creditors may still have an unsecured claim against the Bank for the deficiency, which will rank pari passu with the other deposit obligations of the Bank. However, there can be no assurance that the Bank will have sufficient funds to pay that shortfall.

If there is a call on the Covered Bond Guarantee, the claims of covered bondholders will be limited to the Guarantor’s available funds from time to time, which may be limited due to a lack of liquidity in respect of the Portfolio

If there is a call on the Covered Bond Guarantee and sale of the Portfolio, the proceeds from the sale of the Portfolio will depend on market conditions at the time of sale. If market conditions are unfavorable, the sale of the Portfolio may result in proceeds that are less than the amount due on the covered bonds. Furthermore, the maturities of the Loans in the Portfolio may not match those of the covered bonds which may require the Guarantor to sell Loans in order to pay principal on those covered bonds. Any such sale of Loans exposes investors to market risk, as the then current market value of the Loans may be less than the principal amount on the covered bonds. In addition, should an Issuer Event of Default or other Registered Title Event occur, there may be a delay in any and all borrowers switching payments to the new Servicer or the Guarantor.

There is no tax gross-up under the Covered Bond Guarantee

All payments of principal and interest in respect of the covered bonds will be made by the Bank without withholding or deduction for, or on account of, taxes imposed by any governmental or other taxing authority (subject to customary exceptions), unless such withholding or deduction is required by law. In the event that any such withholding or deduction is imposed by a tax jurisdiction specified under the Terms and Conditions, the Bank will, save in certain limited circumstances provided in the Terms and Conditions, be required to pay additional amounts to

 

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cover the amounts so deducted. By contrast, under the terms of the Covered Bond Guarantee, the Guarantor will not be liable to pay any such additional amounts payable by the Bank under the Terms and Conditions, or to pay any additional amounts in respect of any amount withheld or deducted for, or on account of, taxes from a payment by the Guarantor under the Covered Bond Guarantee.

The Guarantor may not be able to sell Loans prior to maturity of Hard Bullet Covered Bonds upon a breach of the Pre-Maturity Test or upon an Asset Coverage Test Breach Notice or Notice to Pay

Upon the breach of the Pre-Maturity Test and unless the Pre-Maturity Liquidity Required Amount is otherwise fully funded from Capital Contributions, the Guarantor is obligated to sell Selected Loans (selected on a random basis) to a purchaser in order to generate sufficient cash to enable the Guarantor to pay the Final Redemption Amount on any Hard Bullet Covered Bond in the event that the Bank fails to pay that amount on the relevant Final Maturity Date. If an Asset Coverage Test Breach Notice or a Notice to Pay is served on the Guarantor, the Guarantor may be obliged to sell Selected Loans (selected on a random basis) in order to remedy a breach of the Asset Coverage Test or to make payments to the Guarantor’s creditors, including payments under the Covered Bond Guarantee, as appropriate. There is no guarantee that a purchaser will be found to acquire Selected Loans at the times required and there can be no guarantee or assurance as to the price, which may be obtained, which may affect the ability of the Guarantor to make payments under the Covered Bond Guarantee.

In addition, the Guarantor will not be permitted to give representations and warranties or indemnities for those Selected Loans. There is no obligation for the Seller to give, and no assurance that the Seller would give, any representations and warranties or indemnities in respect of the Selected Loans. Any representations or warranties or indemnities previously given by the Seller in respect of Loans in the Portfolio may not have value for a purchaser if the Seller is then insolvent. Accordingly, there is a risk that the realizable value of the Selected Loans could be adversely affected by the lack of representations, warranties or indemnities which in turn could adversely affect the ability of the Guarantor to meet its obligations under the Covered Bond Guarantee.

The Bond Trustee will not be required to release the Loans and their Related Security from the Security pursuant to any sale and purchase agreement with respect to the sale of Selected Loans unless (i) the Bond Trustee has provided its prior written consent to the terms of such sale in accordance with the Guarantor Agreement, and (ii) the Guarantor has provided a certificate to the Bond Trustee that such sale of Loans and their Related Security has been made in accordance with the terms of the Transaction Documents. See “Summary of the Principal Documents—Security Agreement—Release of Security,” below.

Later maturing covered bonds may not be paid in full or at all under the Covered Bond Guarantee as Portfolio assets are not segregated by different Series of covered bonds and will be used to repay earlier maturing covered bonds first

Although each Series of covered bonds will rank pari passu with all other Series of covered bonds, each Series of covered bonds may not necessarily have the same Final Maturity Date. As Portfolio assets are not segregated in relation to each Series of covered bonds and will be used to repay earlier maturing covered bonds first, there is a risk that later maturing covered bonds will not be paid in full (or at all) under the Covered Bond Guarantee. The Amortization Test may not mitigate this risk. A breach of the Amortization Test will occur if the aggregate principal amount of the covered bonds issued and outstanding under the Program is

 

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greater than the aggregate value of the Portfolio’s assets. Upon the occurrence of a breach of the Amortization Test, a Guarantor Event of Default will also occur which will (subject to the Terms and Conditions) lead to the service of a Guarantor Acceleration Notice on the Guarantor and the acceleration of the obligations under the Covered Bond Guarantee in relation to all covered bonds then outstanding (hence any further timing subordination will cease to exist). There is however no guarantee that the remaining Portfolio assets will be sufficient to meet the claims of the remaining covered bondholders under the Covered Bond Guarantee in full.

Reliance on certain transaction parties

The Guarantor and the covered bondholders place significant reliance on the Bank in connection with the multiple roles of the Bank under the Transaction Documents and such reliance may give rise to conflicts of interest

The Guarantor and the covered bondholders place significant reliance on the Bank in connection with the servicing of the Loans in the Portfolio, as well as for the Guarantor’s administration and funding. In particular, the Bank performs the initial roles of (a) Cash Manager, (b) Servicer, (c) GDA Provider, (d) Swap Provider, (e) Intercompany Loan Provider, and (f) Calculation Agent. The Bank holds substantially all of the interests in the Guarantor and is the sole shareholder of the initial Managing GP. Prior to the occurrence of a Managing GP Default Event, subject to the occurrence of certain events, the Bank has the ability to control the Guarantor through its control of the initial Managing GP. The Bank, under the Servicing Agreement, will be responsible for servicing and administering the Loans and their Related Security. Furthermore, the Bank, as the Seller of assets to the Portfolio, (a) has considerable discretion to substitute Portfolio assets during the course of the Program and can generate and store the data and documentation relating to the Portfolio assets underlying the transfer, retransfer and servicing of the Loans and the Related Security, which data is also provided to third parties in their respective functions under the Program, and (b) is obligated in certain circumstances to repurchase Loans and their Related Security from the Guarantor. See “Summary of the Principal Documents—Mortgage Sale Agreement—Repurchase of Loans.” The Bank, as Cash Manager, has, (a) prior to the earlier of (i) its credit rating falling below any of the threshold ratings of (x) P-1 (in respect of Moody’s), (y) BBB+ and F2 (in respect of Fitch), and (z) BBB (low) (in respect of DBRS), as applicable, of the unsecured, unsubordinated and unguaranteed debt obligations (or in the case of Fitch, the issuer default rating) of the Cash Manager by the Rating Agencies (the “Cash Manager Required Ratings”) or (ii) the occurrence of a Cash Manager Termination Event, unrestricted access to the funds standing to the credit accounts of the Guarantor, and (b) the obligation to identify Non-Performing Loans for purposes of performing the Asset Coverage Test, the Amortization Test and the Valuation Calculation from time to time. The Guarantor is also reliant on the Swap Providers to provide it with the funds matching its obligations under advances and the Covered Bond Guarantee. In view of these multiple roles of the Bank, such reliance may give rise to a wide variety of substantial conflicts of interests. The Bank will have significant influence over important services required to maintain the Program and provided to the Guarantor, which may conflict with the interests of the Guarantor and holders of the covered bonds. This influence could adversely affect the Program and value of the covered bonds. If the Bank does not adequately perform or withdraws from performing such services for the Guarantor or if there are disputes between the Bank and the Guarantor, the Guarantor’s performance of its obligations could be affected. There can be no assurance that the conflicts of interest described above will not have a material adverse effect on the Guarantor’s performance of its payment and other obligations and/or on the covered bondholders.

Further, the Bond Trustee is not obliged under any circumstances to act as a Servicer, as Cash Manager or as any other third party on which the Guarantor relies, or to monitor the performance of any obligations of any third parties under any relevant agreement.

 

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Reliance on Swap Providers

The Guarantor has entered into the Interest Rate Swap Agreement with the Interest Rate Swap Provider to provide a hedge against possible variances in the rates of interest payable on the Loans in the Portfolio (which may, for instance, include variable rates of interest or fixed rates of interest), the amounts payable on the Intercompany Loan and (following the Covered Bond Swap Effective Date) the Covered Bond Swap Agreement. To provide a hedge against currency risks arising, following the Covered Bond Swap Effective Date, in respect of amounts received by the Guarantor under the Interest Rate Swap Agreement and amounts payable in respect of its obligations under the Covered Bond Guarantee, the Guarantor has entered into the Covered Bond Swap Agreement with the Covered Bond Swap Provider.

If the Guarantor fails to make timely payments of amounts due under any Swap Agreement (except where such failure is caused by the funds available to the Guarantor being insufficient to make the required payment in full), then it will have defaulted under that Swap Agreement and such Swap Agreement may be terminated. Further, a Swap Provider is only obliged to make payments to the Guarantor as long as and to the extent that the Guarantor complies with its payment obligations. The Guarantor will not be in breach of its payment obligations where the Guarantor fails to pay a required payment in full, provided such non-payment is caused by the funds of the Guarantor being insufficient to make such payment in full under the relevant Swap Agreement. If a Swap Agreement terminates or the Swap Provider is not obliged to make payments or if it defaults in its obligations to make payments of amounts (including in the relevant currency, if applicable) to the Guarantor on the payment date under the relevant Swap Agreement, the Guarantor will be exposed to changes in the relevant currency exchange rates to Canadian Dollars and to any changes in the relevant rates of interest. Unless a replacement Swap Agreement is entered into, the Guarantor may have insufficient funds to meet its obligations under the Covered Bond Guarantee.

If a Swap Agreement terminates, the Guarantor may be obliged to make a termination payment in an amount related to the mark to market value of such Swap Agreement to the relevant Swap Provider. There can be no assurance that the Guarantor will have sufficient funds available to make such termination payment under the relevant Swap Agreement, nor can there be any assurance that the Guarantor will be able to find a replacement swap counterparty which (i) agrees to enter into a replacement swap agreement on substantially the same terms as the terminated swap agreement, and (ii) has sufficiently high ratings to prevent a downgrade of the then current ratings of the covered bonds by any one of the Rating Agencies.

The obligation to pay a termination payment may reduce the funds available to the Guarantor, which may adversely affect the ability of the Guarantor to meet its obligations under the Covered Bond Guarantee. Additionally, the failure of the Guarantor to receive a termination payment from the relevant Swap Provider may reduce the funds available to the Guarantor, which may adversely affect the ability of the Guarantor to meet its obligations under the Covered Bond Guarantee.

 

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Replacement of the Bank as services provider may not be found on acceptable terms or within an acceptable time period and the ability of the Guarantor to perform its obligations may be impaired

As noted above, the Bank performs a number of initial roles. In addition, the Bank will, as Servicer of the Loans and Related Security, continue to service and administer the Loans and Related Security until revocation of the relevant authority by the Guarantor.

In certain circumstances, the Bank is required to be replaced as provider of these services, for instance if it ceases to have the requisite minimum rating (and it is unable to take other mitigating steps), or if an Issuer Event of Default occurs in relation to the Bank. If the Bank is replaced as Cash Manager, then the Guarantor will be obliged to procure that the funds in the Guarantor’s accounts deposited with the Bank are transferred to a newly opened account with a replacement Cash Manager that meets the Cash Manager Required Ratings. See “Summary of the Principal Documents—Cash Management Agreement.”

There is no certainty that a relevant replacement third party services provider/counterparty could be found who would be willing to enter into the relevant agreement with the Guarantor. The ability of that servicer/counterparty to perform fully its services would depend in part on the information, software and records which are then available to it. In addition, the replacement servicer may be required to acquire or develop new servicing systems or platforms, which may require substantial time and expense to implement. There can be no assurance that the Guarantor will be able to enter into such replacement agreements and transactions on acceptable terms and within a time period which will ensure uninterrupted payments of amounts due by the Guarantor under the Covered Bond Guarantee (if called). Moreover, any entity appointed as Servicer would not become bound by the Bank’s obligations under the Mortgage Sale Agreement.

In the event that any of the Cash Manager, the Account Bank, the Custodian, the Servicer, a Swap Provider or other relevant party providing services to the Guarantor under the Transaction Documents fails to perform its obligations or the Guarantor is unable to replace such service providers in a timely manner, the Guarantor’s ability to perform its payment and other obligations may be compromised. Furthermore, any delay or inability to appoint a suitable replacement Servicer may have an impact on the realizable value of the Portfolio’s assets.

Depending on market conditions and the existence of a potential replacement Swap Provider with the required ratings and other applicable characteristics, the Guarantor may not be able to enter into replacement swaps if the Bank is required to be replaced as Swap Provider. If no such replacement swaps are executed, an investor in the relevant covered bonds will be exposed to the interest rate and currency risks that were otherwise hedged by the relevant swaps prior to their termination. Such exposure may result in a reduction of the amounts available to be paid on the covered bonds.

In addition, should the applicable criteria (other than ratings requirements which, if not satisfied, will require the replacement of the Bank unless the Guarantor is Independently Controlled and Governed) cease to be satisfied, the parties to the relevant Transaction Document may agree to amend or waive certain of the terms of such document, including the applicable criteria, in order to avoid the need for a replacement entity to be appointed. Although in certain circumstances the consent of the Bond Trustee and satisfaction of the Rating Agency Condition may be required, the consent of covered bondholders may not be required in relation to such amendments and/or waivers.

Further, the Bank will act in its own interests under the Program which may be adverse to your interests as a holder of the covered bonds. See “—Program related legal and regulatory risks—The Bank will act in its own interest in connection with the Program, and such actions may not be in the best interests of, and may be detrimental to, the holders of covered bonds.”

 

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Bankruptcy or Insolvency Risk

The assignments of the Portfolio assets from the Seller to the Guarantor pursuant to the terms of the Mortgage Sale Agreement are intended by the Seller and the Guarantor to be, and have been documented as, sales for legal purposes. As the subject of a legal sale, the Portfolio assets would not form part of the assets of the Bank available for distribution to the creditors of the Bank. However, if the Seller or the Guarantor were to become bankrupt or otherwise subject to insolvency, winding-up, receivership and/or restructuring proceedings, the Superintendent of Financial Institutions (the “Superintendent”), appointed pursuant to the Office of the Superintendent of Financial Institutions Act (Canada), Canada Deposit Insurance Corporation, appointed as receiver pursuant to the Canada Deposit Insurance Corporation Act (Canada), or any liquidator or other stakeholder of the Seller, could attempt to re-characterize the sale of the Portfolio assets as a loan from the Guarantor to the Seller secured by the Portfolio assets, to challenge the sale under the fraudulent transfer or similar provisions of the Winding-up and Restructuring Act (Canada) (“WURA”) or other applicable laws or to consolidate the assets of the Seller with the assets of the Guarantor. In this regard, the Transaction Documents contain restrictions on the Seller and the Guarantor intended to reduce the possibility that a Canadian court would order consolidation of the assets and liabilities of the Seller and the Guarantor given, among other things, current jurisprudence on the matter. Further, the Legislative Framework contains provisions that will limit the application of the laws of Canada and the provinces and territories relating to bankruptcy, insolvency and fraudulent conveyance to the assignments of the Portfolio assets from the Seller to the Guarantor. Nonetheless, any attempt to challenge the transaction or to consolidate the assets of the Seller with the assets of the Guarantor, even if unsuccessful, could result in a delay or reduction of collections on the Portfolio assets available to the Guarantor to meet its obligations under the Covered Bond Guarantee, which could prevent timely or ultimate payment of amounts due to the Guarantor, and consequently, the holders of the covered bonds.

The interests of the Guarantor may be subordinate to statutory deemed trusts and other non-consensual liens, trusts and claims created or imposed by statute or rule of law on the property of the Seller arising prior to the time that the Portfolio assets are transferred to the Guarantor, which may reduce the amounts that may be available to the Guarantor and, consequently, the holders of the covered bonds. The Guarantor will not, at the time of sale, give notice to borrowers of the transfer to the Guarantor of the Portfolio assets or the grant of a security interest therein to the Bond Trustee. However, under the Mortgage Sale Agreement, the Seller will warrant that the Portfolio assets have been or will be transferred to the Guarantor free and clear of the security interest or lien of any third party claiming an interest therein, through or under the Seller, other than certain permitted security interests. The Guarantor will warrant and covenant that it has not taken and will not take any action to encumber or create any security interests or other liens in any of the property of the Guarantor, except for the security interest granted to the Bond Trustee and except as permitted under the Transaction Documents.

Amounts that are on deposit from time to time in the Guarantor Accounts may be invested in certain permitted investments pursuant to the Transaction Documents. In the event of

 

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the liquidation, insolvency, receivership or administration of any entity with which an investment of the Guarantor is made (such as pursuant to the Guaranteed Deposit Account Contract or the Standby Guaranteed Deposit Account Contract) or which is an issuer, obligor or guarantor of any investment, the ability of the Guarantor to enforce its rights to any such investments and the ability of the Guarantor to make payments to holders of the covered bonds in a timely manner may be adversely affected and may result in a loss on the covered bonds. In order to reduce this risk, these investments must satisfy certain criteria.

Payments of interest and principal on the covered bonds are subordinate to certain payments (including payments for certain services provided to the Guarantor), taxes and the reimbursement of all costs, charges and expenses of and incidental to the enforcement of the Trust Deed and the other Transaction Documents to which the Bond Trustee is a party, including the appointment of a receiver in respect of the Portfolio assets (including legal fees and disbursements) and the exercise by the receiver or the Bond Trustee of all or any of the powers granted to them under the Trust Deed and the other Transaction Documents to which the Bond Trustee is a party, and the reasonable remuneration of such receiver or any agent or employee of such receiver or any agent of the Bond Trustee and all reasonable costs, charges and expenses properly incurred by such receiver or the Bond Trustee in exercising their power. These amounts could increase, especially in adverse circumstances such as the occurrence of a Guarantor Event of Default, the insolvency of the Bank or the Guarantor or a Servicer Termination Event. If after the insolvency of the Bank such expenses or the costs of a receiver or the Bond Trustee become too great, payments of interest on and principal of the covered bonds may be reduced or delayed.

The ability of the Bond Trustee (for itself and on behalf of the other Secured Creditors) to exercise remedies in respect of the covered bonds and the Covered Bond Guarantee and to enforce the security granted to it pursuant to the terms of the Security Agreement is subject to the bankruptcy and insolvency laws of Canada. The Bankruptcy and Insolvency Act (Canada) (“BIA”) and the Companies’ Creditors Arrangement Act (Canada) (“CCAA”) both provide regimes pursuant to which debtor companies are entitled to seek temporary relief from their creditors. The BIA applies to limited partnerships. In addition, Canadian jurisprudence makes it clear that both the BIA and the CCAA can apply to limited partnerships. Further, it is a possibility that a liquidator or receiver of the Seller, another creditor of the Guarantor or the Superintendent could seek the court appointment of a receiver of the Guarantor or a winding-up of the Guarantor, or might commence involuntary bankruptcy or insolvency proceedings against the Guarantor under the BIA or the CCAA.

If the Guarantor or Bank, including as Seller and initial Servicer, voluntarily or involuntarily becomes subject to bankruptcy, insolvency or winding-up proceedings including pursuant to the BIA, the CCAA or the WURA or if a receiver is appointed over the Bank or the Guarantor, notwithstanding the protective provisions of the Legislative Framework, this may delay or otherwise impair the exercise of rights or any realization by the Bond Trustee (for itself and on behalf of the other Secured Creditors) under the covered bonds, the Covered Bond Guarantee and/or the Security Agreement and/or impair the ability of the Guarantor or Bond Trustee to trace and recover any funds which the Servicer has commingled with any other funds held by it prior to such funds being paid into the GDA Account. In the event of a Servicer Termination Event as a result of the insolvency of the Bank, the right of the Guarantor to appoint a successor Servicer may be stayed or prevented.

 

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Risks relating to the Portfolio

When realizing assets of the Portfolio following the occurrence of a Guarantor Event of Default, the proceeds may be insufficient to repay all amounts due to covered bondholders

All Guaranteed Amounts will immediately become due and payable following the occurrence of a Guarantor Event of Default and the service of a Guarantor Acceleration Notice on the Guarantor. At such time, the Bond Trustee will then be entitled to liquidate the Portfolio and otherwise enforce assets under the Portfolio in accordance with, and subject to, the provisions of the Security Agreement. The enforcement proceeds thereof may be used to make payments to the Guarantor’s creditors, including payments under the Covered Bond Guarantee in accordance with the Post-Enforcement Priorities of Payments, described below in “Cashflows.” However, there is no guarantee that the proceeds of enforcement of the Portfolio will be in an amount sufficient to repay all amounts due to the covered bondholders and any relevant creditors.

In the case of insolvency of the Account Bank, the Guarantor will only have an unsecured claim against the estate for funds deposited

While the Guarantor has undertaken to transfer the funds standing to the credit of the Account Bank to another bank if the credit rating of the Account Bank falls below the Account Bank Required Ratings, there can be no assurance that such transfer would be completed before the Account Bank becomes insolvent. If such an event occurs, the Guarantor would have a claim as an unsecured creditor of the Account Bank. Accordingly, there is a potential risk of a loss of the Guarantor’s funds held with the Account Bank in the event that the Account Bank has insufficient funds to meet all the claims of its unsecured creditors.

The Asset Coverage Test, Amortization Test, Valuation Calculation and Pre-Maturity Test may not ensure that adequate funds will be available to satisfy the Guarantor’s obligations in full

While the Asset Coverage Test, the Amortization Test and the Pre-Maturity Test have been designed to mitigate certain economic and legal stresses in connection with the performance and valuation of the Portfolio in order to ensure that the Guarantor is able to meet its ongoing requirements at all relevant times, in setting the values and criteria for such tests, modeling has been undertaken on the basis of certain assumptions in certain stress scenarios. No assurance can be given that the assumptions utilized in such modeling have been able to incorporate or examine all possible scenarios that may occur in respect of the Guarantor and the Portfolio. As such, no assurance can be given that the methodology and modeling utilized to set the relevant values and criteria within such tests will be sufficient in all scenarios to ensure that the Guarantor will be able to meet its obligations in full.

The Bond Trustee will not be responsible for monitoring compliance with, or the monitoring of, the Asset Coverage Test, the Amortization Test, the Valuation Calculation or the Pre-Maturity Test or any other test, or supervising the performance by any other party of its obligations under any Transaction Document. See “Summary of the Principal Documents—Guarantor Agreement.”

While the Guarantor is required to perform the Valuation Calculation to monitor exposure to volatility of interest rate and currency market risk by measuring the present value of the Portfolio relative to the market value of the obligations guaranteed under the Covered Bond Guarantee, there is no obligation on the part of the Bank or the Guarantor to take any action in respect of the Valuation Calculation to the extent it shows the market value of the Portfolio is less than the market value of the obligations guaranteed under the Covered Bond Guarantee.

 

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Borrowers may default in paying amounts due under the Loans. The inability of borrowers to pay amounts due under the Loans may reduce the amount of the Guarantor’s available funds.

Borrowers may for a variety of reasons default on their obligations due under the Loans. Various factors influence mortgage delinquency rates and the ultimate payment of interest and principal. Examples of such factors include changes in the national or international economic climate, regional economic or housing conditions, changes in tax laws, interest rates, inflation, the availability of financing, yields on alternative investments, political developments and government policies. Other factors in a borrower’s individual, personal or financial circumstances may affect the ability of the borrower to repay the Loan. Loss of earnings, illness, divorce and other similar factors may also lead to an increase in delinquencies by and bankruptcies of borrowers, and could ultimately have an adverse impact on the ability of borrowers to repay the Loans. In addition to the above, the ability of a borrower to sell a property at a price sufficient to repay the amounts outstanding under that Loan will depend upon a number of factors, including the availability of purchasers for that property, the value of that property and property values in general at the time. See also “—Risks relating to the Canadian residential mortgage market such as a deterioration in the market for real estate, could negatively affect the value and marketability of the covered bonds.”

Risks relating to the Canadian residential mortgage market such as a deterioration in the market for real estate, could negatively affect the value and marketability of the covered bonds

A severe correction in the housing market could create strains in the residential mortgage market by causing an economic recession (and associated loss of income) and a reduction in homeowner equity, leading to rising delinquencies. The risk of a severe correction is considered low in most regions of the country, as valuations are moderate, affordability is reasonable and interest rates are likely to remain low for some time. The risk of a correction is somewhat larger in the Greater Vancouver and Toronto areas, which account for about one-quarter of the population, as valuations are high and affordability of detached properties is strained. The risk of a severe correction would increase if interest rates rose sharply or an external shock caused the economy to contract. In this case, the subsequent housing downturn would impair economic circumstances and create greater stress in the mortgage market.

Prior to the completion of a transfer of payments collected from the Loans and their Related Security to the Guarantor, funds collected by the Servicer on behalf of the Guarantor are commingled with the funds of the Servicer, and there can be no assurance as to the ability of the Guarantor to obtain effective direct payments from borrowers

Notice is usually given to borrowers of the transfer of the Loan and Related Security to the Guarantor only after the occurrence of a Registered Title Event. Such notice will instruct the relevant borrower to pay all further amounts due under the relevant Loan to an account in the name of the Guarantor (as specified in such notice). As a matter of Canadian law, until such notice is received by the borrower, the borrower may continue to pay all amounts due under the relevant Loan to the Seller and receive good discharge for such payments.

There can be no assurance that upon the occurrence of a Registered Title Event, (a) notification to the borrower will be made duly and timely or (b) the Guarantor will have the ability to obtain effective direct payments from the borrower under the Loan and the Related Security.

 

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Under the Servicing Agreement, the Servicer may receive funds belonging to the Guarantor that arise from the Loans and their Related Security comprised in the Portfolio and are to be paid into the GDA Account. Prior to a downgrade of the ratings of the Servicer by one or more Rating Agencies below any of the Servicer Deposit Threshold Ratings, the Servicer will transfer such funds on or before the next Guarantor Payment Date (i) to the Cash Manager prior to a downgrade of the ratings of the Cash Manager by one or more Rating Agencies below any of the Cash Management Deposit Ratings, and (ii) following a downgrade of the ratings of the Cash Manager by one or more Rating Agencies below any of the Cash Management Deposit Ratings, directly into the GDA Account. In the event of a downgrade of the ratings of the Servicer by one or more Rating Agencies below any of the Servicer Deposit Threshold Ratings, the Servicer will transfer such funds (i) to the Cash Manager prior to a downgrade of the ratings of the Cash Manager by one or more Rating Agencies below any of the Cash Management Deposit Ratings, and (ii) following a downgrade of the ratings of the Cash Manager by one or more Rating Agencies below any of the Cash Management Deposit Ratings, directly into the GDA Account, in each case within two Canadian Business Days of the collection and/or receipt thereof.

Until completion of the transfer of such payments collected on the Loans and Related Security to the Cash Manager or the GDA Account and prior to the circumstances as set out above, funds collected by the Servicer on the account of the Guarantor are commingled with the funds of the Servicer. This may adversely affect the timing and amount of payments on the covered bonds. Moreover, the Bank also serves as initial Account Bank to the Guarantor. Therefore, even if the transfer of such payments to the Guarantor’s account with the Bank is completed, the covered bondholders bear the risk of an insolvency of the Bank unless the Bank has been replaced as Account Bank and transfer of the funds has been completed prior to such event.

The Lending Criteria applicable to any Loans at the time of its origination may not be the same as those set out in this prospectus, including lower creditworthiness

Each of the Loans originated by the Seller will have been originated in accordance with its Lending Criteria at the time of origination. Since the Portfolio is dynamic, Loans made based on different lending criteria may be included in the Portfolio so long as the Loan Representations and Warranties are satisfied as of the applicable Purchase Date with respect to each such Loan. It is expected that the Seller’s Lending Criteria will generally consider type of property, term of loan, age of applicant, the Loan-To-Value ratio, insurance policies, high loan-to-value fees, status of applicants and credit history. In connection with the sale of any Loans and Related Security to the Guarantor, the Seller will warrant only that prior to making each advance under such Loans, the Lending Criteria and all other preconditions to the making of the Loans were satisfied. The Seller retains the right to revise its Lending Criteria from time to time but would only do so to the extent that such a change would be acceptable to reasonable and prudent institutional mortgage lenders in the Seller’s market. If the Lending Criteria of the Seller changes in a manner that affects the creditworthiness of the Loans, that may lead to increased defaults by borrowers and may affect the realizable value of the Portfolio, or part thereof, and the ability of the Guarantor to make payments under the Covered Bond Guarantee.

In addition, New Sellers who are affiliates of the Bank may in the future accede to the Program, become a limited partner of the Guarantor and sell Loans and their Related Security to

 

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the Guarantor. Any loans originated by a New Seller will have been originated in accordance with the lending criteria of the New Seller, which may differ from the Lending Criteria for Loans originated by the Seller. If the lending criteria differ in a way that affects the creditworthiness of the Loans in the Portfolio, that may lead to increased defaults by borrowers and may affect the realizable value of the Portfolio or any part thereof or the ability of the Guarantor to make payments under the Covered Bond Guarantee.

Levels of arrears in the Portfolio included in the applicable prospectus supplement are as of the applicable cut-off dates, and may have changed at the date of the issuance of the relevant Series of covered bonds

For each Series of covered bonds, selected information about the Loans in the Portfolio, including information in respect of arrears as at the cut-off date prior to the time of the relevant issue of such Series of covered bonds, will be set out in the applicable prospectus supplement. Except as otherwise indicated in such prospectus supplement, the selected information will be prepared using the current balance as of the relevant cut-off date, which includes all principal and accrued interest for the Loans as of the relevant cut-off date and may not be a true reflection of the Loans as at the date of issuance of such Series of covered bonds. The selected information will not include any Loans assigned to the Portfolio since the relevant cut-off date.

 

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New Loan Types may be included in the Portfolio without the consent of covered bondholders

As at the date of this prospectus, the Portfolio is comprised of Loans secured on residential property located in Canada which have been fully advanced at the date of sale to the Guarantor. In the event that New Loan Types are subsequently included, amendments will be made to the Eligibility Criteria, the Loan Representations and Warranties and certain related provisions of the Mortgage Sale Agreement, subject to satisfaction of the Rating Agency Condition with respect thereto. While New Loan Types will be required to comply with the eligibility requirements under Part I.1 of the NHA and the CMHC Guide, the consent of the covered bondholders to these changes will not need to be obtained and as a consequence the interests of the covered bondholders may be adversely affected.

The Guarantor does not have registered or recorded title to the Loans and their Related Security in the Portfolio on the relevant Purchase Date, which could affect its rights against borrowers

The Seller will transfer all of its right, title and interest in the Loans and their Related Security to the Guarantor pursuant to the Mortgage Sale Agreement on the relevant Purchase Date. However, the registered or recorded title to the transferred Loans and their Related Security will remain with the Seller until the occurrence of a Registered Title Event. As a result (and until such time) application will not be made to the applicable land registry offices to register or record the Guarantor’s ownership interest in the Loans and their Related Security and notice of the sale of the Loans and their Related Security will not be given to any borrower. Since prior to the occurrence of a Registered Title Event, the Guarantor will not have perfected its ownership interest in the Loans and their Related Security by completing the applicable registrations at the appropriate land registry or land titles office or providing notice of the sale of the Loans to the borrowers, the following risks exist:

 

•

first, if the Seller sells a Loan and its Related Security, which has already been sold to the Guarantor, to another person and that person acted in good faith and did not have notice of the interest of the Guarantor in the Loan and its Related Security, then such person might obtain good title to the Loan and its Related Security, free from the interest of the Guarantor. If this occurs then the Guarantor may not have good title in the affected Loan and its Related Security and it may not be entitled to payments by a borrower in respect of that Loan.

 

•

second, the rights of the Guarantor may be subject to the rights of the borrowers against the Seller, such as rights of set-off that may occur in relation to transactions or deposits made between borrowers and the Seller and the rights of borrowers to redeem their mortgages by repaying the Loans directly to the Seller; and

 

•

third, unless the Guarantor has perfected the sale of the Loans (which it is only entitled to do in certain circumstances), the Guarantor may not be able to enforce any borrower’s obligations under the relevant Loan itself but may have to join the Seller as a party to any legal proceedings.

 

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If any of the risks described in the bullet points above were to occur, then the realizable value of the Portfolio or any part thereof and/or the ability of the Guarantor to make payments under the Covered Bond Guarantee may be adversely affected. In addition, the exercise of set-off rights by borrowers may also adversely affect the amount that the Bond Trustee (for covered bondholders and on behalf of the other Secured Creditors) is able to realize on the Portfolio under the Security Agreement.

Limitations on recourse to the Seller may adversely affect the Portfolio

The Guarantor and the Bond Trustee will not undertake any investigations, searches or other actions on any Loan or its Related Security and will rely instead on the representations and warranties provided by the Seller in connection with the transfer of such Loans and their Related Security. If any of the representations and warranties prove to be untrue or there is a material breach of these representations and warranties (subject to the Seller remedying such breach within a certain period of time), the Seller will be required to repurchase the Loan and its Related Security. There can be no assurance that the Seller will have the financial resources to repurchase the Loans and their Related Security. However, if the Seller does not repurchase those Loans and their Related Security that are in breach, those Loans will be given a zero value for the purposes of any calculation of the Asset Coverage Test, the Valuation Calculation and/or the Amortization Test. There is no further recourse to the Seller for a breach of a Loan Representation and Warranty.

The Portfolio consists of Loans and their Related Security to be randomly selected by the Seller which are represented to satisfy the Loan Representations and Warranties and the CMHC Guide

None of the Arrangers, the Cover Pool Monitor, any Dealer, Bond Trustee, or the Custodian has undertaken or will undertake any due diligence with respect to the wording or content of the individual agreements underlying such Portfolio assets or the facts and circumstances relating to the particular relationship between the relevant borrower or the related Property, respectively, and the Seller, all of which may impact the viability and interpretation of such agreements. The Guarantor will rely on the Loan Representations and Warranties given by the Seller in the Mortgage Sale Agreement. The remedies provided for in the Mortgage Sale Agreement to the Guarantor in respect of non-compliance with the Loan Representation and Warranties (other than where such breach was waived at the point of transfer to the Guarantor), will be limited to the repurchase by the Seller of the related Loan and its Related Security for an amount equal to the applicable Repurchase Amount. Such obligation is not guaranteed by nor will it be the responsibility of any person other than the Seller and neither the Guarantor nor the Bond Trustee will have recourse to any other person in the event that the Seller, for whatever reason, fails to meet such obligation.

The sale of real property upon the enforcement of a mortgage security is subject to Canadian real property and insolvency regulations, property transfer taxes, capital gain taxes and legal liens

Limitations on enforceability of mortgage security. Generally, a lender’s right to realize on its mortgage security may be subject to or regulated by statutes, the existing practice and procedures of a court of competent jurisdiction and that court’s equitable powers. Under certain circumstances, a court may exercise equitable powers to relieve a borrower from the effects of certain defaults or acceleration. Certain proceedings taken by a lender to realize upon its

 

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mortgage security, such as foreclosure and judicial sale, are subject to most of the delays and expenses of other lawsuits, particularly if defenses or counterclaims are asserted, sometimes requiring up to several years to complete. If a borrower makes a proposal or an assignment or initiates or becomes subject to any other proceedings under the BIA or other insolvency, arrangement or other legislation for the relief of debtors, the Seller or the Guarantor may not be permitted to accelerate the maturity of the related Loan, to foreclose on the Property or to exercise power of sale or other mortgage enforcement proceedings for a considerable period of time.

Where a borrower or any beneficial owner of a Property is or subsequently becomes a non-resident of Canada under the ITA and remains a non-resident at the time that enforcement proceedings are taken under the Loan, the specific remedies available to the lender may be practically limited by the requirement that the lender comply with section 116 of the ITA upon any sale of the Property under or in respect of the related Loan which may require the lender to withhold from realization proceeds an amount equal to (or, in certain cases, greater than) the tax applicable to any accrued capital gain of such non-resident person triggered by such sale. Many of the Loans contain “due-on-sale” clauses, which permit the acceleration of the maturity of the related Loan if the borrower sells the related Property. The Loans also generally include a debt-acceleration clause, which permits the acceleration of the Loan upon a monetary or non-monetary default by the borrower. The enforceability of such due-on-sale and debt-acceleration clauses is subject to and may be affected by (i) applicable bankruptcy, insolvency and other laws of general application limiting the enforcement of creditors’ rights and remedies generally, and (ii) applicable principles of law and equity, and in some provinces, applicable statutory provisions which limit restraint on alienation of real property and provide relief to a borrower, in certain circumstances, from the effects of certain defaults or acceleration.

Prior liens. The priority of mortgages securing the Loans may be subject to prior liens resulting from the operation of law, such as liens in favor of governmental authorities and persons having supplied work or materials to the relevant Property. In each province and territory, the priority of a mortgage against real property may be subject to a prior lien for unpaid realty taxes in favor of the applicable taxing authorities. In the Province of Québec, the priority of a hypothec on rents may be subject to a prior claim in favor of the government for amounts due under fiscal laws.

Registered title. The Mortgages securing the Loans will be registered in the name of the Seller, as agent, bare trustee and nominee in trust for the Guarantor. Upon the occurrence of a Registered Title Event, the Guarantor will have the right to demand that the Seller provide it with registered or recorded title to the Loans and their Related Security at the expense of the Seller, and if the Seller fails to do so, the Guarantor will exercise certain powers of attorney granted to it by the Seller, and record assignments and transfers of all Loans in its name (or in any other name it may decide). If such registration becomes necessary, there may be costs and delays associated with effecting such registrations (potentially resulting in delays in commencing, prosecuting and completing enforcement proceedings). The Seller will be responsible for meeting all costs associated with such registrations. However, if the Seller does not have the funds to pay such costs, any related expenses the Guarantor is required to pay may reduce the amounts available to pay the covered bondholders.

 

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Adverse environmental conditions on a Property may affect the value of a Loan

If an adverse environmental condition exists with respect to a Property, the related Loan may be subject to the following risks: (i) a diminution in the value of such Property or the practical ability to foreclose or take other enforcement proceedings against such Property; (ii) the potential that the related borrower may default on the related Loan due to such borrower’s inability to pay high remediation costs or difficulty in bringing the Property into compliance with environmental laws; (iii) in certain circumstances as more fully described below, the liability for clean-up costs or other remedial actions could exceed the value of the Property; or (iv) the practical inability to sell the Property or the related Loan in the secondary market. Under certain provincial laws, the reimbursement of remedial costs incurred by regulatory agencies to correct environmental conditions may be secured by a statutory lien over the subject property, which lien, in some instances, may be prior to the lien of an existing mortgage. Any such lien arising in respect of a Loan could adversely affect the value of such Loan and could make any foreclosure or other enforcement proceedings impracticable. Under various federal and provincial laws and regulations, a current or previous owner or operator of real property, as well as certain other categories of parties, may be liable for the costs of removal or remediation of hazardous or toxic substances on, under, adjacent to or in such property. The cost of any required remediation and the owner’s liability therefor is generally not limited under applicable laws, and could exceed the value of the property and/or the assets of the owner. Under some environmental laws, a secured lender may be found to be an “owner” or “operator” or person in charge, management or control of, or otherwise responsible for, the Property. In such cases, a secured lender may be liable for the costs of any required removal or remediation of adverse environmental conditions. The Guarantor and/or the Bond Trustee’s exposure to liability for clean-up costs will increase if it or its agent actually takes possession of a Property.

The entire real property securing the Loans in the Portfolio is located in Canada and a deterioration in the market for real estate in Canada could negatively affect the value of the covered bonds

All the real property securing the Loans in the Portfolio is located in Canada. The performance of the Loans will therefore be affected by general economic conditions in Canada and the condition of the residential housing market in Canada. A significant deterioration in the market for residential or other real estate could negatively affect the value of the real property in the underlying Portfolio and the Canadian residential mortgage market, which in turn could have an adverse effect on the value and marketability of the covered bonds and the ability of the Guarantor to make payments under the Covered Bond Guarantee.

Interest obligations may be greater than the monthly installment payment for certain products and borrowers may refuse to pay excess amounts

When the Bank’s prime rate increases, the amount of interest payable by a borrower under a variable rate loan increases. The borrower’s installment payment, however, remains constant (except as discussed below) and, the portion of the borrower’s monthly mortgage payment allocated towards the payment of principal is reduced. If the interest rate on a Loan reaches the level at which the borrower’s mortgage payment is insufficient to cover the interest payable, the difference is capitalized and added to the principal balance of the Loan. For certain

 

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variable rate products this may result in the principal balance of the Loan being greater than the original principal amount of the Loan. If the principal balance of the Loan increases in excess of 105 percent of the original principal amount of the Loan, the Bank may require the borrower to pay the excess amount, increase the amount of the borrower’s monthly installment, or (if the borrower has the right to do so under the Loan) convert the Loan to a Fixed Rate Loan. Accordingly, an increase in a borrower’s monthly installment or principal balance may affect the borrower’s timely payment of scheduled payments of principal and interest on the related Loan and, accordingly, the actual rates of delinquencies, foreclosures and losses with respect to such Loan. Further, economic and market conditions may impair borrowers’ ability to make timely payment of scheduled payments of principal and interest on the Loans or to refinance or sell their residential properties, which may contribute to higher delinquency and default rates, and may in turn adversely affect the value of the covered bonds. See “—Risks relating to the Canadian residential mortgage market such as a deterioration in the market for real estate, could negatively affect the value and marketability of the covered bonds.”

The Portfolio consists of Loans with renewal risk due to short maturities

Canadian mortgage loans generally provide for the renewal of the loans periodically (e.g., every five years), but the amortization period of the loans is generally much longer (e.g., 25 years). See “Portfolio—Characteristics of the Loans.” The borrower faces a change, perhaps a substantial change, in the applicable interest rate on the loan at the time of renewal and the prospect of seeking a replacement loan from another lender if the current lender does not renew the loan. In an adverse economic environment, obtaining a replacement loan may be difficult. Accordingly, if prevailing interest rates have risen significantly, an existing lender may need to renew the loan at below market rates in order to avoid a default on a loan up for renewal.

If the Bank renews Loans at below market rates, it may adversely affect the market value of such Loans in the Portfolio and in the event that the Guarantor must liquidate some Loans in order to meet its obligations under the Covered Bond Guarantee it may realize less than the principal amount of the Loans liquidated. If the Guarantor is required to liquidate a large number of Loans that have interest rates significantly below prevailing interest rates, the Guarantor may not realize sufficient proceeds to pay the covered bonds in full.

Risks relating to the Guarantor

There are limited events of default with respect to the Guarantor

Service of an Issuer Acceleration Notice on the Bank does not constitute an event of default with respect to the Guarantor and, therefore, does not in itself trigger an acceleration of the payment obligations of the Guarantor under the Covered Bond Guarantee. Instead, the Terms and Conditions contain limited events of default with respect to the Guarantor, the occurrence of which would entitle covered bondholders to accelerate payment obligations under the Covered Bond Guarantee. Acceleration of the covered bonds following a Guarantor Event of Default may not lead to accelerated payments to covered bondholders, since there can be no assurance that the Guarantor or the Bond Trustee will be able to promptly sell the Portfolio.

 

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Currency risks and risks related to Swaps

Differences in timing of obligations of the Guarantor and the Covered Bond Swap Provider under the Covered Bond Swap Agreement could adversely affect the Guarantor’s ability to meet its obligations

Following the Covered Bond Swap Effective Date, the Guarantor will, on each Guarantor Payment Date, pay or provide for payment of an amount to the Covered Bond Swap Provider based on the Canadian Deposit Offering Rate for Canadian Dollar deposits (“CDOR”) having the relevant maturity for the agreed period. The Covered Bond Swap Provider may not be obliged to make corresponding swap payments to the Guarantor until amounts are due and payable by the Guarantor under the Intercompany Loan Agreement or Due for Payment under the Covered Bond Guarantee. If the Covered Bond Swap Provider does not meet its payment obligations to the Guarantor under the Covered Bond Swap Agreement or does not make a termination payment that has become due from it to the Guarantor under the Covered Bond Swap Agreement, the Guarantor may have a larger shortfall in funds with which to make payments under the Covered Bond Guarantee with respect to the covered bonds than if the Covered Bond Swap Provider satisfied its payment obligations on the same date as the date on which the Guarantor’s payment obligations under the Covered Bond Swap were due. Hence, the difference in timing between the obligations of the Guarantor and the obligations of the Covered Bond Swap Provider under the Covered Bond Swap Agreement may affect the Guarantor’s ability to make payments under the Covered Bond Guarantee with respect to the covered bonds. To mitigate the risk, the Covered Bond Swap Provider will be required, pursuant to the terms of the relevant Covered Bond Swap Agreement, to post collateral with the Guarantor if the Guarantor’s net exposure to the Covered Bond Swap Provider under the relevant Covered Bond Swap Agreement exceeds a certain threshold level or if certain ratings requirements are not met.

Risks related to the structure of a particular issue of covered bonds

Changes of law, including applicable banking, bankruptcy and income tax laws and NHA regulations and policies may affect the covered bonds, the Covered Bond Guarantee, the Bank and/or the Guarantor

The structure of the issue of the covered bonds and the ratings which are to be assigned to them are based on the laws of the Province of Ontario and the federal laws of Canada applicable therein including banking, bankruptcy and income tax laws in effect as at the date of this prospectus, unless otherwise indicated. No assurance can be given as to the impact of any possible change to these laws, including the NHA and the regulations and policies thereunder with respect to CMHC guidelines (including the CMHC Guide), the applicable laws, regulations and policies with respect to the issuance of covered bonds, the covered bonds themselves or the bankruptcy and receivership of the Bank or the Guarantor after the date of this prospectus, nor can any assurance be given as to whether such change could adversely affect the ability of the Bank to meet its obligations in respect of the covered bonds or the Guarantor to meet its obligations under the Covered Bond Guarantee.

The covered bonds may be subject to optional redemption by the Bank

An optional redemption feature of a Series of covered bonds is likely to limit their market value. During any period when the Bank may elect to redeem such covered bonds, the market value of those covered bonds generally will not rise substantially above the price at which they can be redeemed. This also may occur prior to any redemption period.

 

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The Bank may be expected to redeem such Series of covered bonds when its cost of borrowing is lower than the interest rate on the Series of covered bonds. At those times, an investor generally would not be able to reinvest the redemption proceeds at an effective interest rate as high as the interest rate on the Series of covered bonds being redeemed and may only be able to do so at a significantly lower rate. Potential investors should consider reinvestment risk in light of other investments available at that time.

The Bank may issue covered bonds that bear interest at a rate that converts from a Fixed Rate to a Floating Rate, or from a Floating Rate to a Fixed Rate

The Bank may issue a Tranche of covered bonds that bear interest at a rate that converts from a Fixed Rate to a Floating Rate, or from a Floating Rate to a Fixed Rate. Where the Bank has the right to affect such a conversion, this may affect the secondary market and the market value of the covered bonds since the Bank may be expected to convert the rate when it is likely to produce a lower overall cost of borrowing. If the Bank converts from a Fixed Rate to a Floating Rate, in such circumstances, the spread on such covered bonds may be less favorable than the prevailing spreads on comparable Floating Rate covered bonds tied to the same Reference Rate. In addition, the new Floating Rate at any time may be lower than the rates on the other covered bonds. If the Bank converts from a Floating Rate to a Fixed Rate, in such circumstances, the Fixed Rate may be lower than the prevailing rates on the other covered bonds.

Covered bonds issued at a substantial discount or premium may experience significant price volatility

The issue price of covered bonds specified in the applicable prospectus supplement may be more than the market value of such covered bonds as of the issue date, and the price, if any at which a dealer or any other person is willing to purchase the covered bonds in secondary market transactions may be lower than the issue price. Generally, the longer the remaining term of the securities, the greater the price volatility as compared to conventional interest bearing securities with comparable maturities.

The Bond Trustee’s powers may affect the interests of the holders of the covered bonds

In the exercise of its powers, trusts, authorities and discretions, the Bond Trustee will only have regard to the interests of the holders of the covered bonds. In the exercise of its powers, trusts, authorities and discretions, the Bond Trustee may not act on behalf of the Bank. If, in connection with the exercise of its powers, trusts, authorities or discretions, the Bond Trustee is of the opinion that the interests of the holders of the covered bonds of any one or more Series would be materially prejudiced thereby, the Bond Trustee will not exercise such power, trust, authority or discretion without the approval by Extraordinary Resolution of such holders of the relevant Series of covered bonds then outstanding or by a direction in writing of such holders of the covered bonds representing at least 25 percent of the Principal Amount Outstanding of covered bonds of the relevant Series then outstanding.

The Bond Trustee is not obligated to serve an Issuer Acceleration Notice on the Bank upon an Issuer Event of Default or a Notice to Pay on the Guarantor, or to seek enforcement of the provisions of the Trust Deed on the covered bonds, except if so directed by the holders of the covered bonds. Accordingly, the powers of the Bond Trustee may adversely affect your interests in the covered bonds.

 

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Additional risk factors

Additional risk factors in relation to specific issues of covered bonds may be included in the applicable prospectus supplement.

The covered bonds have no established trading market when issued and there is no assurance that an active and liquid secondary market will develop for the covered bonds

Covered bonds may have no established trading market when issued, and no assurance is provided that an active and liquid secondary market for the covered bonds will develop. To the extent a secondary market exists or develops, it may not continue for the life of the covered bonds or it may not provide covered bondholders with liquidity of investment with the result that a covered bondholder may not be able to find a buyer to buy its covered bonds readily or at prices that will enable the covered bondholder to realize a desired yield. This is particularly the case for covered bonds that are especially sensitive to interest rate, currency or market risks, are designed for specific investment objectives or strategies or have been structured to meet the investment requirements of limited categories of investors. These types of covered bonds generally would have a more limited secondary market and more price volatility than conventional debt securities. Illiquidity may severely and adversely affect the market value of covered bonds.

Lack of liquidity in the secondary market may adversely affect the value of the covered bonds

There is not, at present, an active and liquid secondary market for the covered bonds, and there can be no assurance that a secondary market for the covered bonds will develop. If a secondary market does develop, it may not continue for the life of the covered bonds or it may not provide holders of the covered bonds with liquidity of investment with the result that a holder of the covered bonds may not be able to find a buyer to buy its covered bonds readily or at prices that will enable the holder of the covered bonds to realize a desired yield.

The covered bonds will initially be held in book-entry form and therefore you must rely on the procedures of the relevant clearing systems to exercise any rights and remedies

Unless and until definitive U.S. Registered Covered Bonds are issued in exchange for book-entry interests in the covered bonds, owners of the book-entry interests will not be considered owners or holders of the covered bonds. Instead, the registered holder, or their respective nominee, will be the sole holder of the covered bonds. Payments of principal, interest and other amounts owing on or in respect of the covered bonds in global form will be made to Paying Agent, which will make payments to DTC. Thereafter, payments will be made by DTC to participants in these systems and then by such participants to indirect participants. After payment to the common depositary neither the Bank, the Bond Trustee nor the Paying Agent will have any responsibility or liability of any aspect of the records related to, or payments of, interest, principal or other amounts to DTC or to owners of book-entry interests.

Since the covered bonds are not represented in physical form, it may make it difficult for you to pledge the covered bonds as security if covered bonds in physical form are required or necessary for such purposes. Unlike holders of the covered bonds themselves, owners of book-entry interests will not have the direct right to act upon our solicitations or consents or requests

 

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for waivers or other actions from holders of the covered bonds that we may choose to make in the future. Rather, owners of book-entry interests will be permitted to act only to the extent that they have received appropriate proxies to do so from DTC or, if applicable, from a participant. We cannot assure you that procedures implemented for the granting of such proxies will be sufficient to enable you to vote on any such solicitations or requests for actions on a timely basis.

Issuance of covered bonds in book-entry form may affect liquidity and the ability to pledge the covered bonds

Some investors, including some insurance companies and other institutions, are required by law or otherwise to hold physical certificates for securities they invest in and are not be permitted to hold securities in book-entry form. Unless a prospectus supplement provides to the contrary, it is expected that the covered bonds will be issued in registered form as global covered bonds through DTC and, accordingly, some investors may not be permitted to own covered bonds. This may reduce the liquidity for the covered bonds by limiting the purchasers eligible to purchase the covered bonds in the secondary market.

Exchange rate risks relating to currency conversions and/or exchange controls imposed by government or monetary authorities may affect investors expected returns on the covered bonds

The Bank will pay principal and interest on the covered bonds and the Guarantor will make any payments under the Covered Bond Guarantee in U.S. Dollars. This presents certain risks relating to currency conversions if an investor’s financial activities are denominated principally in a currency or currency unit (the “Investor’s Currency”) other than U.S. Dollars. These include the risk that exchange rates may significantly change (including changes due to devaluation of the U.S. Dollar or revaluation of the Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange controls. An appreciation in the value of the Investor’s Currency relative to the U.S. Dollar would decrease (i) the Investor’s Currency-equivalent yield on the covered bonds, (ii) the Investor’s Currency-equivalent value of the principal payable on the covered bonds and (iii) the Investor’s Currency-equivalent market value of the covered bonds.

Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal.

Subsequent changes in market interest rates may adversely affect the value of Fixed Rate Covered Bonds

Investment in Fixed Rate Covered Bonds involves the risk that subsequent changes in market interest rates may adversely affect the value of the Fixed Rate Covered Bonds.

Program related legal and regulatory risks

The covered bonds and the Bank’s activities are subject to the remedial powers of the Superintendent under the Bank Act and the requirements of the Legislative Framework and the CMHC Guide

The Superintendent, under Section 645(1) of the Bank Act, has the power, where in the opinion of the Superintendent, a bank, or a person with respect to a bank, is committing, or is

 

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about to commit, an act that is an unsafe or unsound practice in conducting the business of the bank, or is pursuing or is about to pursue any course of conduct that is an unsafe or unsound practice in conducting the business of the bank, to direct the bank or person, as the case may be, to cease or refrain from committing the act or pursuing the course of conduct and to perform such acts as in the opinion of the Superintendent are necessary to remedy the situation.

Although the above remedial power exists, following an initial review of potential regulatory and policy concerns associated with the issuance of covered bonds by Canadian deposit taking institutions (during which it requested that financial institutions refrain from issuing covered bonds), the Office of the Superintendent of Financial Institutions (“OSFI”) confirmed by letter dated June 27, 2007 that Canadian deposit taking institutions may issue covered bonds, provided certain conditions are met. The conditions are as follows: (i) at the time of issuance, the covered bonds must not make up more than four percent of the OSFI Total Assets of the relevant deposit taking institution; (ii) if at any time after issuance the four percent limit is exceeded, the relevant deposit taking institution must immediately notify OSFI; and (iii) excesses (above the four percent limit) due to factors not under the control of the issuing institution, such as foreign exchange fluctuations, will not require the relevant deposit taking institution to take action to reduce the amount outstanding, however, for other excesses, the relevant deposit taking institution must provide a plan showing how it proposes to eliminate the excess quickly. “OSFI Total Assets” for the purpose of the foregoing limit, will be equal to the numerator of the asset-to-capital multiple of the relevant deposit taking institution. In addition, relevant deposit taking institutions are expected, prior to issuing any covered bonds, to amend the pledging policies they are required to maintain under the Bank Act to take into account the issuance of covered bonds consistent with the above limits and to obtain board and/or committee approval for such amendments prior to issuance of any covered bonds.

The full Program amount, when combined with the outstanding balance of the covered bonds issued by the Bank under its previous program, is less than four percent of the OSFI Total Assets of the Bank as of the date of this prospectus. The Bank did not issue covered bonds prior to June 27, 2007, and the Bank previously received the requisite board approval for amendments to its pledging policies which take into account the issuance of covered bonds under the Program.

In 2012, the NHA was amended to establish a legislative framework for covered bonds (the “Legislative Framework”). The amendments to the NHA have given CMHC the responsibility to administer the Legislative Framework, with discretionary authority to establish conditions and restrictions applicable to registered issuers and registered covered bond programs and to oversee and enforce compliance with those conditions and terms. On December 17, 2012, CMHC published the Canadian Registered Covered Bond Programs Guide (as amended from time to time, the “CMHC Guide”) implementing the Legislative Framework. The CMHC Guide elaborates on the role and powers of CMHC as administrator of the Legislative Framework and sets out the conditions and restrictions applicable to registered issuers and registered covered bond programs. The Bank and the Program are required to comply with the requirements of the NHA and CMHC Guide.

No assurance can be given that additional regulations or guidance from CMHC, OSFI, the Canadian Deposit Insurance Corporation or any other regulatory authority will not arise with regard to the mortgage market in Canada generally, the Seller’s or the Guarantor’s particular sector in that market or specifically in relation to the Seller or the Guarantor. Any such action or developments may have a material adverse effect on the Seller and/or the Guarantor and their respective businesses and operations. This may adversely affect the ability of the Guarantor to

 

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dispose of the Portfolio or any part thereof in a timely manner and/or the realizable value of the Portfolio or any part thereof, and accordingly, affect the ability of the Bank and the Guarantor, respectively, to meet their obligations under the covered bonds in the case of the Bank and the Covered Bond Guarantee in the case of the Guarantor.

Suspension of the Bank’s ability to issue covered bonds under Part I.1 of NHA and the CMHC Guide could negatively impact the covered bonds

Part I.1 of the NHA and the CMHC Guide impose certain ongoing obligations on both the Bank and the Guarantor and permit CMHC to take certain actions in respect of the Bank if such obligations are not complied with from time to time. Such actions include suspending the right of the Bank to issue covered bonds under the Program and directing the Bank to take specified steps for the purpose of complying with the CMHC Guide. There is a risk that suspending the right of the Bank to issue covered bonds under the Program or any non-compliance with a request from CMHC may negatively impact the value and/or liquidity of the covered bonds. However, pursuant to 9.1(a) (Issuer Events of Default), non-compliance by the Bank with Part I.1 of the NHA or the CMHC Guide will not constitute an Issuer Event of Default.

The Bank’s residential mortgage underwriting practices and procedures may be affected by regulatory guidelines

Guideline B-20—Residential Mortgage Underwriting Practices and Procedures (“Guideline B-20”), published by OSFI in June 2012, sets out OSFI’s expectations for prudent residential mortgage underwriting by federally-regulated financial institutions, which includes the Seller in respect of Loans originated by it. Guideline B-20 calls for the establishment of a residential mortgage underwriting policy by the Seller and sets out expectations with respect to borrower due diligence, collateral management and appraisal processes and credit and counterparty risk management practices and procedures by the Seller. OSFI’s expectation was for full compliance with Guideline B-20 by the end of the Seller’s fiscal year 2012 and it had indicated that, where possible, federally-regulated financial institutions should comply immediately.

Loans that may be sold to the Guarantor in the future may have characteristics differing from current Loans generated before the implementation of Guideline B-20, including in respect of loss experience, delinquencies, revenue experience and monthly payment rates. Although uncertain at this time, compliance with Guideline B-20 may impact the Seller’s ability to generate Loans at the same rate as the Seller originated prior to Guideline B-20 coming into effect.

Guideline B-20 also provides that where a federally-regulated financial institution acquires a residential mortgage loan, including a home equity line of credit, that has been originated by a third party, such federally regulated financial institution should ensure that the underwriting standards of that third party are consistent with those set out in the residential mortgage underwriting policy of the federally-regulated financial institution and compliant with Guideline B-20. To the extent that the Bond Trustee realizes upon the security it has on the Loans and Related Security, the Bond Trustee may be limited in its ability to sell such assets to a federally-regulated financial institution if such purchaser determines that the sale would not be in compliance with Guideline B-20.

 

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Canadian usury laws prohibit the receipt of interest above certain thresholds and any provisions for the payment of interest or a redemption amount above these thresholds may not be enforceable

Unless otherwise indicated, all covered bonds issued under the Program are governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein. The Criminal Code (Canada) prohibits the receipt of “interest” at a “criminal rate” (namely, an effective annual rate of interest that exceeds 60 percent). Accordingly, the provisions for the payment of interest or a redemption amount in excess of the aggregate principal amount of the covered bonds may not be enforceable if the provision provides for the payment of “interest” in excess of an effective annual rate of interest of 60 percent.

Implementation of the Basel III risk-weighted asset framework may result in changes to the risk-weighting of the covered bonds

In order to promote a more resilient banking sector and strengthen global capital standards, the Basel Committee on Banking Supervision proposed significant enhancements and capital reforms to the current framework, referred to as Basel II. The revised framework, referred to as Basel III, was effective January 1, 2013 and provides lengthy periods for transitioning to numerous new requirements. The most significant aspects of the reforms are measures to improve the quality of capital and increase capital requirements for the global financial system. The Bank cannot predict the precise effects of the potential changes that might result from implementation of the Basel III framework on both its own financial performance or the impact on the pricing of the covered bonds.

Implementation of the Basel framework and any changes as described above may have an impact on the capital requirements in respect of ownership of the covered bonds and/or on incentives to hold the covered bonds for investors that are subject to requirements that follow the relevant framework and, as a result, may affect the liquidity and/or value of the covered bonds.

In general, investors should consult their own advisers as to the regulatory capital requirements of the covered bonds and as to the consequences for and effect on them of any changes to the Basel framework (including the changes described above) and the relevant implementing measures. No predictions can be made as to the precise effects of such matters on any investor or otherwise.

The Bank will act in its own interest in connection with the Program, and such actions may not be in the best interests of and may be detrimental to the holders of covered bonds

The Bank has a number of roles pursuant to the Program including, but not limited to, Seller, Servicer, Cash Manager, Swap Provider, GDA Provider, Intercompany Loan Provider, and Limited Partner. In respect of the Program, the Bank will act in its own interest subject to compliance with the Transaction Documents. Such actions by the Bank may not be in the best interests of, and may be detrimental to, the holders of the covered bonds. Subject to compliance with the Transaction Documents, the Bank may act in its own interest without incurring any liability to the holders of any Series or Tranche of covered bonds.

Legal investment considerations may restrict certain investments

The investment activities of certain investors are subject to legal investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent: (i) covered bonds are legal investments for it; (ii) covered bonds can be used as collateral for various types of borrowing; and (iii) other restrictions apply to its purchase or pledge of any covered bonds. Financial institutions should consult their legal advisers or the appropriate regulators to determine the appropriate treatment of covered bonds under any applicable risk-based capital or similar rules.

Interests of Dealers

Certain of the Dealers and their affiliates have engaged, and may in the future engage, in investment banking and/or commercial banking transactions with, and may perform services for, the Bank and its affiliates in the ordinary course of business.

 

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The Bank may sell the covered bonds to one or more of the Dealers, including BMO Capital Markets Corp. which is an affiliate of the Bank. The terms of the Program were negotiated at arm’s length between the Bank and the Dealers. BMO Capital Markets Corp. will receive a portion of any fees and commissions payable in connection with any such offering of covered bonds in its capacity as a Dealer.

U.S. Foreign Account Tax Compliance Act withholding may apply to payments in respect of the covered bonds

Sections 1471 through 1474 of the U.S. Internal Revenue Code of 1986 (“FATCA”) impose a new reporting regime and, potentially, a 30% withholding tax with respect to (i) certain payments from sources within the United States, (ii) “foreign passthru payments” made to certain non-U.S. financial institutions that do not comply with this new reporting regime, and (iii) payments to certain investors that do not provide identification information with respect to interests issued by a participating non-U.S. financial institution. Whilst the covered bonds are held within the clearing systems, in all but the most remote circumstances, it is not expected that FATCA will affect the amount of any payment received by the clearing systems in respect of such covered bonds. However, FATCA may affect payments made to custodians or intermediaries in the subsequent payment chain leading to the ultimate investor if any such custodian or intermediary generally is unable to receive payments free of FATCA withholding. It also may affect payment to any ultimate investor that is a financial institution that is not entitled to receive payments free of withholding under FATCA, or an ultimate investor that fails to provide its broker (or other custodian or intermediary from which it receives payment) with any information, forms, other documentation or consents that may be necessary for the payments to be made free of FATCA withholding. Investors should choose the custodians or intermediaries with care (to ensure each is compliant with FATCA or other laws or agreements related to FATCA) and provide each custodian or intermediary with any information, forms, other documentation or consents that may be necessary for such custodian or intermediary to make a payment free of FATCA withholding. The Bank’s obligations under the covered bonds are discharged once it has paid the clearing systems and the Bank has therefore no responsibility for any amount thereafter transmitted through the hands of the clearing systems and custodians or intermediaries. Prospective investors should refer to the section “Taxation—Foreign Account Tax Compliance Act”.

Covered bonds that bear interest at rates based on LIBOR and/or EURIBOR may be adversely affected by a change in the Bank’s inter-bank lending rate reporting practices or the method in which LIBOR and/or EURIBOR is determined

Regulators and law enforcement agencies from a number of governments have been conducting investigations relating to the calculation of the London inter-bank lending rate (“LIBOR”) across a range of maturities and currencies, and certain financial institutions that are member banks surveyed by the British Bankers’ Association (the “BBA”) in setting daily LIBOR have entered into agreements with the U.S. Department of Justice, the U.S. Commodity Futures Trading Commission and/or the Financial Services Authority in order to resolve the investigations. In addition, in September 2012, the U.K. government published the results of its review of LIBOR, which is referred to as the “Wheatley Review.” The Wheatley Review made a number of recommendations for changes with respect to LIBOR, including the introduction of statutory regulation of LIBOR, the transfer of responsibility for LIBOR from the BBA to an independent administrator, changes to the method of compilation of lending rates, new regulatory oversight and enforcement mechanisms for rate-setting and the corroboration of LIBOR, as far as possible, by transactional data. Based on the Wheatley Review, on March 25, 2013, final rules for the regulation and supervision of LIBOR by the Financial Conduct Authority (the “FCA”) were published (the “FCA Rules”). In particular, the FCA Rules include requirements that (1) an independent LIBOR administrator monitor and survey LIBOR submissions to identify breaches of practice standards and/or potentially manipulative behavior, and (2) firms submitting data to LIBOR establish and maintain a clear conflicts of interest policy and appropriate systems and controls. The FCA Rules took effect on April 2, 2013. It is anticipated that a reform of EURIBOR will be implemented also, which may (but will not necessarily) be in a similar fashion. Accordingly, EURIBOR calculation and publication could be altered, suspended or discontinued.

 

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It is not possible to predict the effect of changes in the methods pursuant to which the LIBOR and/or EURIBOR rates are determined, any other reforms to LIBOR and/or EURIBOR that will be enacted in the U.K. and elsewhere, and any actions taken by any new administrator of LIBOR and/or EURIBOR that may be appointed, each of which may adversely affect the trading market for LIBOR and/or EURIBOR-based securities, including any covered bonds that bear interest at rates based on LIBOR and/or EURIBOR. Any such changes or reforms in the method pursuant to which the LIBOR and/or EURIBOR rates are determined or actions taken by any new administrator of LIBOR and/or EURIBOR may result in a sudden or prolonged increase or decrease in the reported LIBOR and/or EURIBOR rates. If that were to occur and to the extent that the value of any covered bonds that bear interest at rates based on LIBOR and/or EURIBOR is affected by reported LIBOR and/or EURIBOR rates, the amount of interest payable under and the value of such covered bonds may be affected.

Further, uncertainty as to the extent and manner in which the Wheatley Review recommendations with respect to LIBOR will continue to be adopted and the timing of such changes may adversely affect the current trading market for LIBOR-based securities and the value of any covered bonds that bear interest at rates based on LIBOR.

Since the Bank and the Guarantor reside outside of the United States and a substantial portion of their respective assets is located outside the United States, there is a risk that service of process, enforcement of judgments and bringing of original actions will be more difficult.

The Bank is incorporated under the federal laws of Canada under the Bank Act and the Guarantor is an Ontario limited partnership. Substantially all of the Bank’s directors and executive officers, and all or a substantial portion of our assets and the assets of such persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon such persons, or to realize upon judgments rendered against the Bank or such persons by the courts of the United States predicated upon, among other things, the civil liability provisions of the federal securities laws of the United States. In addition, it may be difficult for you to enforce, in original actions brought in courts in jurisdictions located outside the United States, among other things, civil liabilities predicated upon such securities laws. Based on the foregoing, it may not be possible for U.S. investors to enforce against us any judgments obtained in U.S. courts in civil and commercial matters, including judgments under the U.S. federal securities laws.

 

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USE OF PROCEEDS

Except as otherwise set forth in the prospectus supplement, the net proceeds from the sale of the covered bonds will be added to the Bank’s general working capital and will be used for general working capital purposes.

 

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CONSOLIDATED EARNINGS RATIOS

The following table provides the Bank’s consolidated ratios of earnings to fixed charges, calculated in accordance with Canadian GAAP for each of the years in the three year period ended October 31, 2010 and in accordance with IFRS for each of the nine month periods ended July 31, 2013 and 2012 and the years in the two year period ended October 31, 2012.

 

		Nine Months Ended July 31,								Years Ended October 31,
		2013(1)				2012(1)				2012(1)				2011(1)				2010(2)				2009(2)				2008(2)
Consolidated Ratios of Earnings to Fixed Charges
Excluding interest on deposits			3.50				3.06				3.08				2.57				4.56				2.90				1.79
Including interest on deposits			2.12				2.01				2.01				1.76				2.06				1.40				1.20
Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Dividends
Excluding interest on deposits			3.26				2.86				2.88				2.39				3.90				2.58				1.74
Including interest on deposits			2.05				1.94				1.94				1.70				1.96				1.37				1.19

 

(1)	Calculated in accordance with IFRS.

 

(2)	Calculated in accordance with Canadian GAAP.

For purposes of computing these ratios:

 

•

earnings represent income from continuing operations plus income taxes and fixed charges (excluding capitalized interest);

 

•

fixed charges, excluding interest on deposits, represent interest (including capitalized interest), estimated interest within rent, and amortization of debt issuance costs; and

 

•

fixed charges, including interest on deposits, represent all interest.

 

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CONSOLIDATED CAPITALIZATION OF THE BANK

The following table sets forth the consolidated capitalization of the Bank as at July 31, 2013:

 

		As at July 31, 2013
		(In millions of Canadian Dollars)
Subordinated Debt			4,014
Capital Trust Securities(1)
BMO Tier 1 Notes – Series A			451
Equity
Preferred Shares(2)			2,265
Common Shares			11,999
Contributed Surplus			321
Retained Earnings			14,780
Accumulated Other Comprehensive Income			274
Total Shareholders’ Equity			29,639
Non-controlling Interest in Subsidiaries			1,058
Total Equity			30,697
Total Capitalization			35,162

 

Notes:

 

(1)	For more information on the classification of Capital Trust Securities, please refer to Note 18 of the audited consolidated financial statements of Bank of Montreal for the year ended October 31, 2012.

 

(2)

Preferred Shares classified under Shareholders’ Equity consist of Class B Preferred Shares Series 13, 14, 15, 16, 18, 21, 23 and 25. For more information on the classification of Preferred Shares, please refer to Note 20 of the audited consolidated financial statements of Bank of Montreal for the year ended October 31, 2012.

 

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BANK OF MONTREAL

The Bank commenced business in Montreal in 1817 and was incorporated in 1821 by an Act of Lower Canada as the first Canadian chartered bank. Since 1871, the Bank has been a chartered bank under the Bank Act, and is named in Schedule I of the Bank Act. The Bank Act is the charter of the Bank and governs its operations. The Bank is a registered holding company under the Bank Holding Company Act of 1956 and is certified as a financial holding company under the Gramm-Leach-Bliley Act.

The Bank’s head office is located at 129 rue Saint Jacques, Montréal, Québec, H2Y 1L6, and its executive offices are located at 100 King Street West, 1 First Canadian Place, Toronto, Ontario, M5X 1A1. The Bank’s telephone number is (416) 867-6785.

The Bank offers a broad range of credit and non-credit products and services directly and through Canadian and non-Canadian subsidiaries, offices and branches. As at October 31, 2012, the Bank had more than 12 million customers, approximately 46,000 full-time equivalent employees, maintained approximately 1,570 bank branches in Canada and the United States and operated internationally in major financial markets and trading areas through its offices in 24 other jurisdictions, including the United States. BMO Financial Corp. (formerly Harris Financial Corp.), based in Chicago and wholly-owned by Bank of Montreal, operates primarily through its subsidiary BMO Harris Bank N.A., which provides banking, financing, investing and cash management services in select markets in the U.S. Midwest. The Bank provides a full range of investment dealer services through entities including BMO Nesbitt Burns Inc., a major fully-integrated Canadian investment dealer, and BMO Capital Markets Corp., Bank of Montreal’s wholly-owned registered securities dealer in the United States.

The Bank primarily conducts business through three operating groups: Personal and Commercial Banking (“P&C”) comprised of P&C Canada and P&C U.S.; Private Client Group (“PCG”); and BMO Capital Markets. P&C Canada operates across Canada, offering banking, financing, and investing solutions as well as card and payment services. Operating predominately in the U.S. Midwest under the BMO Harris brand, P&C U.S. provides personal and commercial clients with banking, lending, and treasury management services. PCG, the Bank’s wealth management business, serves a full range of client segments from mainstream to ultra-high net worth and institutional, with a broad offering of wealth management products and solutions including insurance products. PCG operates in both Canada and the United States as well as in Asia and Europe. BMO Capital Markets provides capital raising, investing, advisory, treasury and research services to corporate, institutional, and government clients in Canada, the United States, South America, Europe, Asia and Australia. The Bank’s Corporate Services group, which includes Technology and Operations, provides risk management, information technology and other corporate services to the three operating groups.

Certain Matters Relating to the Bank’s Board of Directors

Under the Bank Act, the Bank’s board of directors must have at least seven members and the Bank’s board of directors may establish by by-law a minimum and maximum number of directors. The Bank Act also requires that no more than two-thirds of the directors may be affiliated with the Bank, as specified by the Bank Act, and no more than 15% of the directors may be employees of the Bank or a subsidiary of the Bank, except that up to four of these employees may be directors if they constitute not more than 50% of the directors. Subject to the foregoing

 

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residency requirements, a majority of directors will constitute a quorum at any meeting of the board of directors. Under the Bank Act, a majority of the directors of the Bank must be resident Canadians and, except in limited circumstances, directors may not transact business at a meeting of directors or a committee of directors at which a majority of the directors present are not resident Canadians. The Bank Act also requires the directors of a bank to appoint from their members a chief executive officer who must ordinarily be resident in Canada. Under the Bank’s by-laws, the minimum number of directors is seven and the maximum number of directors is 40. The Bank’s by-laws provide that the number of directors to be elected at any annual meeting of shareholders of the Bank will be fixed by the board of directors before the meeting. Directors may be elected to terms of one, two or three years. The Bank currently has 13 directors.

Under the Bank Act, any director or the entire board of directors may be removed with the approval of a majority of the votes cast at a special meeting of shareholders. A vacancy created by such removal may be filled at the meeting or by a quorum of the directors. Bank policies stipulate that a director will not stand for re-election at the first annual meeting after reaching the age of 70, and, in addition, directors are subject to maximum term limits of 15 years for new directors (elected after January 1, 2010), except a director serving as chairman, who is subject to a maximum term limit of 20 years.

Conflicts of Interest

The Bank Act contains detailed provisions with regard to a director’s power to vote on a material proposal, arrangement or contract in which the director is interested. These provisions include procedures for: disclosure of the conflict of interest and the timing for such disclosure; the presence of directors at board meetings where the proposal, arrangement or contract giving rise to the conflict of interest is being considered, and voting with respect to the proposal, arrangement or contract giving rise to the conflict of interest; and other provisions for dealing with such conflicts of interest. The Bank Act also contains detailed provisions regarding transactions with persons who are related parties of the Bank, including directors of the Bank. See “—Borrowing Powers.”

Compensation

The by-laws of the Bank have provisions with regard to remuneration of directors. The board of directors may, from time to time, by resolution determine their remuneration that may be paid, but such remuneration may not exceed in each year an aggregate cap set out in the by-laws, and individually may be in such amounts as the board may determine by resolution. The directors may also be paid their reasonable out-of-pocket expenses incurred in attending meetings of the board, shareholders or committees of the board or otherwise in the performance of their duties.

Directors are required to hold at least eight times the cash retainer portion of their annual retainer fee in either common shares or deferred share units under the Bank’s Deferred Share Unit Plan for Non-employee Directors (“Deferred Share Units”) and until this level is obtained, directors must take 100% of their annual retainer in the form of either common shares (which are purchased on the open market) or Deferred Share Units. Once this threshold has been reached, directors receive a minimum of $100,000 of their $175,000 annual retainer fee in common shares (which are purchased on the open market) or in Deferred Share Units. A Deferred Share Unit is an amount owed by the Bank to directors having the same value as one common share, but is not paid out (in cash or in common shares purchased on the open market) until such time as the director leaves the board, thereby providing an ongoing equity stake in the Bank throughout the

 

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director’s period of board service. Directors have the option to receive up to 100% of their annual retainer and meeting fees in this manner. Only non-employee directors can receive Deferred Share Units.

Borrowing Powers

The directors of the Bank may, without authorization of the shareholders, authorize the Bank to borrow money. The Bank Act, however, prohibits the Bank from entering into transactions with persons who are deemed to be related parties of the Bank, subject to certain exceptions. Related party transactions may include loans made on the credit of the Bank. In addition, the by-laws of the Bank may be amended, as described in “Description of Common Shares and Preferred Shares—Amendments to the Rights, Privileges, Restrictions and Conditions of the Bank’s Share Capital” in the Bank’s 2012 Annual Report, to vary the borrowing authority of directors in this regard.

 

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BMO COVERED BOND GUARANTOR LIMITED PARTNERSHIP

The Guarantor is a limited partnership established under the laws of the Province of Ontario whose principal business is providing services to the Bank in respect of the Program by (i) entering into the Intercompany Loan Agreement and accepting Capital Contributions from the partners; (ii) using the proceeds from the Intercompany Loan and Capital Contributions (a) to purchase the Initial Portfolio consisting of Loans and their Related Security from the Seller in accordance with the terms of the Mortgage Sale Agreement and Loans and their Related Security pursuant to the terms of the Mortgage Sale Agreement; and/or (b) to invest in Substitution Assets in an amount not exceeding the prescribed limit in the CMHC Guide; and/or (c) subject to complying with the Asset Coverage Test and the CMHC Guide, from time to time, to make Capital Distributions to the Limited Partner; and/or (d) to make deposits of the proceeds in the Guarantor Accounts (including, without limitation, to fund the Reserve Fund and the Pre-Maturity Liquidity Ledger, in each case up to an amount not exceeding the Prescribed Cash Limitation); (iii) arranging for the servicing of the Portfolio by the Servicer; (iv) entering into the Trust Deed, giving the Covered Bond Guarantee and entering into the Security Agreement; (v) entering into the other Transaction Documents to which it is a party; and (vi) performing its obligations under the Transaction Documents and in respect thereof and doing all things incidental or ancillary thereto.

The Guarantor has not, since its formation, engaged in, and will not, while there are covered bonds outstanding, engage in any material activities other than activities relating to the business of the Guarantor described above and/or incidental or ancillary thereto. The Guarantor and its general partners are not required by applicable Canadian law (including the Limited Partnership Act (Ontario)) to publish any financial statements, and will not be required by the SEC to publish any financial statements in its annual reports on Form 10-K. Instead the Guarantor will file an annual report in accordance with General Instruction J of Form 10-K and will include in the Form 10-K information required by the following provisions of Regulation AB: Item 1112(b), Item 1114(b)(2), Item 1115(b), Item 1117, Item 1119, Item 1122 and Item 1123. The Guarantor has no employees.

The current partners (the “Partners”) of the Guarantor are BMO Covered Bond GP, Inc., as the managing general partner (the “Managing GP”), 8429065 Canada Inc., as the liquidation general partner (the “Liquidation GP”), and the Bank, as the sole limited partner. The Bank holds substantially all of the capital in the Guarantor with the Managing GP and the Liquidation GP each holding a nominal interest in the Guarantor. Pursuant to the terms of the Limited Partnership Act (Ontario), the liability of a limited partner for the liabilities, debts and obligations of the Guarantor is limited to the amount contributed by it or agreed to be contributed by it to the Guarantor, unless, in addition to exercising rights and powers as a limited partner, such limited partner takes part in control of the business of the Guarantor and such limited partner will, subject to applicable law, otherwise have no liability in respect of the liabilities, debts and obligations of the partnership. Each of the general partners of the Guarantor will have unlimited liability for any obligation of the Guarantor unless the holder of such obligation agrees otherwise.

Each of the Partners has covenanted in the Guarantor Agreement that, except as provided in the Transaction Documents, it will not sell, transfer, convey, create or permit to arise any security interest on, create any beneficial interest in or otherwise dispose of its interest in the Guarantor without the prior written consent of the Guarantor and, while there are covered bonds outstanding, the Bond Trustee.

 

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Ownership Structure of the Guarantor

The following diagram sets forth the ownership structure of the Guarantor:

 

 

Ownership Structure of the Managing GP

The Managing GP is a wholly-owned subsidiary of the Bank. The directors and officers of the Managing GP are officers and employees of the Bank.

Ownership Structure of the Liquidation GP

91 percent of the issued and outstanding shares in the capital of the Liquidation GP are held by the Corporate Services Provider, as trustee of the BMO Covered Bond LGP Trust (the “LGP Trust”) and 9 percent of the issued and outstanding shares in the capital of the Liquidation GP are held by the Bank. A majority of the directors of the Liquidation GP are appointed by the Corporate Services Provider, as trustee of the LGP Trust, and are independent of the Bank. The Bank is entitled to have one nominee on the board of the Liquidation GP who is an officer or employee of the Bank.

 

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The beneficiary of the LGP Trust is one or more charities registered under the ITA.

 

 

Withdrawal or Removal of the General Partners

The Managing GP or Liquidation GP may resign as managing general partner or liquidation general partner, as the case may be, on not less than 180 days’ prior written notice to the Partners and the Bond Trustee, provided that neither the Managing GP nor Liquidation GP may resign if the effect would be to dissolve the Guarantor. In the event that the Liquidation GP resigns as liquidation general partner, the Managing GP will use its best commercially reasonable efforts to, without delay, find a replacement liquidation general partner acceptable to the limited partner(s) of the Guarantor and the Bond Trustee and which satisfies the requirements of the CMHC Guide, to accept the role of liquidation general partner formerly held by the Liquidation GP and acquire a general partner interest in the Guarantor.

In the event the Managing GP resigns, an Issuer Event of Default occurs and is continuing, or a winding-up or insolvency of the Managing GP occurs, the Managing GP will forthwith, or in the case of resignation at the expiry of the notice period described above, cease to be the managing general partner of the Guarantor and the Liquidation GP will automatically assume the role and responsibilities (but not the interest in the Guarantor) of the Managing GP and continue the business of the Guarantor as Managing GP.

If at any time the Liquidation GP becomes the Managing GP pursuant to the foregoing, it may appoint a replacement Managing GP (other than the Bank or any of its affiliates) acceptable to the limited partner(s) of the Guarantor and the Bond Trustee and which satisfies the requirements of the CMHC Guide to act as Managing GP and acquire a general partner interest in the Guarantor. Following the appointment of the replacement Managing GP pursuant to the foregoing, the replacement Managing GP will have the powers, duties and responsibilities of the Managing GP of the Guarantor and the Liquidation GP will resume its role, as it was, prior to assuming the role and responsibility of the Managing GP.

 

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DESCRIPTION OF THE COVERED BONDS

General

The Bank may issue, and the Guarantor may guarantee, as many distinct Series of the covered bonds under the Trust Deed as the Bank wishes. The provisions of the Trust Deed allow the Bank not only to issue covered bonds with terms different from those previously issued, but also to “re-open” a previous issue of a Series of covered bonds and issue additional covered bonds of that Series. The Bank may issue covered bonds in amounts that exceed the total amount specified on the cover of the prospectus supplement at any time without the consent of holders of covered bonds and without notifying them.

This section summarizes the material terms of the covered bonds that are common to all Series subject to any modifications contained in an applicable prospectus supplement. As you read this section, please remember that the specific terms of your covered bonds as described in the applicable prospectus supplement will supplement and, if applicable, may modify or replace the general terms described in this section. If there are any differences between the information in the applicable prospectus supplement and this prospectus, the information in the applicable prospectus supplement will control. Because this section is a summary of the material terms and provisions of the covered bonds, it does not describe every aspect of the covered bonds. This description is subject to and qualified in its entirety by reference to all the provisions of the Trust Deed and other Transaction Documents, including definitions of certain terms used in the Trust Deed and other Transaction Documents. In this description, the meaning of only some of the more important terms that are applicable to U.S. Registered Covered Bonds is described. Reference should be made to the Trust Deed and the other Transaction Documents for the most complete description of what is described in summary form in this prospectus.

This description is also subject to and qualified by reference to the description of the particular terms of your Series described in the prospectus supplement. Those terms may vary from the terms described in this prospectus. The applicable prospectus supplement relating to each Series or Tranche of U.S. Registered Covered Bonds will be attached to the front of this prospectus.

Credit Structure

The covered bonds will constitute deposit liabilities of the Bank for purposes of the Bank Act, however the covered bonds will not be insured under the Canada Deposit Insurance Corporation Act (Canada), and will constitute legal, valid and binding direct, unconditional, unsubordinated and unsecured obligations of the Bank and rank pari passu with all deposit liabilities of the Bank without any preference among themselves and at least pari passu with all other unsubordinated and unsecured obligations of the Bank, present and future, except as prescribed by law and in certain limited circumstances described in Conditions 9.1 (Issuer Events of Default) and 14 (Meetings of Covered Bondholders, Modification, Waiver and Substitution).

The Guarantor has no obligation to pay the Guaranteed Amounts under the Covered Bond Guarantee until the occurrence of an Issuer Event of Default, service by the Bond Trustee on the Bank of an Issuer Acceleration Notice and on the Guarantor of a Notice to Pay or, if earlier, following the occurrence of a Guarantor Event of Default and service by the Bond Trustee of a Guarantor Acceleration Notice on the Bank and the Guarantor. The Bank will not be relying

 

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on payments by the Guarantor with respect to advances under the Intercompany Loan Agreement or receipt of Revenue Receipts or Principal Receipts from the Portfolio in order to pay interest or repay principal under the covered bonds. The recourse of the covered bondholders to the Guarantor under the Covered Bond Guarantee will be limited to the Portfolio and will be subject to the applicable Priorities of Payments.

The Program includes certain features relating to the timely, and, as applicable, ultimate payments of principal and interest to covered bondholders:

 

•

the Covered Bond Guarantee and Portfolio provide credit support to the covered bondholders;

 

•

the Pre-Maturity Test is intended to test the liquidity of the Guarantor’s assets with respect to principal due on the Final Maturity Date of Hard Bullet Covered Bonds;

 

•

the Asset Coverage Test is intended to ensure that the asset coverage of the Guarantor’s assets with respect to the covered bonds is maintained at a certain level;

 

•

the Amortization Test is intended to test the asset coverage of the Guarantor’s assets in respect of the covered bonds following the occurrence of an Issuer Event of Default and service of a Notice to Pay on the Guarantor;

 

•

the Valuation Calculation is intended to ensure that the Program’s exposure to market risk is monitored;

 

•

a Reserve Fund (if the Bank’s ratings fall below the Reserve Fund Required Amount Ratings) will be established by the Guarantor (or the Cash Manager on its behalf) in the GDA Account to reserve Available Revenue Receipts and Available Principal Receipts up to a specified amount; and

 

•

under the terms of the Guaranteed Deposit Account Contract, the GDA Provider has agreed to pay a variable rate of interest on all amounts held by the Guarantor in the GDA Account at a floor of 0.10 percent below 1-month CDOR that appears on the Reuters Screen as of 10:00 a.m. (Toronto time) on the date of determination, as reported by the GDA Provider (and if such screen is not available, any successor or similar service as may be selected by the GDA Provider) or such greater amount as the Guarantor and the GDA Provider may agree from time to time.

Covered Bond Guarantee

The Covered Bond Guarantee provided by the Guarantor under the Trust Deed guarantees payment of Guaranteed Amounts when they become Due for Payment in connection with all covered bonds issued under the Program following the service of a Notice to Pay on the Guarantor. The Covered Bond Guarantee will not guarantee any amount becoming payable on the covered bonds for any other reason, including any accelerated payment pursuant to Condition 9 (Events of Default, Acceleration and Enforcement) of the Terms and Conditions of the Covered Bonds following service of a Notice to Pay on the Bank. Under this circumstance (and until a Guarantor Event of Default occurs and a Guarantor

 

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Acceleration Notice is served), the Guarantor’s obligations will only be to pay the Guaranteed Amounts as they fall Due for Payment. However, should any payments made by the Guarantor under the Covered Bond Guarantee be subject to any withholding or deduction on account of taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of Canada or any province or territory thereof or by any authority therein or thereof having the power to tax, the Guarantor will not be obliged to pay any additional amount as a consequence. See “Summary of the Principal Documents.”

Pre-Maturity Test

Certain Series of covered bonds may be scheduled to be redeemed in full on their respective Final Maturity Dates without any provision for scheduled redemption other than on the Final Maturity Date (the “Hard Bullet Covered Bonds”). The applicable prospectus supplement will identify whether any Series of covered bonds is a Series of Hard Bullet Covered Bonds. The Pre-Maturity Test is intended to test the liquidity of the Guarantor’s assets with respect to the Hard Bullet Covered Bonds when the Bank’s ratings fall below a certain level. On each Canadian Business Day that falls within 12 months prior to the Final Maturity Date of any Series of Hard Bullet Covered Bonds, (each, a “Pre-Maturity Test Date”) prior to the occurrence of an Issuer Event of Default or the occurrence of a Guarantor Event of Default, the Guarantor or the Cash Manager on its behalf will determine if the Pre-Maturity Test has been breached, and if so, it will immediately notify the Seller and the Bond Trustee. The Cash Manager and the Guarantor are required to undertake certain actions upon the failure or breach of the Pre-Maturity Test by the Bank, including the sale of Selected Loans. See “Summary of the Principal Documents—Guarantor Agreement—Sales of Selected Loans following a breach of the Pre-Maturity Test.”

Asset Coverage Test

An Asset Coverage Test is conducted on the Portfolio on the last day of each calendar month (the “Calculation Date”). The Asset Coverage Test determines whether the assets and cashflows of the Guarantor satisfy the required overcollateralization which is intended to ensure that the Guarantor meets its obligations under the Covered Bond Guarantee following the occurrence of the Covered Bond Guarantee Activation Event. If the Asset Coverage Test is not met on two consecutive Calculation Dates, an Asset Coverage Test Breach Notice will be served to the Guarantor and if not revoked (in accordance with the terms of the Transaction Documents) on or before the Guarantor Payment Date immediately following the next Calculation Date after service of such Asset Coverage Test Breach Notice, will constitute an Issuer Event of Default and entitle the Bond Trustee to serve a Notice to Pay on the Guarantor.

The Bank will use all reasonable efforts to ensure that the Guarantor is in compliance with the Asset Coverage Test which should reduce the risk of there ever being a breach of the Asset Coverage Test although there is no assurance of this result and the sale of Loans and their Related Security by the Seller to the Guarantor, advances under the Intercompany Loan or additional Capital Contributions by the Limited Partner may be required to avoid or, before or after delivery of an Asset Coverage Test Breach Notice, remedy a breach of the Asset Coverage Test. There is no specific recourse available to the Guarantor in respect of any failure by the Bank to make a Capital Contribution in any circumstances, including following receipt of an Asset Coverage Test Breach Notice. See “Summary of the Principal Documents—Guarantor Agreement—Asset Coverage Test.”

 

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Amortization Test

The Amortization Test is conducted on the Portfolio on each Calculation Date following an Issuer Event of Default that is continuing. The Amortization Test has been structured to determine whether the assets of the Guarantor, including the Loans and their Related Security in the Portfolio, have fallen below the threshold required to ensure that the assets of the Guarantor are sufficient to meet its obligations under the Covered Bond Guarantee following service of a Notice to Pay. A breach of the Amortization Test will constitute a Guarantor Event of Default and will entitle the Bond Trustee to serve a Guarantor Acceleration Notice on the Guarantor. See “Summary of the Principal Documents—Guarantor Agreement—Amortization Test.”

Valuation Calculation

The Guarantor is required to perform on a monthly basis the Valuation Calculation to monitor exposure to the volatility to interest rate and currency exchange rates by measuring the present value of the Portfolio relative to the market value of the obligations guaranteed under the Covered Bond Guarantee. However, there is no obligation on the part of the Bank or the Guarantor to take any action in respect of the Valuation Calculation to the extent it shows the market value of the Portfolio is less than the market value of the obligations guaranteed under the Covered Bond Guarantee. See “Summary of the Principal Documents—Guarantor Agreement—Valuation Calculation.”

Reserve Fund

If at any time prior to the occurrence of an Issuer Event of Default, the Bank’s ratings fall below the Reserve Fund Required Amount Ratings, the Guarantor will be required to credit Available Revenue Receipts and Available Principal Receipts to the Reserve Fund up to an amount equal to the Reserve Fund Required Amount. The Reserve Fund Required Amount will be funded from Available Revenue Receipts and Available Principal Receipts, after the Guarantor has paid all of its obligations in respect of items ranking higher than the Reserve Ledger in the applicable Priorities of Payments on each Guarantor Payment Date and may in certain circumstances be funded through an advance under the Intercompany Loan or a Capital Contribution made in cash (a “Cash Capital Contribution”). Following the occurrence of an Issuer Event of Default, service of an Issuer Acceleration Notice and service of a Notice to Pay on the Guarantor, amounts standing to the credit of the Reserve Fund will be added to certain other income of the Guarantor in calculating Available Revenue Receipts.

Terms and Conditions

The covered bonds of each Series issued pursuant to this prospectus will be in fully registered form, without interest coupons.

A global covered bond will be deposited with a custodian for, and registered in the name of DTC, or its nominee. Persons holding beneficial interests in global covered bonds will be entitled or required, as the case may be, under the circumstances described below, to receive physical delivery of definitive covered bonds in registered form representing covered bonds issued under this prospectus (the “Definitive Covered Bonds”).

Interests in a global covered bond will be exchangeable (free of charge), in whole but not in part, for Definitive Covered Bonds without interest coupons only upon the occurrence of an

 

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Exchange Event. For these purposes, “Exchange Event” means that either DTC has notified the Bank that it is unwilling, or unable, to continue to act as depository for the covered bonds and no alternative clearing system is available or DTC has ceased to constitute a clearing agency registered under the Exchange Act. The Bank will promptly give notice to holders of covered bonds if an Exchange Event occurs by delivery of the notice to DTC for communication to the holders of the covered bonds. Notice will be deemed to have been given to the holders of the covered bonds on the day on which the notice is given to DTC. In the event of the occurrence of an Exchange Event, DTC (acting on the instructions of any holder of an interest in such global covered bond) may give notice to the Registrar requesting exchange and, in the event of the occurrence of an Exchange Event as described above, the Bank may also give notice to the Registrar requesting exchange. Any such exchange will occur not later than 10 days after the date of receipt of the first relevant notice by the Registrar.

No holder of covered bonds will be entitled to proceed directly against the Bank unless the Bond Trustee, having become bound so to proceed, fails to do so within a reasonable period of time and the failure is continuing, provided that the right of any holder of a covered bond to receive payment of principal and interest on or after the due date or to bring suit for enforcement of any such payment after the due date may not be impaired or affected without the holder’s consent.

The terms and conditions applicable to covered bonds will be endorsed on such covered bonds and will consist of the terms and conditions attached as Schedule 1 to the Trust Deed and the provisions of the applicable prospectus supplement that supplement, amend and/or replace such terms and conditions. The Terms and Conditions of the Covered Bonds set forth below, are the terms and conditions that will be applicable to U.S. Registered Covered Bonds, which may be supplemented, amended or replaced by the terms in the applicable prospectus supplement applicable to the covered bonds. Certain provisions of the Terms and Conditions attached as Schedule I to the Trust Deed are not applicable to U.S. Registered Covered Bonds and have therefore been intentionally omitted, but the numbering has been preserved to assist in a comparison to Schedule I.

The Terms and Conditions of the Covered Bonds set forth below are organized as follows:

 

		Condition		Page
1		Form, Denomination and Title			72
2.		Transfers of Registered Covered Bonds			73
3.		Status of the Covered Bonds and the Covered Bond Guarantee			74
4.		Interest			75
5.		Payments			92
6.		Redemption and Purchase			95
7.		Taxation			99
8.		Prescription			101
9.		Events of Default, Acceleration and Enforcement			101
10.		Replacement of Covered Bonds			106
11.		Principal Paying Agent, Paying Agents, Registrar, Transfer Agent and Exchange Agent			106
12.		Reserved
13.		Notices			107
14.		Meetings of Covered Bondholders, Modification, Waiver and Substitution			108
15.		Indemnification of the Bond Trustee. Contracting with the Bank and/or the Guarantor			110
16.		Further Issues			111
17.		Rating Agency Condition			112
18.		Governing Law			113

 

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The following is a general overview of key provisions of the Terms and Conditions applicable to the covered bonds:

Condition 3 (Status of the Covered Bonds and the Covered Bond Guarantee) provides that the covered bonds constitute deposit liabilities of the Bank for purposes of the Bank Act, but will not be insured under the Canada Deposit Insurance Corporation Act (Canada). The covered bonds will be direct obligations of the Bank, ranking equally with the deposit liabilities of the Bank and at least equally with all unsubordinated and unsecured obligations of the Bank, except as prescribed by law and in certain limited circumstances described in Conditions 9.1 (Issuer Events of Default) and 14 (Meetings of Covered Bondholders, Modification, Waiver and Substitution).

Condition 3 (Status of the Covered Bonds and the Covered Bond Guarantee) also provides the terms of the Covered Bond Guarantee and the conditions precedent to the obligation of the Guarantor to make payment of Guaranteed Amounts. The obligations of the Guarantor, following the occurrence of a Covered Bond Guarantee Activation Event, are direct and unconditional, secured by the pledge of the assets of the Guarantor which includes the Portfolio pursuant to the terms of the Security Agreement. A “Covered Bond Guarantee Activation Event” will occur on the earlier of (i) an Issuer Event of Default, together with service by the Bond Trustee of an Issuer Acceleration Notice on the Bank and a Notice to Pay on the Guarantor and (ii) a Guarantor Event of Default, together with service by the Bond Trustee of a Guarantor Acceleration Notice on the Bank and the Guarantor.

Condition 4 (Interest) sets forth the terms of the interest rates that may apply to the covered bonds. The specific terms of interest payable on a covered bond that you purchase will be disclosed in the applicable prospectus supplement.

Condition 5 (Payments) provides that payments of principal, interest and any other amount in respect of the registered global covered bonds (other than the final installments of principal of a covered bond) will be made to the person shown on the Register as the registered holder of the registered global covered bonds. None of the Bank, any Paying Agent and the Registrar will have any responsibility or liability for any aspect of the records relating to or payments or deliveries made on account of beneficial ownership interests in the registered global covered bonds or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Final installments of principal will be made against presentation and surrender of the global covered bond at the specified office of the Registrar or any of the Paying Agents.

Condition 6 (Redemption and Purchase) provides for redemption of the covered bonds on their maturity dates and for the early payment of covered bonds under certain conditions, including for taxation reasons, changes in law, illegality or as the result of the exercise of call option or put option features of covered bonds, if applicable, as specified in the related prospectus supplement.

 

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Condition 7 (Taxation) provides that all payments by the Bank on the covered bonds will be paid free and clear of any taxes, duties, assessment, or charges of any kind imposed by Canada or any political subdivision of Canada or, if the covered bonds are issued by a branch of the Bank located outside Canada, by any taxing authority of the jurisdiction where the branch is located unless required by law. Except for certain conditions described in Condition 7 (Taxation) (including, among other things, certain circumstances where a covered bondholder would have been able to avoid such withholding or deduction or such withholding or deduction is imposed upon a covered bondholder by law), if a tax or other levy is imposed, the Bank will pay additional amounts sufficient so that the holder will receive the same net amount that would have been received absent the tax or other duty, assessment or charge.

Condition 9 (Events of Default, Acceleration and Enforcement) sets forth the conditions that will constitute an Issuer Event of Default and a Guarantor Event of Default. Condition 9.3 (Enforcement) provides for the enforcement of the obligations of the Bank and the Guarantor. Under the Condition, the Bond Trustee is not required to take proceedings against the Bank or the Guarantor to seek enforcement of the provisions of the Trust Deed and the covered bonds unless it will be directed by an Extraordinary Resolution of the holders of the covered bonds of all Series or by holders of not less than 25 percent of the aggregate Principal Amount Outstanding of the covered bonds of all Series then outstanding and it has been indemnified to its satisfaction.

Condition 14 (Meetings of Covered Bondholders, Modification, Waiver and Substitution) provides for convening meetings of holders of covered bonds to consider matters that affect one or more Series of covered bonds or all of the covered bonds under the Program, which may include, among other things, a modification of the Terms and Conditions or the provisions of the Trust Deed. A resolution adopted at a meeting to effect such a modification will be binding on all holders of all covered bonds of any Series for which the meeting was convened. Condition 14 (Meetings of Covered Bondholders, Modification, Waiver and Substitution) also provides that the Bond Trustee, the Guarantor and the Bank may agree to modifications set out in more detail in Condition 14 (Meetings of Covered Bondholders, Modification, Waiver and Substitution) without the consent of holders of covered bonds of any Series, which may include among other things, any modification of the terms and conditions applying to covered bonds of one or more Series, which in the sole opinion of the Bond Trustee is not materially prejudicial to the interest of any of the covered bondholders of any Series or is of a formal, minor or technical nature or is to correct an error, or is to comply with mandatory provisions of law.

 

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TERMS AND CONDITIONS OF THE COVERED BONDS

The following are the Terms and Conditions of the covered bonds which will be incorporated by reference into each Global Covered Bond (as defined below) and each Definitive Covered Bond (as defined below), in the latter case only if permitted by the relevant stock exchange or other relevant authority (if any) and agreed by the Bank and the relevant Dealer(s) at the time of issue but, if not so permitted and agreed, such Definitive Covered Bond will have endorsed thereon or attached thereto such Terms and Conditions. The applicable prospectus supplement in relation to any Tranche of covered bonds may specify other terms and conditions which will, to the extent so specified or to the extent inconsistent with the following Terms and Conditions, replace or modify the following Terms and Conditions for the purpose of such covered bonds. The applicable prospectus supplement (or the relevant provisions thereof) will be endorsed on, or attached to, each Global Covered Bond and Definitive Covered Bond. Reference should be made to “Form of the Covered Bonds” for a description of the content of the prospectus supplement which will specify which of such terms are to apply in relation to the relevant covered bonds.

This covered bond is one of a Series (as defined below) of covered bonds issued by the Bank constituted by a trust deed dated the Program Date made between the Bank, BMO Covered Bond Guarantor Limited Partnership (the “Guarantor”) and Computershare Trust Company of Canada, as Bond Trustee (and such trust deed as further modified and/or supplemented and/or restated from time to time, the “Trust Deed”).

Save as provided for in Conditions 9 (Events of Default, Acceleration and Enforcement) and 14 (Meetings of Covered Bondholders, Modification, Waiver and Substitution), references herein to the covered bonds will be references to the covered bonds of this Series and will mean:

 

(a)

any registered covered bond representing covered bonds (a “Global Covered Bond”); and

 

(b)

any definitive covered bonds in registered form representing covered bonds issued under a registration statement under the Securities Act (the “Definitive Covered Bonds”) (whether or not issued in exchange for a Global Covered Bond in registered form).

The covered bonds have the benefit of an agency agreement dated the Program Date, made between the Bank, the Guarantor, the Bond Trustee, BNY Mellon as principal paying agent (in such capacity, the “Principal Paying Agent,” which expression will include any successor Principal Paying Agent, and together with any other paying agents, the “Paying Agents,” which expression will include any additional or successor Paying Agents), BNY Mellon as registrar (together, as the “Registrar,” which expression will include any successor Registrar), and BNY Mellon as transfer agent (the “Transfer Agent,” which expression will include any successor Transfer Agent), and BNY Mellon as the exchange agent (the “Exchange Agent,” which expression will include any successor Exchange Agent, and together with the Paying Agents, Registrar, and Transfer Agent, the “Agents”) (such agency agreement as further amended and/or supplemented and/or restated from time to time, the “Agency Agreement”).

The prospectus supplement for the covered bonds supplements these Terms and Conditions (the “Terms and Conditions” or “Conditions”) and may specify other terms and

 

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conditions which will, to the extent so specified or to the extent inconsistent with the Terms and Conditions, replace or modify the Terms and Conditions for the purposes of the covered bonds. References to the applicable prospectus supplement are to the prospectus supplement (or the relevant provisions thereof) endorsed on or attached to the covered bond.

The Bond Trustee acts for the benefit of the holders for the time being of the covered bonds (the “covered bondholders”), and for the holders of each other Series of covered bonds in accordance with the provisions of the Trust Deed.

As used herein, “Tranche” means covered bonds which are identical in all respects (including as to listing and admission to trading) and “Series” means a Tranche of covered bonds together with any further Tranche or Tranches of covered bonds which are (i) expressed to be consolidated and form a single Series, and (ii) identical in all respects (including as to listing and admission to trading) except for their respective Issue Dates, Interest Commencement Dates and/or Issue Prices.

The Guarantor has, in the Trust Deed, irrevocably and unconditionally guaranteed payment of Guaranteed Amounts in respect of the covered bonds as and when the same will become Due for Payment, but only after service of a Notice to Pay on the Guarantor following service of an Issuer Acceleration Notice on the Bank (after the occurrence of an Issuer Event of Default) or service of a Guarantor Acceleration Notice on the Guarantor (after the occurrence of a Guarantor Event of Default) and subject to the applicable Priorities of Payments. The recourse of the covered bondholders to the Guarantor under the Covered Bond Guarantee will be limited to the Portfolio, certain contractual rights, and any Excess Proceeds and will be subject to the applicable Priorities of Payments.

The security for the obligations of the Guarantor under the Covered Bond Guarantee and the other Transaction Documents to which it is a party has been created in and pursuant to, and on the terms set out in, a security agreement dated the Program Date and made between the Guarantor, the Bond Trustee and certain other Secured Creditors (such security agreement as amended and/or supplemented and/or restated from time to time, the “Security Agreement”). The obligations of the Guarantor are secured against the Portfolio and recourse against the Guarantor is limited to the Portfolio, certain contractual rights, and any Excess Proceeds and is subject to the applicable Priorities of Payments.

These Terms and Conditions include summaries of, and are subject to, the provisions of the Trust Deed, the Security Agreement and the Agency Agreement.

Copies of the Trust Deed, the Security Agreement, the Master Definitions and Construction Agreement (as defined below), the Agency Agreement and each of the other Transaction Documents (in redacted or other general form and subject to any exclusions pursuant to applicable law, including, without limitation, privacy law, and policies of the Bank relating to confidentiality and privacy matters) are available for inspection during normal business hours at the office for the time being of the Bond Trustee being at 100 University Avenue, 11th Floor, Toronto, Ontario M5J 2Y1, and at the specified office of each of the Paying Agents. Copies of the applicable prospectus supplement for all covered bonds of each Series (including in relation to unlisted covered bonds of any Series) are obtainable during normal business hours at the registered office of the Bank and at the specified office of each of the Paying Agents. The covered bondholders are deemed to have notice of, are bound by all the provisions of, and definitions contained in, the Trust Deed, the Security Agreement, the Master Definitions and Construction Agreement, the Agency Agreement, each of the other Transaction Documents and the applicable prospectus supplement which are applicable to them.

 

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Except where the context otherwise requires, capitalized terms used and not otherwise defined in these Terms and Conditions (including the preceding paragraphs) will bear the meanings given to them in the applicable prospectus supplement and/or the master definitions and construction agreement made between the parties to the Transaction Documents on the Program Date (and as further amended and/or supplemented and/or restated from time to time, the “Master Definitions and Construction Agreement”), a copy of each of which may be obtained as described above.

 

1.	Form, Denomination and Title

The covered bonds are in registered form as specified in the applicable prospectus supplement and, in the case of Definitive Covered Bonds, serially numbered, in the Specified Denomination(s). Unless otherwise specified in the applicable prospectus supplement, covered bonds of one Specified Denomination may not be exchanged for covered bonds of another Specified Denomination.

The covered bonds in a Series may be Fixed Rate Covered Bonds, Floating Rate Covered Bonds, or a combination of any of the foregoing, depending upon the Interest Basis shown in the applicable prospectus supplement. Prior to issuing a Series of covered bonds (if such covered bonds are not Fixed Rate Covered Bonds or Floating Rate Covered Bonds), the Bank has obtained confirmation from each of the Rating Agencies that the covered bonds of all Series then outstanding will not be downgraded or withdrawn as a result of the issuance of this Series of covered bonds.

Other than as set out below, title to covered bonds in registered form (“Registered Covered Bonds”) will pass upon registration of transfers in accordance with the provisions of the Agency Agreement. The Bank, the Guarantor, the Paying Agents and the Bond Trustee will (except as otherwise required by law) deem and treat the registered holder of any Registered Covered Bond as the absolute owner thereof (whether or not overdue and notwithstanding any notice of ownership or writing thereon or notice of any previous loss or theft thereof) for all purposes but, in the case of any Global Covered Bond, without prejudice to the provisions set out in the next succeeding paragraph.

For so long as any of the covered bonds are represented by a Global Covered Bond held on behalf of or, as the case may be, registered in the name of DTC or its nominee, each person (other than DTC) who is for the time being shown in the records of DTC as the holder of a particular nominal amount of such covered bonds (in which regard any certificate or other document issued by DTC as to the nominal amount of such covered bonds standing to the account of any person will be conclusive and binding for all purposes save in the case of manifest or proven error and any such certificate or other document may comprise any form of statement or print out of electronic records provided by the relevant clearing system in accordance with its usual procedures and in which the holder of a particular nominal amount of the covered bonds is clearly identified with the amount of such holding) will be treated by the Bank, the Guarantor, the Paying Agents and the Bond Trustee as the holder of such nominal amount of such covered bonds for all purposes other than with respect to the payment of principal or interest or other amounts on such nominal amount of such covered bonds and the expressions “covered bondholder” and “holder” and related expressions should be construed accordingly.

 

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Covered bonds which are represented by a Global Covered Bond will be transferable only in accordance with the rules and procedures for the time being of DTC or any other relevant clearing system, as the case may be.

References to DTC will, whenever the context so permits, be deemed to include a reference to any successor operator and/or successor clearing system and/or any additional or alternative clearing system specified in the applicable prospectus supplement or as may otherwise be approved by the Bank, the Principal Paying Agent and the Bond Trustee.

 

2.	Transfers of Registered Covered Bonds

 

2.1	Transfers of interests in Registered Global Covered Bonds

Transfers of beneficial interests in registered global covered bonds will be effected by DTC and, in turn, by other participants and, if appropriate, indirect participants in DTC acting on behalf of beneficial transferors and transferees of such interests. The laws in some States within the United States require that certain persons take physical delivery of securities in definitive form. Consequently, the ability to transfer covered bonds represented by a Registered Covered Bond in global form (a “Registered Global Covered Bond”) to such persons may depend upon the ability to exchange such covered bonds for covered bonds in definitive form. Similarly, because DTC can only act on behalf of direct participants in the DTC system who in turn act on behalf of indirect participants, the ability of a person having an interest in covered bonds represented by a Registered Global Covered Bond accepted by DTC to pledge such covered bonds to persons or entities that do not participate in the DTC system or otherwise to take action in respect of such covered bonds may depend upon the ability to exchange such covered bonds for covered bonds in definitive form. A beneficial interest in a Registered Global Covered Bond will, subject to compliance with all applicable legal and regulatory restrictions, be exchangeable for Registered Covered Bonds in definitive form (“Registered Definitive Covered Bonds”) or for a beneficial interest in another Registered Global Covered Bond only in the Specified Denomination(s) set out in the applicable prospectus supplement and only in accordance with the rules and operating procedures for the time being of DTC and in accordance with the terms and conditions specified in the Agency Agreement.

 

2.2	Transfers of Registered Covered Bonds in definitive form

Subject as provided in Conditions 2.3 (Registration of transfer upon partial redemption) and 2.4 (Costs of registration), upon the terms and subject to the conditions set forth in the Agency Agreement, a Registered Definitive Covered Bond may be transferred in whole or in part in the Specified Denomination(s) set out in the applicable prospectus supplement. In order to effect any such transfer (a) the holder or holders must (i) surrender the Registered Definitive Covered Bond for registration of the transfer of the Registered Definitive Covered Bond (or the relevant part of the Registered Definitive Covered Bond) at the specified office of the Registrar or any Transfer Agent, with the form of transfer thereon duly executed by the holder or holders thereof or his or their attorney or attorneys duly authorized in writing, and (ii) complete and deposit such other certifications as may be required by the Registrar or, as the case may be, the relevant Transfer Agent, and (b) the Registrar or, as the case may be, the relevant Transfer Agent must, after due and careful enquiry, be satisfied with the documents of title and the identity of the person making the request.

 

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Any such transfer will be subject to such reasonable regulations as the Bank, the Bond Trustee and the Registrar may from time to time prescribe (the initial such regulations being set out in the Agency Agreement).

Subject as provided above, the Registrar or, as the case may be, the relevant Transfer Agent will, within three business days (being for this purpose a day on which banks are open for business in the city where the specified office of the Registrar or, as the case may be, the relevant Transfer Agent is located) of the request (or such longer period as may be required to comply with any applicable fiscal or other laws or regulations), authenticate and deliver, or procure the authentication and delivery of, at its specified office to the transferee or (at the risk of the transferee) send by uninsured mail to such address as the transferee may request, a new Registered Definitive Covered Bond of a like aggregate nominal amount to the Registered Definitive Covered Bond (or the relevant part of the Registered Definitive Covered Bond) transferred.

In the case of the transfer of only part of a Registered Definitive Covered Bond, a new Registered Definitive Covered Bond in respect of the balance of the Registered Definitive Covered Bond not transferred will (in addition to the new Registered Definitive Covered Bond in respect of the nominal amount transferred) be so authenticated and delivered or (at the risk of the transferor) sent by uninsured mail to the address specified by the transferor.

 

2.3	Registration of transfer upon partial redemption

In the event of a partial redemption of covered bonds under Condition 6 (Redemption and Purchase) of the Terms and Conditions of the Covered Bonds, the Bank will not be required to register the transfer of any Registered Covered Bond, or part of a Registered Covered Bond, called for partial redemption.

 

2.4	Costs of registration

Covered bondholders will not be required to bear the costs and expenses of effecting any registration of transfer as provided above, except for any costs or expenses of delivery other than by regular uninsured mail and except that the Bank, the Registrar or the Transfer Agent may require the payment of a sum sufficient to cover any stamp duty, Taxes or any other governmental charge that may be imposed in relation to the registration.

 

2.7	Definitions

In these Terms and Conditions, the following expression will have the following meanings:

“U.S. Registered Covered Bond” means a covered bond issued under a registration statement under the Securities Act.

 

3.	Status of the Covered Bonds and the Covered Bond Guarantee

 

3.1	Status of the Covered Bonds

The covered bonds will constitute deposit liabilities of the Bank for purposes of the Bank Act, however the covered bonds will not be insured under the Canadian Deposit Insurance Corporation Act (Canada), and will constitute legal, valid and binding direct, unconditional,

 

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unsubordinated and unsecured obligations of the Bank and rank pari passu with all deposit liabilities of the Bank without any preference among themselves at least pari passu with all other unsubordinated and unsecured obligations of the Bank, present and future (except as prescribed by law and in certain limited circumstances described in Conditions 9.1 (Issuer Events of Default) and 14 (Meetings of Covered Bondholders, Modification, Waiver and Substitution)).

 

3.2	Status of the Covered Bond Guarantee

The payment of Guaranteed Amounts in respect of the covered bonds when the same will become Due for Payment has been unconditionally (save as set out below) and irrevocably guaranteed by the Guarantor in favor of the Bond Trustee for and on behalf of the covered bondholders pursuant to the Covered Bond Guarantee. However, the Guarantor will have no obligation under the Covered Bond Guarantee to pay any Guaranteed Amounts when the same will become Due for Payment under the covered bonds or the Trust Deed until service of a Notice to Pay by the Bond Trustee on the Guarantor (which the Bond Trustee will be required to serve following the occurrence of an Issuer Event of Default and service of an Issuer Acceleration Notice by the Bond Trustee on the Bank) or, if earlier, the occurrence of a Guarantor Event of Default and service of a Guarantor Acceleration Notice by the Bond Trustee on the Bank and the Guarantor. The obligations of the Guarantor under the Covered Bond Guarantee are subject to the applicable Priorities of Payments, and subject as aforesaid, are unsubordinated obligations of the Guarantor, which are secured and subject to limitations on recourse as provided in the Security Agreement.

As security for the Guarantor’s obligations under the Covered Bond Guarantee and the other Transaction Documents to which it is a party, the Guarantor has granted a security interest over all of its assets under the Security Agreement in favor of the Bond Trustee (for covered bondholders and on behalf of the other Secured Creditors).

 

4.

Interest

 

4.1	Interest on Fixed Rate Covered Bonds

Each Fixed Rate Covered Bond bears interest on its Principal Amount Outstanding from (and including) the Interest Commencement Date at the rate(s) per annum equal to the Rate(s) of Interest. Interest will be payable, subject as provided in these Terms and Conditions, in arrears on the Interest Payment Date(s) in each year up to (and including) the Final Maturity Date.

If the covered bonds are in definitive form, except as provided in the applicable prospectus supplement, the amount of interest payable on each Interest Payment Date in respect of the Interest Period ending on (but excluding) such date will amount to the Fixed Coupon Amount. Payments of interest on any Interest Payment Date will, if so specified in the applicable prospectus supplement, an amount which may be paid in addition to the interest payment amount on an Interest Payment Date, if so specified (the “Broken Amount”).

Except in the case of covered bonds in definitive form where a Fixed Coupon Amount or Broken Amount is specified in the applicable prospectus supplement, interest will be calculated in respect of any period by applying the Rate of Interest to (i) in the case of Fixed Rate Covered Bonds which are represented by a Global Covered Bond, the aggregate outstanding nominal amount of the Fixed Rate Covered Bonds represented by such Global Covered Bond, or (ii) in the case of Fixed Rate Covered Bonds in definitive form, the Calculation Amount; and in each case,

 

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multiplying such sum by a 30/360 day count basis or the applicable day count basis set forth in the applicable prospectus supplement, and rounding the resultant figure to the nearest sub unit of the relevant specified currency, half of any such sub unit being rounded upwards or otherwise in accordance with applicable market convention. Where the Specified Denomination of a Fixed Rate Covered Bond in definitive form comprises more than one Calculation Amount, the amount of interest payable in respect of such Fixed Rate Covered Bond will be the aggregate of the amounts (determined in the manner provided above) for each Calculation Amount comprising the Specified Denomination without any further rounding.

The applicable prospectus supplement may provide that if the payment of the Final Redemption Amount of a Series of Fixed Rate Covered Bonds on its Final Maturity Date is deferred until the applicable Extended Due for Payment Date in accordance with the Terms and Conditions, interest will accrue and be payable on the unpaid portion of the Final Redemption Amount up to the Extended Due for Payment Date at the Rate of Interest specified in the applicable prospectus supplement which may provide that such Series of Fixed Rate Covered Bonds will continue to bear interest at a Fixed Rate or at a Floating Rate despite the fact that interest accrued and was payable on such covered bonds prior to the Final Maturity Date at a Fixed Rate.

 

4.2	Interest on U.S. Registered Covered Bonds

Condition 4.6 will only apply to U.S. Registered Covered Bonds.

Each covered bond will bear interest from its date of issue at the rate per annum, in the case of a Fixed Rate Covered Bond, or pursuant to the interest rate formula, in the case of a Floating Rate Covered Bond, in each case as specified in the prospectus supplement, until the principal thereof is paid. Interest payments on covered bonds will be made in respect of Fixed Rate Covered Bonds and Floating Rate Covered Bonds in an amount equal to the interest accrued from and including the immediately preceding Interest Payment Date in respect of which interest has been paid or from and including the date of issue, if no interest has been paid, to but excluding the applicable Interest Payment Date or the Final Maturity Date, as the case may be (each an “Interest Period”).

Interest on Fixed Rate Covered Bonds and Floating Rate Covered Bonds will be payable in arrears on each Interest Payment Date and on the Final Maturity Date. The first payment of interest on any covered bonds originally issued between a Regular Record Date (as defined below) and the related Interest Payment Date will be made on the Interest Payment Date immediately following the next succeeding record date to the registered holder on the next succeeding record date. The “Regular Record Date” will be the fifteenth calendar day, whether or not a Business Day, immediately preceding the related Interest Payment Date. For the purpose of determining the holder at the close of business on a Regular Record Date when business is not being conducted, the close of business will mean 5:00 P.M., New York City time, on that day.

 

4.3	Interest Rates Applicable to U.S. Registered Covered Bonds

Condition 4.7 will only apply to U.S. Registered Covered Bonds.

The applicable prospectus supplement will specify the Interest Payment Dates for a Fixed Rate Covered Bond as well as the Final Maturity Date. Interest on Fixed Rate Covered Bonds will be computed on the basis of a 360-day year consisting of twelve 30-day months or such other day count basis set forth in the prospectus supplement.

 

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Fixed Rate Covered Bonds

If any Interest Payment Date, redemption date, repayment date or Final Maturity Date of a Fixed Rate Covered Bond falls on a day that is not a Business Day, the required payment of principal, premium, if any, and/or interest will be made on the next succeeding Business Day, and no additional interest will accrue in respect of the payment made on that next succeeding Business Day.

U.S. Registered Covered Bonds that are Floating Rate Covered Bonds

The following will only apply to Floating Rate Covered Bonds.

Interest Rate Basis. Floating Rate Covered Bonds will bear interest at rates based on one or more of the following interest rate bases:

 

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commercial paper rate;

 

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U.S. prime rate;

 

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LIBOR;

 

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EURIBOR;

 

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treasury rate;

 

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CMT rate;

 

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CD rate;

 

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CMS rate; and/or

 

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federal funds rate.

The applicable prospectus supplement will specify the interest rate basis that applies to a specific Series or Tranche of Floating Rate Covered Bonds.

Calculation of Interest. Calculations relating to Floating Rate Covered Bonds will be made by the Calculation Agent. The prospectus supplement for a particular Floating Rate Covered Bond will name the Calculation Agent for that covered bond as of its original issue date. A successor institution may be appointed to serve as Calculation Agent for such covered bonds from time to time after the original issue date of such covered bonds without the consent of covered bondholders or notification of the change.

For each Floating Rate Covered Bond, the Calculation Agent will determine, on the corresponding interest calculation date or on the interest determination date, as described below, the interest rate that takes effect on each interest reset date. In addition, the Calculation Agent will calculate the amount of interest that has accrued during each interest period that is, the period

 

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from and including the original issue date, or the last date to which interest has been paid or made available for payment, to but excluding the payment date. For each Interest Period, the Calculation Agent will calculate the amount of accrued interest by multiplying the face or other specified amount of the Floating Rate Covered Bond by an accrued interest factor for the Interest Period. This factor will equal the sum of the interest factors calculated for each day during the Interest Period. The interest factor for each day will be expressed as a decimal and will be calculated by dividing the interest rate, also expressed as a decimal, applicable to that day by 360 or by the actual number of days in the year, as specified in the applicable prospectus supplement.

Upon the request of the covered bondholder of any Floating Rate Covered Bond, the Calculation Agent will provide for that covered bond the interest rate then in effect and, if determined, the interest rate that will become effective on the next interest reset date. The Calculation Agent’s determination of any interest rate, and its calculation of the amount of interest for any Interest Period, will be final and binding in the absence of manifest error.

All percentages resulting from any calculation relating to a covered bond will be rounded upward or downward, as appropriate, to the next higher or lower one hundred-thousandth of a percentage point, e.g., 9.876541% (or 0.09876541) being rounded down to 9.87654% (or 0.0987654) and 9.876545% (or 0.09876545) being rounded up to 9.87655% (or 0.0987655). All amounts used in or resulting from any calculation relating to a Floating Rate Covered Bond will be rounded upward or downward, as appropriate, to the nearest cent, in the case of U.S. Dollars, or to the nearest corresponding hundredth of a unit, in the case of a currency other than U.S. Dollars, with one-half cent or one-half of a corresponding hundredth of a unit or more being rounded upward.

In determining the interest rate basis that applies to a Floating Rate Covered Bond during a particular Interest Period, the Calculation Agent may obtain rate quotes from various banks or dealers active in the relevant market, as discussed below. Those reference banks and dealers may include the Calculation Agent itself and its affiliates, as well as any agent participating in the distribution of the relevant floating rate covered bonds and its affiliates, and they may include affiliates of the Bank.

Initial Interest Rate. For any Floating Rate Covered Bond, the interest rate in effect from the original issue date to the first interest reset date will be the initial interest rate. The initial interest rate or the manner in which it is determined will be set forth in the applicable prospectus supplement.

Spread or Spread Multiplier. In some cases, the interest rate basis for a Floating Rate Covered Bond may be adjusted:

 

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by adding or subtracting a specified number of basis points, called the spread, with one basis point being 0.01 percent; or

 

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by multiplying the interest rate basis by a specified percentage, called the spread multiplier.

For any Floating Rate Covered Bond, the applicable prospectus supplement will indicate whether a spread or spread multiplier will apply to the covered bond and, if so, the amount of the spread or spread multiplier.

 

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Maximum and Minimum Rates. The actual interest rate, after being adjusted by the spread or spread multiplier, may also be subject to either or both of the following limits:

 

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a maximum rate—i.e., a specified upper limit that the actual interest rate in effect at any time may not exceed; and/or

 

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a minimum rate—i.e., a specified lower limit that the actual interest rate in effect at any time may not fall below.

For any Floating Rate Covered Bond, the applicable prospectus supplement will indicate whether a maximum rate and/or minimum rate will apply to the covered bond and, if so, what those rates are.

Whether or not a maximum rate applies, the interest rate on a floating rate covered bond will in no event be higher than the maximum rate permitted by New York law, as it may be modified by U.S. law of general application and the law of Ontario and the laws of Canada applicable therein.

Interest Reset Dates. The rate of interest on a Floating Rate Covered Bond will be reset, by the Calculation Agent described below, daily, weekly, monthly, quarterly, semi-annually or annually. The date on which the interest rate resets and the reset rate becomes effective is called the interest reset date. Except as otherwise specified in the applicable prospectus supplement, the interest reset date will be as follows:

 

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for Floating Rate Covered Bonds that reset daily, each Business Day;

 

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for Floating Rate Covered Bonds that reset weekly and are not treasury rate covered bonds, the Wednesday of each week;

 

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for treasury rate covered bonds that reset weekly, the Tuesday of each week;

 

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for Floating Rate Covered Bonds that reset monthly, the third Wednesday of each month;

 

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for Floating Rate Covered Bonds that reset quarterly, the third Wednesday of each of four months of each year as indicated in the applicable prospectus supplement;

 

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for Floating Rate Covered Bonds that reset semi-annually, the third Wednesday of each of two months of each year as indicated in the applicable prospectus supplement; and

 

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for Floating Rate Covered Bonds that reset annually, the third Wednesday of one month of each year as indicated in the applicable prospectus supplement.

For a Floating Rate Covered Bond, the interest rate in effect on any particular day will be the interest rate determined with respect to the latest interest reset date that occurs on or before that day. There are several exceptions, however, to the reset provisions described above.

 

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If any interest reset date for a Floating Rate Covered Bond would otherwise be a day that is not a Business Day, the interest reset date will be postponed to the next day that is a Business Day. For a LIBOR or EURIBOR covered bond, however, if that Business Day is in the next succeeding calendar month, the interest reset date will be the immediately preceding Business Day.

Interest Determination Dates. The interest rate that takes effect on an interest reset date will be determined by the Calculation Agent by reference to a particular date called an interest determination date. Except as otherwise indicated in the applicable prospectus supplement:

 

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for commercial paper rate, federal funds rate and U.S. prime rate covered bonds, the interest determination date relating to a particular interest reset date will be the Business Day preceding the interest reset date;

 

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for LIBOR covered bonds, the interest determination date relating to a particular interest reset date will be the second London business day preceding the interest reset date, unless the index currency is pounds sterling, in which case the interest determination date will be the interest reset date. An interest determination date for a LIBOR covered bond is referred to as a LIBOR interest determination date;

 

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for EURIBOR covered bonds, the interest determination date relating to a particular interest reset date will be the second Euro Business Day preceding the interest reset date. An interest determination date for a EURIBOR covered bond is referred to as a EURIBOR interest determination date;

 

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for treasury rate covered bonds, the interest determination date relating to a particular interest reset date, which is referred to as a treasury interest determination date, will be the day of the week in which the interest reset date falls on which treasury bills—i.e., direct obligations of the U.S. government—would normally be auctioned. Treasury bills are usually sold at auction on the Monday of each week, unless that day is not a Business Day, in which case the auction is usually held on the following Tuesday, except that the auction may be held on the preceding Friday. If as the result of a Monday not being a Business Day an auction is held on the preceding Friday, that Friday will be the treasury interest determination date relating to the interest reset date occurring in the next succeeding week; and

 

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for CD rate, CMT rate and CMS rate covered bonds, the interest determination date relating to a particular interest reset date will be the second Business Day preceding the interest reset date.

The interest determination date pertaining to a Floating Rate Covered Bond the interest rate of which is determined with reference to two or more interest rate bases will be the latest Business Day which is at least two Business Days before the related interest reset date for the applicable floating rate covered bond on which each interest rate basis is determinable.

 

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Interest Calculation Dates. As described above, the interest rate that takes effect on a particular interest reset date will be determined by reference to the corresponding interest determination date. Except for LIBOR covered bonds and EURIBOR covered bonds, however, the determination of the rate will actually be made on a day no later than the corresponding interest calculation date. The interest calculation date will be the earlier of the following:

 

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the tenth calendar day after the interest determination date or, if that tenth calendar day is not a Business Day, the next succeeding Business Day; and

 

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the Business Day immediately preceding the Interest Payment Date or the maturity, whichever is the day on which the next payment of interest will be due.

The Calculation Agent need not wait until the relevant interest calculation date to determine the interest rate if the rate information it needs to make the determination is available from the relevant sources sooner.

Interest Payment Dates. The Interest Payment Dates for a Floating Rate Covered Bond will depend on when the interest rate is reset and, unless otherwise specified in the applicable prospectus supplement, will be as follows:

 

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for Floating Rate Covered Bonds that reset daily, weekly or monthly, the third Wednesday of each month;

 

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for Floating Rate Covered Bonds that reset quarterly, the third Wednesday of the four months of each year specified in the applicable prospectus supplement;

 

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for Floating Rate Covered Bonds that reset semi-annually, the third Wednesday of the two months of each year specified in the applicable prospectus supplement; or

 

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for Floating Rate Covered Bonds that reset annually, the third Wednesday of the month specified in the applicable prospectus supplement.

Notwithstanding the above, if a covered bond is originally issued after the Regular Record Date and before the date that would otherwise be the first Interest Payment Date, the first Interest Payment Date will be the date that would otherwise be the second Interest Payment Date.

In addition, the following special provision will apply to a Floating Rate Covered Bond with regard to any Interest Payment Date other than one that falls on the maturity. If the Interest Payment Date would otherwise fall on a day that is not a Business Day, then the Interest Payment Date will be the next day that is a Business Day. However, if the floating rate covered bond is a LIBOR covered bond or a EURIBOR covered bond and the next Business Day falls in the next calendar month, then the Interest Payment Date will be advanced to the next preceding day that is a Business Day. If the Final Maturity Date of a Floating Rate Covered Bond falls on a day that is not a Business Day, the required payment of principal, premium, if any, and interest will be made on the next succeeding Business Day, and no additional interest will accrue in respect of the payment made on that next succeeding Business Day.

Commercial Paper Rate Covered Bonds

A commercial paper rate covered bond will bear interest at an interest rate equal to the commercial paper rate and adjusted by the spread or spread multiplier, if any, indicated in the applicable prospectus supplement.

 

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The commercial paper rate will be the money market yield of the rate, for the relevant interest determination date, for commercial paper having the index maturity indicated in the applicable prospectus supplement, as published in H.15(519) under the heading “Commercial Paper—Nonfinancial.” If the commercial paper rate cannot be determined as described above, the following procedures will apply.

 

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If the rate described above does not appear in H.15(519) by 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from that source at that time, then the commercial paper rate will be the rate, for the relevant interest determination date, for commercial paper having the index maturity specified in the applicable prospectus supplement, as published in H.15 daily update or any other recognized electronic source used for displaying that rate, under the heading “Commercial Paper—Nonfinancial.”

 

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If the rate described above does not appear in H.15(519), H.15 daily update or another recognized electronic source by 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from one of those sources at that time, the commercial paper rate will be the money market yield of the arithmetic mean of the following offered rates for U.S. Dollar commercial paper that has the relevant index maturity and is placed for an industrial issuer whose bond rating is “Aa,” or the equivalent, from a nationally recognized rating agency: the rates offered as of 11:00 A.M., New York City time, on the relevant interest determination date, by three leading U.S. Dollar commercial paper dealers in New York City selected by the Calculation Agent.

 

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If fewer than three dealers selected by the Calculation Agent are quoting as described above, the commercial paper rate for the new interest period will be the commercial paper rate in effect for the prior interest period. If the initial interest rate has been in effect for the prior interest period, however, it will remain in effect for the new interest period.

U.S. Prime Rate Covered Bonds

A U.S. prime rate covered bond will bear interest at an interest rate equal to the U.S. prime rate and adjusted by the spread or spread multiplier, if any, indicated in the applicable prospectus supplement.

The U.S. prime rate will be the rate, for the relevant interest determination date, published in H.15(519) opposite the heading “Bank Prime Loan.” If the U.S. prime rate cannot be determined as described above, the following procedures will apply.

 

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If the rate described above does not appear in H.15(519) by 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from that source at that time, then the U.S. prime rate will be the rate, for the relevant interest determination date, as published in H.15 daily update or another recognized electronic source used for the purpose of displaying that rate, under the heading “Bank Prime Loan.”

 

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If the rate described above does not appear in H.15(519), H.15 daily update or another recognized electronic source by 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from one of those sources at that time, then the U.S. prime rate will be the arithmetic mean of the following rates as they appear on the Reuters screen US PRIME 1 page: the rate of interest publicly announced by each bank appearing on that page as that bank’s prime rate or base lending rate, as of 11:00 A.M., New York City time, on the relevant interest determination date.

 

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If fewer than four of these rates appear on the Reuters screen US PRIME 1 page, the U.S. prime rate will be the arithmetic mean of the prime rates or base lending rates, as of the close of business on the relevant interest determination date, of three major banks in New York City selected by the Calculation Agent. For this purpose, the Calculation Agent will use rates quoted on the basis of the actual number of days in the year divided by a 360-day year.

 

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If fewer than three banks selected by the Calculation Agent are quoting as described above, the U.S. prime rate for the new interest period will be the U.S. prime rate in effect for the prior interest period. If the initial interest rate has been in effect for the prior interest period, however, it will remain in effect for the new interest period.

LIBOR Covered Bonds

A LIBOR covered bond will bear interest at an interest rate equal to LIBOR, which will be the London interbank offered rate for deposits in U.S. Dollars or any other index currency, as specified in the applicable prospectus supplement. In addition, when LIBOR is the interest rate basis the applicable LIBOR rate will be adjusted by the spread or spread multiplier, if any, indicated in the applicable prospectus supplement. LIBOR will be determined in the following manner:

 

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LIBOR will be the offered rate appearing on the Reuters Page LIBOR01 as of 11:00 A.M., London time, on the relevant LIBOR interest determination date, for deposits of the relevant index currency having the relevant index maturity beginning on the relevant interest reset date. The applicable prospectus supplement will indicate the index currency, the index maturity and the reference page that apply to the LIBOR covered bond. If no reference page is mentioned in the prospectus supplement, Reuters Page LIBOR01 will apply to the LIBOR covered bond.

 

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If Reuters Page LIBOR01 applies and the rate described above does not appear on that page, then LIBOR will be determined on the basis of the rates, at approximately 11:00 A.M., London time, on the relevant LIBOR interest determination date, at which deposits of the following kind are offered to prime banks in the London interbank market by four major banks in that market selected by the Calculation Agent: deposits of the index currency having the relevant index maturity, beginning on the relevant interest reset date, and in a representative amount. The Calculation Agent will request the principal London office of each of these banks to provide a quotation of its rate. If at least two quotations are provided, LIBOR for the relevant LIBOR interest determination date will be the arithmetic mean of the quotations.

 

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If fewer than two quotations are provided as described above, LIBOR for the relevant LIBOR interest determination date will be the arithmetic mean of the rates for loans of the following kind to leading European banks quoted, at approximately 11:00 A.M., in the applicable principal financial center, on that LIBOR interest determination date, by three major banks in that financial center selected by the Calculation Agent: loans of the index currency having the relevant index maturity, beginning on the relevant interest reset date and in a representative amount.

 

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If fewer than three banks selected by the Calculation Agent are quoting as described above, LIBOR for the new interest period will be LIBOR in effect for the prior interest period. If the initial interest rate has been in effect for the prior interest period, however, it will remain in effect for the new interest period.

EURIBOR Covered Bonds

A EURIBOR covered bond will bear interest at an interest rate equal to the interest rate for deposits in euro, designated as “EURIBOR” and sponsored jointly by the European Banking Federation and ACI—the Financial Market Association, or any company established by the joint sponsors for purposes of compiling and publishing that rate. In addition, when EURIBOR is the interest rate basis the EURIBOR base rate will be adjusted by the spread or spread multiplier, if any, specified in the applicable prospectus supplement. EURIBOR will be determined in the following manner:

 

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EURIBOR will be the offered rate for deposits in euros having the index maturity specified in the applicable prospectus supplement, beginning on the second Euro Business Day after the relevant EURIBOR interest determination date, as that rate appears on Reuters page EURIBOR01 as of 11:00 A.M., Brussels time, on the relevant EURIBOR interest determination date.

 

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If the rate described above does not appear on Reuters page EURIBOR01, EURIBOR will be determined on the basis of the rates, at approximately 11:00 A.M., Brussels time, on the relevant EURIBOR interest determination date, at which deposits of the following kind are offered to prime banks in the euro-zone interbank market by the principal euro-zone office of each of four major banks in that market selected by the Calculation Agent: euro deposits having the relevant index maturity, beginning on the relevant interest reset date, and in a representative amount. The Calculation Agent will request the principal euro-zone office of each of these banks to provide a quotation of its rate. If at least two quotations are provided, EURIBOR for the relevant EURIBOR interest determination date will be the arithmetic mean of the quotations.

 

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If fewer than two quotations are provided as described above, EURIBOR for the relevant EURIBOR interest determination date will be the arithmetic mean of the rates for loans of the following kind to leading euro-zone banks quoted, at approximately 11:00 A.M., Brussels time on that EURIBOR interest determination date, by three major banks in the euro-zone selected by the Calculation Agent: loans of euros having the relevant index maturity, beginning on the relevant interest reset date, and in a representative amount.

 

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•

If fewer than three banks selected by the Calculation Agent are quoting as described above, EURIBOR for the new interest period will be EURIBOR in effect for the prior interest period. If the initial interest rate has been in effect for the prior interest period, however, it will remain in effect for the new interest period.

Treasury Rate Covered Bonds

A treasury rate covered bond will bear interest at an interest rate equal to the treasury rate and adjusted by the spread or spread multiplier, if any, indicated in the applicable prospectus supplement.

The treasury rate will be the rate for the auction, on the relevant treasury interest determination date, of treasury bills having the index maturity specified in the applicable prospectus supplement, as that rate appears on Reuters page USAUCTION 10/11. If the treasury rate cannot be determined in this manner, the following procedures will apply.

 

•

If the rate described above does not appear on either page by 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from that source at that time, the treasury rate will be the bond equivalent yield of the rate, for the relevant interest determination date, for the type of treasury bill described above, as published in H.15 daily update, or another recognized electronic source used for displaying that rate, under the heading “U.S. Government Securities/Treasury Bills/Auction High.”

 

•

If the rate described in the prior paragraph does not appear in H.15 daily update or another recognized electronic source by 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from one of those sources at that time, the treasury rate will be the bond equivalent yield of the auction rate, for the relevant treasury interest determination date and for treasury bills of the kind described above, as announced by the U.S. Department of the Treasury.

 

•

If the auction rate described in the prior paragraph is not so announced by 3:00 P.M., New York City time, on the relevant interest calculation date, or if no such auction is held for the relevant week, then the treasury rate will be the bond equivalent yield of the rate, for the relevant treasury interest determination date and for treasury bills having a remaining maturity closest to the specified index maturity, as published in H.15(519) under the heading “U.S. Government Securities/Treasury Bills/Secondary Market.”

 

•

If the rate described in the prior paragraph does not appear in H.15(519) by 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from one of those sources at that time, then the treasury rate will be the rate, for the relevant treasury interest determination date and for treasury bills having a remaining maturity closest to

 

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the specified index maturity, as published in H.15 daily update, or another recognized electronic source used for displaying that rate, under the heading “U.S. Government Securities/Treasury Bills/Secondary Market.”

 

•

If the rate described in the prior paragraph does not appear in H.15 daily update or another recognized electronic source by 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from one of those sources at that time, the treasury rate will be the bond equivalent yield of the arithmetic mean of the following secondary market bid rates for the issue of treasury bills with a remaining maturity closest to the specified index maturity: the rates bid as of approximately 3:30 P.M., New York City time, on the relevant treasury interest determination date, by three primary U.S. government securities dealers in New York City selected by the Calculation Agent.

 

•

If fewer than three dealers selected by the Calculation Agent are quoting as described in the prior paragraph, the treasury rate in effect for the new interest period will be the treasury rate in effect for the prior interest period. If the initial interest rate has been in effect for the prior interest period, however, it will remain in effect for the new interest period.

CD Rate Covered Bonds

A CD rate covered bond will bear interest at an interest rate equal to the CD rate and adjusted by the spread or spread multiplier, if any, indicated in the applicable prospectus supplement.

The CD rate will be the rate, on the relevant interest determination date, for negotiable U.S. Dollar certificates of deposit having the index maturity specified in the applicable prospectus supplement, as published in H.15(519) under the heading “CDs (Secondary Market).” If the CD rate cannot be determined in this manner, the following procedures will apply.

 

•

If the rate described above does not appear in H.15(519) by 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from that source at that time, then the CD rate will be the rate, for the relevant interest determination date, described above as published in H.15 daily update, or another recognized electronic source used for displaying that rate, under the heading “CDs (Secondary Market).”

 

•

If the rate described above does not appear in H.15(519), H.15 daily update or another recognized electronic source by 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from one of those sources at that time, the CD rate will be the arithmetic mean of the following secondary market offered rates for negotiable U.S. Dollar certificates of deposit of major U.S. money market banks with a remaining maturity closest to the specified index maturity, and in a representative amount: the rates offered as of 10:00 A.M., New York City time, on the relevant interest determination date, by three leading non-bank dealers in negotiable U.S. Dollar certificates of deposit in New York City, as selected by the Calculation Agent.

 

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•

If fewer than three dealers selected by the Calculation Agent are quoting as described above, the CD rate in effect for the new interest period will be the CD rate in effect for the prior interest period. If the initial interest rate has been in effect for the prior interest period, however, it will remain in effect for the new interest period.

CMT Rate Covered Bonds

A CMT rate covered bond will bear interest at an interest rate equal to the CMT rate and adjusted by the spread or spread multiplier, if any, indicated in the applicable prospectus supplement.

The CMT rate will be the following rate displayed on the designated CMT Reuters page under the heading “. . . Treasury Constant Maturities . . . Federal Reserve Board Release H.15 Mondays Approximately 3:45 P.M.”, under the column for the designated CMT index maturity:

 

•

if the designated CMT Reuters page is Reuters page FRBCMT, the rate for the relevant interest determination date; or

 

•

if the designated CMT Reuters page is Reuters page FEDCMT, the weekly or monthly average, as specified in the applicable prospectus supplement, for the week that ends immediately before the week in which the relevant interest determination date falls, or for the month that ends immediately before the month in which the relevant interest determination date falls, as applicable.

If the CMT rate cannot be determined in this manner, the following procedures will apply.

 

•

If the applicable rate described above is not displayed on the relevant designated CMT Reuters page at 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from that source at that time, then the CMT rate will be the applicable treasury constant maturity rate described above—i.e., for the designated CMT index maturity and for either the relevant interest determination date or the weekly or monthly average, as applicable—as published in H.15(519).

 

•

If the applicable rate described above does not appear in H.15(519) by 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from one of those sources at that time, then the CMT rate will be the treasury constant maturity rate, or other U.S. treasury rate, for the designated CMT index maturity and with reference to the relevant interest determination date, that:

 

•

is published by the Board of Governors of the Federal Reserve System, or the U.S. Department of the Treasury; or

 

•

as is otherwise announced by the Federal Reserve Bank of New York for the week or month, as applicable, ended immediately preceding the week or month, as applicable, in which such CMT rate interest determination date falls; and

 

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•

in either case, is determined by the Calculation Agent to be comparable to the applicable rate formerly displayed on the designated CMT Reuters page and published in H.15(519).

 

•

If the rate described in the prior paragraph does not appear by 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from one of those sources at that time, then the CMT rate will be the yield to maturity of the arithmetic mean of the following secondary market bid rates for the most recently issued treasury covered bonds having an original maturity equal to the designated CMT index maturity and a remaining term to maturity of not less than the designated CMT index maturity minus one year, and in a representative amount: the bid rates, as of approximately 3:30 P.M., New York City time, on the relevant interest determination date, of three primary U.S. government securities dealers in New York City selected by the Calculation Agent. In selecting these bid rates, the Calculation Agent will request quotations from five of these primary dealers and will disregard the highest quotation—or, if there is equality, one of the highest—and the lowest quotation—or, if there is equality, one of the lowest. Treasury covered bonds are direct, non-callable, fixed rate obligations of the U.S. government.

 

•

If the Calculation Agent is unable to obtain three quotations of the kind described in the prior paragraph, the CMT rate will be the yield to maturity of the arithmetic mean of the following secondary market bid rates for treasury covered bonds with an original maturity longer than the designated CMT index maturity, with a remaining term to maturity closest to the designated CMT index maturity and in a representative amount: the bid rates, as of approximately 3:30 P.M., New York City time, on the relevant interest determination date, of three primary U.S. government securities dealers in New York City selected by the Calculation Agent. In selecting these bid rates, the Calculation Agent will request quotations from five of these primary dealers and will disregard the highest quotation (or, if there is equality, one of the highest) and the lowest quotation (or, if there is equality, one of the lowest). If two treasury covered bonds with an original maturity longer than the designated CMT index maturity have remaining terms to maturity that are equally close to the designated CMT index maturity, the Calculation Agent will obtain quotations for the treasury covered bond with the shorter remaining term to maturity.

 

•

If fewer than five but more than two of these primary dealers are quoting as described in the prior paragraph, then the CMT rate for the relevant interest determination date will be based on the arithmetic mean of the bid rates so obtained, and neither the highest nor the lowest of those quotations will be disregarded.

 

•

If two or fewer primary dealers selected by the Calculation Agent are quoting as described above, the CMT rate in effect for the new interest period will be the CMT rate in effect for the prior interest period. If the initial interest rate has been in effect for the prior interest period, however, it will remain in effect for the new interest period.

 

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CMS Rate Covered Bonds

A CMS rate covered bond will bear interest at an interest rate equal to the CMS rate and adjusted by the spread or spread multiplier, if any, indicated in the applicable prospectus supplement.

The CMS rate will be the rate for U.S. Dollar swaps with a maturity for a specified number of years, expressed as a percentage in the applicable prospectus supplement, which appears on the Reuters page ISDAFIX1 as of 11:00 a.m., New York City time, on the interest rate determination date.

 

•

If the CMS rate cannot be determined as described above, the following procedures will be used:

 

•

If the applicable rate described above is not displayed on the relevant designated CMS Reuters page by 11:00 a.m., New York City time, on the interest rate determination date, then the CMS rate will be a percentage determined on the basis of the mid-market, semi-annual swap rate quotations provided by five leading swap dealers in the New York City interbank market at approximately 11:00 a.m., New York City time, on the interest rate determination date. For this purpose, the semi-annual swap rate means the mean of the bid and offered rates for the semi-annual fixed leg, calculated on a 30/360 day count basis, of a fixed-for-floating U.S. Dollar interest rate swap transaction with a term equal to the maturity designated in the applicable prospectus supplement commencing on that interest rate determination date with an acknowledged dealer of good credit in the swap market, where the floating leg, calculated on an Actual/360 day count basis, is equivalent to “LIBOR Reuters” with a maturity of three months. The Calculation Agent will select the five swap dealers after consultation with us and will request the principal New York City office of each of those dealers to provide a quotation of its rate. If at least three quotations are provided, the CMS rate for that interest rate determination date will be the arithmetic mean of the quotations, eliminating the highest and lowest quotations or, in the event of equality, one of the highest and one of the lowest quotations.

 

•

If fewer than three leading swap dealers selected by the Calculation Agent are quoting as described above, the CMS rate will remain the CMS rate in effect on that interest rate determination date or, if that interest rate determination date is the first reference rate determination date, the initial interest rate.

Federal Funds Rate Covered Bonds

A federal funds rate covered bond will bear interest at an interest rate equal to the federal funds rate and adjusted by the spread or spread multiplier, if any, indicated in the applicable prospectus supplement.

The federal funds rate will be the rate for U.S. Dollar federal funds as of the relevant interest determination date, as published in H.15(519) under the heading “Federal Funds (Effective)”, as that rate is displayed on Reuters page FEDFUNDS1. If the federal funds rate cannot be determined in this manner, the following procedures will apply.

 

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•

If the rate described above is not displayed on Reuters page FEDFUNDS1 by 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from that source at that time, then the federal funds rate, as of the relevant interest determination date, will be the rate described above as published in H.15 daily update, or another recognized electronic source used for displaying that rate, under the heading “Federal Funds (Effective).”

 

•

If the rate described above is not displayed on Reuters page FEDFUNDS1 and does not appear in H.15(519), H.15 daily update or another recognized electronic source by 3:00 P.M., New York City time, on the relevant interest calculation date, unless the calculation is made earlier and the rate is available from one of those sources at that time, the federal funds rate will be the arithmetic mean of the rates for the last transaction in overnight, U.S. Dollar federal funds arranged, before 9:00 A.M., New York City time, on the Business Day following the relevant interest determination date, by three leading brokers of U.S. Dollar federal funds transactions in New York City selected by the Calculation Agent.

 

•

If fewer than three brokers selected by the Calculation Agent are quoting as described above, the federal funds rate in effect for the new interest period will be the federal funds rate in effect for the prior interest period. If the initial interest rate has been in effect for the prior interest period, however, it will remain in effect for the new interest period.

Special Rate Calculation Terms

For the purposes of this Condition 4.7:

The term “bond equivalent yield” means a yield expressed as a percentage and calculated in accordance with the following formula:

 

		bond equivalent yield =		D x N			x 100
				360 – (D x M)

where,

“D” means the annual rate for treasury bills quoted on a bank discount basis and expressed as a decimal;

“N” means 365 or 366, as the case may be; and

“M” means the actual number of days in the applicable interest reset period.

The term “Business Day” means, for any covered bond, a day that meets all the following applicable requirements:

 

(a)

for all covered bonds, is a Monday, Tuesday, Wednesday, Thursday or Friday that is neither a legal holiday nor a day on which banking institutions are authorized or required by law to close in New York City or Toronto, and, in the case of a Floating Rate covered bond, London;

 

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(b)

if the covered bond has a specified currency other than U.S. Dollars or euros, is also a day on which banking institutions are not authorized or obligated by law, regulation or executive order to close in the applicable principal financial center; and

 

(c)

if the covered bond is a EURIBOR covered bond or has a specified currency of euros, or is a LIBOR covered bond for which the index currency is euros, is also a Euro Business Day.

The term “designated CMT index maturity” means the index maturity for a CMT rate covered bond and will be the original period to maturity of a U.S. treasury security—either 1, 2, 3, 5, 7, 10, 20 or 30 years—specified in the applicable prospectus supplement.

The term “designated CMT Reuters page” means the Reuters page that displays treasury constant maturities as reported in H.15(519). If no Reuters page is so specified, then the applicable page will be Reuters page FEDCMT. If Reuters page FEDCMT applies but the applicable prospectus supplement does not specify whether the weekly or monthly average applies, the weekly average will apply.

The term “Euro Business Day” means any day on which the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) System, or any successor system, is open for business.

The term “euro-zone” means, at any time, the region comprised of the member states of the European Economic and Monetary Union that, as of that time, have adopted a single currency in accordance with the Treaty on European Union of February 1992.

“H.15(519)” means the weekly statistical release entitled “Statistical Release H.15(519)”, or any successor publication, published by the Board of Governors of the Federal Reserve System.

“H.15 daily update” means the daily update of H.15(519) available through the worldwide website of the Board of Governors of the Federal Reserve System, at http://www.federalreserve.gov/releases/h15/update, or any successor site or publication.

The term “index currency” means, with respect to a LIBOR covered bond, the currency specified as such in the applicable prospectus supplement. The index currency may be U.S. Dollars or any other currency, and will be U.S. Dollars unless another currency is specified in the prospectus supplement.

The term “index maturity” means, with respect to a floating rate covered bond, the period to maturity of the instrument or obligation on which the interest rate formula is based, as specified in the applicable prospectus supplement.

“Interest Period” has the meaning given to such term in Condition 4.6 (Interest on U.S. Registered Covered Bonds) of the Terms and Conditions of the Covered Bonds.

“London business day” means any day on which dealings in the relevant index currency are transacted in the London interbank market.

 

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The term “money market yield” means a yield expressed as a percentage and calculated in accordance with the following formula:

 

		money market yield =		D x 360			x 100
				360 – (D x M)

where,

“D” means the annual rate for commercial paper quoted on a bank discount basis and expressed as a decimal; and

“M” means the actual number of days in the relevant interest reset period.

The term “principal financial center” means the capital city of the country to which an index currency relates (or the capital city of the country issuing the specified currency, as applicable), except that with respect to U.S. Dollars, Australian dollars, Canadian Dollars, South African rands and Swiss francs, the “principal financial center” means The City of New York, Sydney, Toronto, Johannesburg and Zurich, respectively, and with respect to euros the principal financial center means London.

The term “representative amount” means an amount that, in the Calculation Agent’s judgment, is representative of a single transaction in the relevant market at the relevant time.

“Reuters Page LIBOR01” means the display designated as “LIBOR01” on Reuters 3000 Xtra (or any successor service) (or such other page as may replace Page LIBOR01 on Reuters 3000 Xtra or any successor service).

“Reuters screen US PRIME 1 page” means the display on the “US PRIME 1” page on the Reuters Monitor Money Rates Service, or any successor service, or any replacement page or pages on that service, for the purpose of displaying prime rates or base lending rates of major U.S. banks.

“Reuters page” means the display on Reuters 3000 Xtra, or any successor service or any replacement page or pages on that service.

If, when using the terms designated CMT Reuters page, H.15(519), H.15 daily update, Reuters screen US PRIME 1 page, Reuters Page LIBOR01 or Reuters page, a particular heading or headings is referenced on any of those pages, those references include any successor or replacement heading or headings as determined by the Calculation Agent.

 

5.

Payments

 

5.1	Method of payment

Payments will be subject in all cases to (i) any fiscal or other laws and regulations applicable thereto in the place of payment but without prejudice to the provisions of Condition 7 (Taxation) and (ii) any withholding or deduction required pursuant to an agreement described in Section 1471(b) of the U.S. Internal Revenue Code of 1986 (the “Code”) or otherwise imposed pursuant to Sections 1471 through 1474 of the Code, any regulations or agreements thereunder, official interpretations thereof, or (without prejudice to the provisions of Condition 7) any law implementing an intergovernmental approach thereto.

 

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5.4	Payments in respect of Registered Covered Bonds

Payments of principal in respect of each Registered Covered Bond (whether or not in global form) will be made against presentation and surrender (or, in the case of part payment of any sum due, endorsement) of the Registered Covered Bond at the specified office of the Registrar or any of the Paying Agents. Such payments will be made in accordance with Condition 5.1 (Method of Payment) by transfer to the Designated Account (as defined below) of the holder (or the first named of joint holders) of the Registered Covered Bond appearing in the register of holders of the Registered Covered Bonds maintained by the Registrar (the “Register”) at the close of business on the tenth business day (“business day” being for the purposes of this Condition 5.4 a day on which banks are open for business in the city where the specified office of the Registrar is located) before the relevant due date (the “Record Date”). Notwithstanding the previous sentence, if (i) a holder does not have a Designated Account, or (ii) the principal amount of the covered bonds held by a holder is less than U.S.$250,000 (or its approximate equivalent in any other specified currency), payment will instead be made by a check drawn on a Designated Bank (as defined below). For these purposes, “Designated Account” means the account (which, in the case of a payment in Yen to a non resident of Japan, will be a non resident account) maintained by a holder with a Designated Bank and identified as such in the Register and “Designated Bank” means a bank in the City of New York.

Payments of interest in respect of each Registered Covered Bond (whether or not in global form) will be made by a check in the specified currency drawn on a Designated Bank and mailed by uninsured mail on the business day immediately preceding the relevant due date to the holder (or the first named of joint holders) of the Registered Covered Bond appearing in the Register at the close of business on the Record Date at the holder’s address shown in the Register on the Record Date and at the holder’s risk. Upon application of the holder to the specified office of the Registrar not less than three business days before the due date for any payment of interest in respect of a Registered Covered Bond, the payment may be made by transfer on the due date in the manner provided in the preceding paragraph. Any such application for transfer will be deemed to relate to all future payments of interest (other than interest due on redemption) in respect of the Registered Covered Bonds which become payable to the holder who has made the initial application until such time as the Registrar is notified in writing to the contrary by such holder. Payment of the interest due in respect of each Registered Covered Bond on redemption will be made in the same manner as payment of the principal in respect of such Registered Covered Bond.

Holders of Registered Covered Bonds will not be entitled to any interest or other payment for any delay in receiving any amount due in respect of any Registered Covered Bond as a result of a check posted in accordance with this Condition arriving after the due date for payment or being lost in the post. No commissions or expenses will be charged to such holders by the Registrar or any of the Paying Agents in respect of any payments of principal or interest in respect of the Registered Covered Bonds.

None of the Bank, the Guarantor, the Bond Trustee or the Agents will have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in the Registered Covered Bonds or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.

 

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5.5	General provisions applicable to payments

The holder of a Global Covered Bond (or, as provided in the Trust Deed, the Bond Trustee) will be the only person entitled to receive payments in respect of covered bonds represented by such Global Covered Bond and the obligations of the Bank or, as the case may be, the Guarantor under the Covered Bond Guarantee will be discharged by payment to, or to the order of, the holder of such Global Covered Bond (or the Bond Trustee, as the case may be) in respect of each amount so paid. Each of the persons shown in the records of DTC as the beneficial holder of a particular nominal amount of covered bonds represented by such Global Covered Bond must look solely to DTC for his share of each payment so made by the Bank or the Guarantor under the Covered Bond Guarantee to, or to the order of, the holder of such Global Covered Bond (or the Bond Trustee, as the case may be). No person other than the holder of the relevant Global Covered Bond (or, as provided in the Trust Deed, the Bond Trustee) will have any claim against the Bank or the Guarantor under the Covered Bond Guarantee in respect of any payments due on that Global Covered Bond.

 

5.6	Payment Day

If the date for payment of any amount in respect of any covered bond is not a Payment Day (as defined below), the holder thereof will not be entitled to payment of the relevant amount due until the next following Payment Day and will not be entitled to any interest or other sum in respect of any such delay. In this Condition (unless otherwise specified in the applicable prospectus supplement), “Payment Day” means any day which (subject to Condition 8 (Prescription)) is a day on which commercial banks and foreign exchange markets in the City of New York settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits).

 

5.7	Interpretation of principal and interest

Any reference in these Terms and Conditions to principal in respect of the covered bonds will be deemed to include, as applicable:

 

(a)

any additional amounts which may be payable with respect to principal under Condition 7 (Taxation) or under any undertakings or covenants given in addition thereto, or in substitution therefor, pursuant to the Trust Deed;

 

(b)

the Final Redemption Amount of the covered bonds;

 

(c)

the Early Redemption Amount of the covered bonds, but excluding any amount of interest referred to therein;

 

(d)

the Optional Redemption Amount(s) (if any) of the covered bonds;

 

(e)

any premium and any other amounts (other than interest) which may be payable under or in respect of the covered bonds; and

 

(f)

any Excess Proceeds attributable to principal which may be deposited by the Bond Trustee into the GDA Account in respect of the covered bonds, and following a Guarantor Event of Default and service of a Guarantor Acceleration Notice deposited or paid in such other manner as the Bond Trustee may direct.

 

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Any reference in these Terms and Conditions to interest in respect of the covered bonds will be deemed to include, as applicable, any additional amounts which may be payable with respect to interest under Condition 7 (Taxation) or under any undertakings given in addition thereto, or in substitution therefor, pursuant to the Trust Deed.

 

6.	Redemption and Purchase

 

6.1	Final redemption

Unless previously redeemed or purchased and cancelled as specified below, each covered bond will be redeemed by the Bank at its Final Redemption Amount specified in, or determined in the manner specified in, the applicable prospectus supplement in the relevant specified currency on the Final Maturity Date.

Without prejudice to Condition 9 (Events of Default, Acceleration and Enforcement), if an Extended Due for Payment Date is specified in the applicable prospectus supplement for a Series of covered bonds and the Bank has failed to pay the Final Redemption Amount on the Final Maturity Date specified in the prospectus supplement (in each case after the expiry of the grace period set out in Condition 9.1(a) (Issuer Events of Default)) and following service of a Notice to Pay on the Guarantor by no later than the date falling one Business Day prior to the Extension Determination Date, the Guarantor has insufficient funds available under the Guarantee Priorities of Payments to pay the Guaranteed Amounts corresponding to the Final Redemption Amount in full in respect of the relevant Series of covered bonds on the date falling on the earlier of (a) the date which falls two Business Days after service of a Notice to Pay on the Guarantor or, if later, the Final Maturity Date (in each case after the expiry of the grace period set out in Condition 9.2(a) (Guarantor Events of Default)), and (b) the Extension Determination Date, under the Covered Bond Guarantee, then (subject as provided below) payment of the unpaid portion of the Final Redemption Amount by the Guarantor under the Covered Bond Guarantee will be deferred until the Extended Due for Payment Date, provided that any amount representing the Final Redemption Amount due and remaining unpaid on the earlier of (a) and (b) above will be paid by the Guarantor to the extent it has sufficient funds available under the Guarantee Priorities of Payments on any Interest Payment Date thereafter up to (and including) the relevant Extended Due for Payment Date.

The Bank will confirm to the Principal Paying Agent as soon as reasonably practicable and in any event at least four Business Days prior to the Final Maturity Date of a Series of covered bonds whether (a) payment will be made in full of the Final Redemption Amount in respect of a Series of covered bonds on that Final Maturity Date or (b) payment will not be made in full of the Final Redemption Amount in respect of a Series of covered bonds on that Final Maturity Date. Any failure by the Bank to notify the Principal Paying Agent will not affect the validity or effectiveness of the extension.

The Guarantor will notify the relevant covered bondholders (in accordance with Condition 13 (Notices)), the Rating Agencies, the Bond Trustee, the Principal Paying Agent and (in the case of Registered Covered Bonds) the Registrar as soon as reasonably practicable and in any event at least one Business Day prior to the date specified in (a) or (b) of the second preceding paragraph (as appropriate) of any inability of the Guarantor to pay in full the Guaranteed Amounts corresponding to the Final Redemption Amount in respect of a Series of covered bonds pursuant to the Covered Bond Guarantee. Any failure by the Guarantor to notify such parties will not affect the validity or effectiveness of the extension nor will any rights accrue to any of them by virtue thereof.

 

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In the circumstances outlined above, the Guarantor will on the earlier of (a) the date falling two Business Days after service of a Notice to Pay or, if later, the Final Maturity Date (in each case after the expiry of the grace period set out in Condition 9.2(a)) (Guarantor Events of Default), and (b) the Extension Determination Date, under the Covered Bond Guarantee, apply the funds (if any) available (after paying or providing for payment of higher ranking or pari passu amounts in accordance with the Guarantee Priorities of Payments) pro rata in part payment of an amount equal to the Final Redemption Amount of each covered bond of the relevant Series of covered bonds and will pay Guaranteed Amounts constituting the corresponding part of Scheduled Interest in respect of each such covered bond on such date. The obligation of the Guarantor under the Covered Bond Guarantee to pay any amounts in respect of the balance of the Final Redemption Amount not so paid will be deferred as described above. Such failure to pay by the Guarantor will not constitute a Guarantor Event of Default.

Any discharge of the obligations of the Bank as a result of the payment of Excess Proceeds to the Bond Trustee will be disregarded for the purposes of determining the liabilities of the Guarantor under the Covered Bond Guarantee in connection with this Condition 6.1 (Final redemption).

 

6.2	Redemption for taxation reasons

The covered bonds may be redeemed at the option of the Bank in whole, but not in part, at any time (if the relevant covered bond is not a Floating Rate Covered Bond) or on any Interest Payment Date (if the relevant covered bond is a Floating Rate Covered Bond), on giving not less than 30 nor more than 60 days’ notice to the Bond Trustee and, in accordance with Condition 13 (Notices), the covered bondholders (which notice will be irrevocable), if the Bank satisfies the Bond Trustee immediately before the giving of such notice that on the occasion of the next date for payment of interest on the relevant covered bonds, that the Bank is or would be required to pay additional amounts as provided or referred to in Condition 7 (Taxation). Covered bonds redeemed pursuant to this Condition 6.2 will be redeemed at their Early Redemption Amount referred to in Condition 6.7 (Early Redemption Amounts) together (if appropriate) with interest accrued to (but excluding) the date of redemption.

 

6.3	Redemption at the option of the Bank (“Issuer Call”)

If an Issuer Call is specified in the applicable prospectus supplement, the Bank may, having given not less than 15 nor more than 30 days’ notice or such other period of notice as may be specified in the applicable prospectus supplement to the Bond Trustee, the Principal Paying Agent, the Registrar (in the case of the redemption of Registered Covered Bonds) and, in accordance with Condition 13 (Notices), the covered bondholders (which notice will be irrevocable) redeem all or only some of the covered bonds then outstanding on any Optional Redemption Date(s) and at the Optional Redemption Amount(s) specified in, or determined in the manner specified in, the applicable prospectus supplement together, if applicable, with interest accrued to (but excluding) the relevant Optional Redemption Date(s). The Bank will be bound to redeem the covered bonds on the date specified in such notice. In the event of a redemption of only some of the covered bonds, such redemption must be of a nominal amount not less than the Minimum Redemption Amount and not more than the Maximum Redemption Amount (if any) as specified in the applicable prospectus supplement. In the case of a partial redemption of covered

 

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bonds, the covered bonds to be redeemed (the “Redeemed Covered Bonds”) will be selected individually by lot, in the case of Redeemed Covered Bonds represented by Definitive Covered Bonds, and in accordance with the rules of DTC, in the case of Redeemed Covered Bonds represented by a Global Covered Bond, in each case, not more than 30 days prior to the date fixed for redemption (such date of selection being hereinafter called the “Selection Date”). In the case of Redeemed Covered Bonds represented by Definitive Covered Bonds, a list of the serial numbers of such Redeemed Covered Bonds will be published in accordance with Condition 13 (Notices) not less than 15 days (or such shorter period as may be specified in the applicable prospectus supplement) prior to the date fixed for redemption. The aggregate nominal amount of Redeemed Covered Bonds represented by Definitive Covered Bonds or represented by Global Covered Bonds will, in each case, bear the same proportion to the aggregate nominal amount of all Redeemed Covered Bonds as the aggregate nominal amount of Definitive Covered Bonds or Global Covered Bonds outstanding bears, in each case, to the aggregate nominal amount of the covered bonds outstanding on the Selection Date, provided that such nominal amounts will, if necessary, be rounded downwards to the nearest integral multiple of the Specified Denomination. No exchange of the relevant Global Covered Bond will be permitted during the period from (and including) the Selection Date to (and including) the date fixed for redemption pursuant to this Condition 6.3 and notice to that effect will be given by the Bank to the covered bondholders in accordance with Condition 13 (Notices) at least five days (or such shorter period as is specified in the applicable prospectus supplement) prior to the Selection Date.

 

6.4	Redemption at the option of the covered bondholders (“Investor Put”)

If an Investor Put is specified in the prospectus supplement for a covered bond, then if and to the extent specified in the applicable prospectus supplement and provided that an Issuer Event of Default has not occurred and is continuing, upon the covered bondholder giving to the Bank, in accordance with Condition 13 (Notices), not less than 30 nor more than 60 days’ notice (which notice will be irrevocable), the Bank will, upon the expiry of such notice provided that the Cash Manager has notified the Bond Trustee in writing that there will be sufficient funds available to pay any termination payment due to the Covered Bond Swap Provider, redeem subject to, and in accordance with, the terms specified in the applicable prospectus supplement in whole (but not in part) such covered bond on the Optional Redemption Date and at the relevant Optional Redemption Amount as specified in, or determined in the manner specified in, the applicable prospectus supplement, together, if applicable, with interest accrued to (but excluding) the relevant Optional Redemption Date.

If the covered bond is in definitive form, to exercise the right to require redemption of such covered bond, the covered bondholder must deliver such covered bond, on any Business Day falling within the above mentioned notice period at the specified office of any Paying Agent, accompanied by a duly signed and completed notice of exercise of the Investor Put in the form (for the time being currently) obtainable from any specified office of any Paying Agent and in which the holder must specify a bank account (or, if payment is by check, an address) to which payment is to be made under this Condition 6.4.

It may be that before an Investor Put can be exercised, certain conditions and/or circumstances will need to be satisfied. Where relevant, the provisions will be set out in the applicable prospectus supplement.

 

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6.5	Redemption due to illegality or invalidity

 

(a)

The covered bonds of all Series may be redeemed at the option of the Bank in whole, but not in part, at any time, on giving not less than 30 nor more than 60 days’ notice to the Bond Trustee, the Principal Paying Agent, the Registrar and, in accordance with Condition 13 (Notices), all covered bondholders (which notice will be irrevocable), if the Bank satisfies the Bond Trustee immediately before the giving of such notice that it has, or will, before the next Interest Payment Date of any covered bond of any Series, become unlawful for the Bank to make, fund or allow to remain outstanding any Guarantee Loan made by it to the Guarantor under the Intercompany Loan Agreement, as a result of any change in, or amendment to, the applicable laws or regulations or any change in the application or official interpretation of such laws or regulations, which change or amendment has become or will become effective before the next such Interest Payment Date.

 

(b)

Covered bonds redeemed pursuant to Condition 6.5(a) will be redeemed at their Early Redemption Amount referred to in Condition 6.7 (Early Redemption Amounts) together (if appropriate) with interest accrued to (but excluding) the date of redemption.

 

6.6

General

Prior to the publication of any notice of redemption pursuant to Conditions 6.2 (Redemption for taxation reasons) or 6.5(a) (Redemption due to illegality or invalidity), the Bank will deliver to the Bond Trustee a certificate signed by two authorized signatories stating that the Bank is entitled or required to effect such redemption and setting forth a statement of facts showing that the conditions set out in Conditions 6.2 (Redemption for taxation reasons) or, as the case may be, 6.5(a) (Redemption due to illegality or invalidity) for such right or obligation (as applicable) of the Bank to arise have been satisfied and the Bond Trustee will be entitled to accept the certificate as sufficient evidence of the satisfaction of the conditions set out above, in which event it will be conclusive and binding on all covered bondholders.

 

6.7	Early Redemption Amounts

For the purpose of Conditions 6.2 (Redemption for taxation reasons), 6.5(a) (Redemption due to illegality or invalidity) and 9 (Events of Default, Acceleration and Enforcement), each covered bond will be redeemed (unless otherwise stated in the applicable prospectus supplement) at its Early Redemption Amount calculated at the amount specified in, or determined in the manner specified in, the applicable prospectus supplement or, if no such amount or manner is so specified in the applicable prospectus supplement, at its Principal Amount Outstanding, together with interest accrued to (but excluding) the date fixed for redemption (the “Early Redemption Amount”).

 

6.8

Purchases

The Bank or any of its subsidiaries, or the Guarantor, may at any time purchase or otherwise acquire covered bonds at any price in the open market either by tender or private agreement or otherwise. If purchases are made by tender, tenders must be available to all covered bondholders alike. Such covered bonds may be held, reissued, resold or, at the option of the Bank

 

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or the relevant subsidiary, surrendered to any Paying Agent and/or the Registrar for cancellation (except that any covered bonds purchased or otherwise acquired by the Guarantor must immediately be surrendered to any Paying Agent and/or the Registrar for cancellation).

 

6.9	Cancellation

All covered bonds which are redeemed will forthwith be cancelled. All covered bonds so cancelled and any covered bonds purchased and surrendered for cancellation pursuant to Condition 6.8 (Purchases) and cancelled will be forwarded to the Principal Paying Agent and cannot be reissued or resold.

 

6.10	Late Payment

If any amount payable in respect of any covered bond is improperly withheld or refused upon its becoming due and payable or is paid after its due date, the amount due and payable in respect of such covered bond (the “Late Payment”) will itself accrue interest (both before and after any judgment or other order of a court of competent jurisdiction) from (and including) the date on which such payment was improperly withheld or refused or, as the case may be, became due, to (but excluding) the Late Payment Date at the rate determined in accordance with Condition 4.1 (Interest on Fixed Rate Covered Bonds) and on the basis of the day count basis specified in the applicable prospectus supplement or, if none is specified, on a 30/360 basis.

For the purpose of this Condition 6.10, the “Late Payment Date” will mean the earlier of:

 

(i)

the date which the Bond Trustee determines to be the date on which, upon further presentation of the relevant covered bond, payment of the full amount (including interest as aforesaid) in the relevant currency in respect of such covered bond is to be made; and

 

(ii)

the seventh day after notice is given to the relevant covered bondholder (whether individually or in accordance with Condition 13 (Notices)) that the full amount (including interest as aforesaid) in the relevant currency in respect of such covered bond is available for payment,

provided that in the case of both (i) and (ii), upon further presentation thereof being duly made, such payment is made.

 

7.

Taxation

All payments of principal and interest (if any) in respect of the covered bond by or on behalf of the Bank or the Guarantor under the Covered Bond Guarantee, as the case may be, will be made without withholding or deduction for, or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature unless such withholding or deduction of such taxes, duties, assessments or governmental charges is required by law or regulation or administrative practice of any jurisdiction.

In the event that any payments made by the Bank are or become subject to a withholding or deduction for or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of (i) the Government of Canada or

 

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any province, territory or political division thereof or any authority or agency therein or thereof having power to tax, or (ii) in the case of covered bonds issued by a branch of the Bank located outside of Canada, the country in which such branch is located or any political subdivision thereof or any authority or agency therein or thereof having power to tax, in respect of any payment of principal and interest on the covered bonds, the Bank will pay such additional amounts as will be necessary in order that the net amounts received by the covered bondholders after such withholding or deduction will equal the respective amounts of principal and interest, if any, which would otherwise have been receivable in respect of the covered bonds, as the case may be, in the absence of such withholding or deduction; except that no such additional amounts will be payable with respect to any covered bond presented for payment:

 

(a)

to, or to a third party on behalf of, a covered bondholder who is liable to such taxes, duties, assessments or government charges in respect of such covered bond by reason of such covered bondholder having some connection with Canada or the jurisdiction imposing such tax otherwise than the mere holding of such covered bond;

 

(b)

presented for payment more than 30 days after the Relevant Date except to the extent that the holder thereof would have been entitled to such additional amount on presenting the same for payment on or before such thirtieth day;

 

(c)

where such withholding or deduction is imposed on a payment and is required to be made pursuant to European Council Directive 2003/48/EC or any other law implementing or complying with, or introduced in order to conform to, such Directive;

 

(d)

presented for payment by or on behalf of a covered bondholder who would have been able to avoid such withholding or deduction by presenting the relevant covered bond to another Paying Agent in any member state of the European Union (each a “Member State”);

 

(e)

to, or to a third party on behalf of, a covered bondholder in respect of whom such tax, duty, assessment or governmental charge is required to be withheld or deducted by reason of such covered bondholder or other person entitled to payments on the covered bond being a person not dealing at arm’s length (within the meaning of the ITA) with the Bank; or

 

(f)

to, or to a third party on behalf of, a covered bondholder who is liable for such taxes, duties, assessments or other charges by reason of such covered bondholder’s failure to comply with any certification, identification, documentation or other reporting requirement concerning the nationality, residence, identity or connection with Canada of such covered bondholder, if (i) compliance is required by law as a precondition to, exemption from, or reduction in the rate of, the tax, assessment or other charge and (ii) the Bank has given such covered bondholder or, if such covered bondholder is not the beneficial owner of

 

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the covered bond in question, the beneficial owner of such covered bond at least 30 days’ notice that such covered bondholder or beneficial owner will be required to provide such certification, identification, documentation or other requirement.

As used herein, the “Relevant Date” means the date on which payment in respect of the covered bond first becomes due and payable but, if the full amount of the funds payable on such date has not been received by the Principal Paying Agent or the Bond Trustee on or prior to such date, the Relevant Date will be the date on which such funds will have been so received and notice to that effect has been given to covered bondholders in accordance with Condition 13 (Notices).

If any payments made by the Guarantor under the Covered Bond Guarantee are or become subject to any withholding or deduction on account of any taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of Canada or any political subdivision thereof or by any authority therein or thereof having power to tax or, in the case of covered bonds issued by a branch of the Bank located outside of Canada, the country in which such branch is located or any political subdivision thereof or any authority or agency therein or thereof having power to tax, the Guarantor will not be obliged to pay any additional amount as a consequence.

 

8.	Prescription

The covered bonds will become void unless presented for payment within 10 years (in the case of principal) and five years (in the case of interest) in each case from the Relevant Date (as defined in Condition 7 (Taxation)) therefor, subject in each case to the provisions of Condition 5 (Payments).

The Bank will be discharged from its obligation to pay principal on a Registered Covered Bond to the extent that the relevant Registered Covered Bond certificate has not been surrendered to the Registrar by, or a check which has been duly dispatched in the specified currency remains uncashed at, the end of the period of 10 years from the Relevant Date for such payment.

The Bank will be discharged from its obligation to pay interest on a Registered Covered Bond to the extent that a check which has been duly dispatched in the specified currency remains uncashed at the end of the period of five years from the Relevant Date in respect of such payment.

 

9.	Events of Default, Acceleration and Enforcement

 

9.1	Issuer Events of Default

The Bond Trustee at its discretion may, and if so requested in writing by the holders of at least 25 percent of the aggregate Principal Amount Outstanding of the covered bonds (which for this purpose or the purpose of any Extraordinary Resolution referred to in this Condition 9.1 means the covered bonds of a Series together with the covered bonds of any other Series constituted by the Trust Deed) then outstanding as if they were a single Series (with the nominal amount of covered bonds not denominated in Canadian Dollars converted into Canadian Dollars at the relevant exchange rate specified in the applicable Covered Bond Swap Agreement) or if so directed by an Extraordinary Resolution of all the covered bondholders will (subject in each case

 

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to being indemnified and/or secured to its satisfaction), give notice (an “Issuer Acceleration Notice”) in writing to the Bank that as against the Bank (but not, for the avoidance of doubt, against the Guarantor under the Covered Bond Guarantee) each covered bond of each Series is, and each such covered bond will thereupon immediately become, due and repayable at its Early Redemption Amount together with (to the extent not included in the Early Redemption Amount) accrued interest as provided in the Trust Deed if any of the following events (each, an “Issuer Event of Default”) will occur and be continuing:

 

(a)

if default is made by the Bank for a period of 10 Canadian Business Days or more in the payment of any principal or 30 days or more in the payment of any interest due in respect of the covered bonds or any of them; or

 

(b)

if the Bank fails to perform or observe any of its other obligations not otherwise specified in subparagraph (a) above or subparagraph (f) below under the covered bonds of any Series or the Trust Deed or any other Transaction Documents to which the Bank is a party (other than any dealership agreement, subscription agreement or underwriting agreement), but excluding any obligation of the Bank to comply with the Asset Coverage Test or any Loan Representations and Warranties given by the Bank thereunder or pursuant thereto, and (except where the Bond Trustee considers such failure to be incapable of remedy when no such continuation or notice as is hereinafter referred to will be required) such failure continues for the period of 30 days (or such longer period as the Bond Trustee may permit) after written notice thereof has been given by the Bond Trustee to the Bank requiring the same to be remedied; or

 

(c)

if an Insolvency Event has occurred with respect to the Bank; or

 

(d)

if an Asset Coverage Test Breach Notice has been served and not revoked (in accordance with the terms of the Transaction Documents) on or before the immediately succeeding Calculation Date following service of such Asset Coverage Test Breach Notice; or

 

(e)

if the Pre-Maturity Test in respect of any Series of Hard Bullet Covered Bonds is breached and the Guarantor has not taken the necessary actions to cure the breach before the earlier to occur of: (i) 10 Canadian Business Days from the date that the Seller is notified of the breach of the Pre-Maturity Test and (ii) the Final Maturity Date of that Series of Hard Bullet Covered Bonds; or

 

(f)

if a Ratings Trigger prescribed by the Terms and Conditions or the Transaction Documents (and not otherwise specifically provided for in this Condition 9.1) is breached and the prescribed remedial action is not taken within the specified time period, unless, in respect of any Ratings Trigger other than the Account Bank Threshold Ratings, the Standby Account Bank Required Ratings, the Servicer Deposit Threshold Ratings or the Cash Management Deposit Ratings, such breach occurs at a time that the Guarantor is Independently Controlled and Governed,

provided that the condition, event or act described in subparagraphs (b) to (e) above will only constitute an Issuer Event of Default if the Bond Trustee has certified in writing to the Bank and the Guarantor that such condition, event or act is, in its opinion, materially prejudicial to the interests of the covered bondholders of any Series.

 

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Upon the covered bonds becoming immediately due and payable against the Bank pursuant to this Condition 9.1, the Bond Trustee will forthwith serve on the Guarantor a notice to pay (the “Notice to Pay”) pursuant to the Covered Bond Guarantee. If a Notice to Pay has been served, the Guarantor will be required to make payments of Guaranteed Amounts when the same will become Due for Payment in accordance with the terms of the Covered Bond Guarantee and the Trust Deed.

Following the occurrence of an Issuer Event of Default and service of an Issuer Acceleration Notice, the Bond Trustee may or will take such proceedings against the Bank in accordance with the first paragraph of Condition 9.3 (Enforcement).

The Trust Deed provides that all funds received by the Bond Trustee from the Bank or any liquidator or person with similar powers appointed in relation to the Bank following the occurrence of an Issuer Event of Default and service of an Issuer Acceleration Notice (the “Excess Proceeds”), will be deposited by the Bond Trustee on behalf of the covered bondholders, as soon as practicable, into the GDA Account, and following a Guarantor Event of Default and service of a Guarantor Acceleration Notice, deposited or paid in such other manner as the Bond Trustee may direct, and in either case, will be distributed in accordance with the applicable Priorities of Payments. The Excess Proceeds will thereafter form part of the Portfolio and, if deposited into the GDA Account, will be used by the Guarantor in the same manner as all other funds from time to time standing to the credit of the GDA Account and distributed in accordance with the applicable Priorities of Payments.

By subscribing for or purchasing covered bonds, each covered bondholder will be deemed to have irrevocably directed the Bond Trustee to deposit the Excess Proceeds into the GDA Account in the manner described above, or following a Guarantor Event of Default and service of a Guarantor Acceleration Notice, deposit or pay the Excess Proceeds in such other manner as the Bond Trustee may direct, provided that in each case, distributions thereof will be made in accordance with the applicable Priorities of Payments.

Upon deposit of any Excess Proceeds into the GDA Account, the Guarantor will be deemed to have assumed all of the obligations of the Bank (other than the obligation to make any payments in respect of additional amounts which may become payable by the Bank pursuant to Condition 7 (Taxation)), and be solely liable as principal obligor, and not as a guarantor, in respect of the obligation to pay to the covered bondholders interest and principal in respect of covered bonds to which the Excess Proceeds relate (to the extent distributable to covered bondholders under the applicable Priorities of Payments), and the covered bondholders will have no rights against the Bank with respect to payment of such Excess Proceeds.

 

9.2	Guarantor Events of Default

The Bond Trustee at its discretion may, and if so requested in writing by the holders of at least 25 percent of the aggregate Principal Amount Outstanding of the covered bonds (which for this purpose and the purpose of any Extraordinary Resolution referred to in this Condition 9.2 means the covered bonds of a Series together with the covered bonds of any other Series constituted by the Trust Deed) then outstanding as if they were a single Series (with the nominal amount of covered bonds not denominated in Canadian Dollars converted into Canadian Dollars

 

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at the relevant exchange rate specified in the applicable Covered Bond Swap Agreement) or if so directed by an Extraordinary Resolution of all the covered bondholders will (subject in each case to being indemnified and/or secured to its satisfaction), give a Guarantor Acceleration Notice in writing to the Bank and the Guarantor, that (i) each covered bond of each Series is, and each covered bond of each Series will as against the Bank (if not already due and repayable against the Bank following service of an Issuer Acceleration Notice), thereupon immediately become, due and repayable at its Early Redemption Amount together with (to the extent not already included in the Early Redemption Amount) accrued interest, and (ii) all amounts payable by the Guarantor under the Covered Bond Guarantee will thereupon immediately become due and payable at the Guaranteed Amount corresponding to the Early Redemption Amount for each covered bond of each Series together with (to the extent not already included in the Early Redemption Amount) accrued interest, in each case as provided in the Trust Deed and thereafter the Security will become enforceable if any of the following events (each, a “Guarantor Event of Default”) will occur and be continuing:

 

(a)

if default is made by the Guarantor for a period of seven days or more in the payment of any Guaranteed Amounts which are Due for Payment on the relevant Guaranteed Amounts Due Date in respect of the covered bonds of any Series except in the case of the payments of a Guaranteed Amount which is Due for Payment under Condition 6.1 (Final redemption) of the Terms and Conditions of the Covered Bonds when the Guarantor will be required to make payments of Guaranteed Amounts which are Due for Payment on the dates specified therein; or

 

(b)

if default is made by the Guarantor in the performance or observance of any obligation, condition or provision binding on it (other than any obligation for the payment of Guaranteed Amounts in respect of the covered bonds of any Series or as specified in subparagraph (f) below) under the Trust Deed, the Security Agreement or any other Transaction Document to which the Guarantor is a party (other than the obligation of the Guarantor to (i) repay the Demand Loan within 60 days of demand therefor or an obligation to do so pursuant to the terms of the Intercompany Loan Agreement, and (ii) to make a payment under a Swap Agreement if it has insufficient funds therefor), and (except where such default is or the effects of such default are, in the opinion of the Bond Trustee, not capable of remedy when no such continuation and notice as is hereinafter mentioned will be required), such default continues for 30 days (or such longer period as the Bond Trustee may permit) after written notice thereof has been given by the Bond Trustee to the Guarantor requiring the same to be remedied; or

 

(c)

if an Insolvency Event has occurred with respect to the Guarantor; or

 

(d)

if there is a failure to satisfy the Amortization Test (as set out in the Guarantor Agreement) on any Calculation Date following an Issuer Event of Default that is continuing, or

 

(e)

if the Covered Bond Guarantee is not, or is claimed by the Guarantor not to be, in full force and effect; or

 

(f)

if a Ratings Trigger prescribed by the Terms and Conditions or the Transaction Documents (and not otherwise specifically provided for in this Condition 9.2) is breached and the prescribed remedial action is not taken within the specified time

 

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period, unless, in respect of any Ratings Trigger other than the Account Bank Threshold Ratings, the Standby Account Bank Required Ratings, the Servicer Deposit Threshold Ratings or the Cash Management Deposit Ratings, such breach occurs at a time that the Guarantor is Independently Controlled and Governed,

provided that the condition, event or act described in subparagraphs (b) to (e) above will only constitute a Guarantor Event of Default if the Bond Trustee has certified in writing to the Bank and the Guarantor that such condition, event or act is, in its opinion, materially prejudicial to the interests of the covered bondholders of any Series.

Following the occurrence of a Guarantor Event of Default and service of a Guarantor Acceleration Notice on the Guarantor, the Bond Trustee may or will take such proceedings or steps in accordance with the first and third paragraphs, respectively, of Condition 9.3 (Enforcement).

Upon service of a Guarantor Acceleration Notice, the covered bondholders will have a claim against the Guarantor, under the Covered Bond Guarantee, for an amount equal to the Early Redemption Amount in respect of each covered bond together with (to the extent not included in the Early Redemption Amount) accrued but unpaid interest and any other amount due under such covered bonds (other than additional amounts payable under Condition 7 (Taxation)) as provided in the Trust Deed.

 

9.3	Enforcement

The Bond Trustee may at any time, at its discretion and without further notice, take such proceedings against the Bank or the Guarantor, as the case may be, and/or any other person as it may think fit to enforce the provisions of the Trust Deed, the covered bonds or any other Transaction Document, but it will not be bound to take any such enforcement proceedings in relation to the Trust Deed, the covered bonds or any other Transaction Document unless (i) it has been so directed by an Extraordinary Resolution of all the covered bondholders of all Series (with the covered bonds of all Series taken together as a single Series as aforesaid) or so requested in writing by the holders of not less than 25 percent of the aggregate Principal Amount Outstanding of the covered bonds of all Series then outstanding (taken together and converted into Canadian Dollars at the relevant exchange rate specified in the applicable Covered Bond Swap Agreement as aforesaid), and (ii) it has been indemnified and/or secured to its satisfaction against all liabilities to which it may thereafter render itself liable or which it may incur by so doing.

In exercising any of its powers, trusts, authorities and discretions, the Bond Trustee will, subject to applicable law, only have regard to the interests of the covered bondholders of all Series and will not have regard to the interests of any other Secured Creditors.

The Bond Trustee may at any time, at its discretion and without further notice but subject to applicable law, take such proceedings against the Guarantor and/or any other person as it may think fit to enforce the provisions of the Security Agreement or any other Transaction Document in accordance with its terms and may, at any time after the Security has become enforceable, take such proceedings or steps as it may think fit to enforce the Security, but it will not be bound to take any such proceedings or steps unless (i) it has been so directed by an Extraordinary Resolution of all the covered bondholders of all Series (with the covered bonds of all Series taken together as a single Series as aforesaid) or a request in writing by the holders of not less than 25

 

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percent of the aggregate Principal Amount Outstanding of the covered bonds of all Series then outstanding (taken together and converted into Canadian Dollars at the relevant exchange rate specified in the applicable Covered Bond Swap Agreement as aforesaid), and (ii) it has been indemnified and/or secured to its satisfaction against all liabilities to which it may thereafter render itself liable or which it may incur by so doing. In exercising any of its powers, trusts, authorities and discretions under this paragraph, the Bond Trustee will only have regard to the interests of the covered bondholders of all Series and will not have regard to the interests of any other Secured Creditors.

No covered bondholder will be entitled to proceed directly against the Bank or the Guarantor or to take any action with respect to the Trust Deed, any other Transaction Document, the covered bonds, or the Security unless the Bond Trustee having become bound so to proceed, fails to do so within 30 days and such failure is continuing. Notwithstanding any other provision of these Conditions, for so long as there are U.S. Registered Covered Bonds outstanding, in accordance with Section 316(b) of the Trust Indenture Act, the right of any holder to receive payment of principal and interest on the covered bonds on or after the due date for such principal or interest, or to institute suit for the enforcement of payment of that principal or interest, may not be impaired or affected without the consent of the holders of the covered bonds, provided that no such right of enforcement will exist (i) in respect of a postponement of an interest payment which has been consented to by the holders of the covered bonds in accordance with the Trust Deed or (ii) to the extent that the institution or prosecution of such suit or the entry of judgment therein would, under applicable law, result in the surrender, impairment, waiver or loss of the security granted pursuant to the Trust Deed or the relevant Security Agreements upon any property subject to such security.

 

10.	Replacement of Covered Bonds

If any covered bond is lost, stolen, mutilated, defaced or destroyed, it may be replaced at the specified office of the Registrar (in the case of Registered Covered Bonds), or any other place approved by the Bond Trustee of which notice has been given to the covered bondholders in accordance with Condition 13 (Notices) upon payment by the claimant of such costs and expenses as may be incurred in connection therewith and on such terms as to evidence and indemnity as the Bank may reasonably require. Mutilated or defaced covered bonds must be surrendered before replacements will be issued.

 

11.	Principal Paying Agent, Paying Agents, Registrar, Transfer Agent and Exchange Agent

The Bank is entitled, with the prior written approval of the Bond Trustee, to vary or terminate the appointment of any Agent and/or appoint additional or other Agents and/or approve any change in the specified office through which any Agent acts, provided that:

 

(a)

there will at all times be a Principal Paying Agent and a Registrar;

 

(b)

the Bank will, so long as any covered bond is outstanding, maintain a Paying Agent (which may be the Principal Paying Agent) having a specified office in a city in Europe approved by the Bond Trustee;

 

(c)

so long as any covered bond is listed on any stock exchange or admitted to listing or trading by any other relevant authority, there will at all times be a Transfer

 

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Agent (in the case of Registered Covered Bonds) with a specified office in such place as may be required by the rules and regulations of the relevant stock exchange or, as the case may be, other relevant authority;

 

(d)

so long as any of the registered global covered bonds payable in a currency other than U.S. Dollars are held through DTC or its nominee, there will at all times be an Exchange Agent; and

 

(e)

the Bank will ensure that it maintains a Paying Agent in a Member State that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC on the taxation of savings income or any other Directive implementing the conclusions of the ECOFIN Council Meeting of November 26 to 27, 2000 or any law implementing or complying with, or introduced in order to conform to any such Directive, provided that the Bank will not, under any circumstances, be obliged to maintain a Paying Agent with a specified office in such Member State unless at least one European Member State does not require a Paying Agent making payments through a specified office in that Member State to so withhold or deduct tax.

In addition, the Bank will forthwith appoint a Paying Agent having a specified office in the United States in the circumstances described in Condition 5.5 (General provisions applicable to payments). Notice of any such variation, termination, appointment or change will be given by the Bank to the covered bondholders as soon as reasonably practicable in accordance with Condition 13 (Notices).

In acting under the Agency Agreement, the Agents act solely as agents of the Bank and the Guarantor and, in certain circumstances specified therein, of the Bond Trustee and do not assume any obligation to, or relationship of agency or trust with, any covered bondholders. The Agency Agreement contains provisions permitting any entity into which any Agent is merged or converted or with which it is consolidated or to which it transfers all or substantially all of its assets to become the successor agent.

 

13.

Notices

All notices regarding the Registered Covered Bonds will be deemed to be validly given if sent by first class mail or (if posted to an address overseas) by airmail to the holders (or the first named of joint holders) at their respective addresses recorded in the Register and will be deemed to have been given on the fourth day after mailing.

The Bond Trustee will be at liberty to sanction some other method of giving notice to the covered bondholders if, in its opinion, such other method is reasonable having regard to market practice then prevailing and to the requirements of the stock exchange on which the relevant covered bonds are then admitted to trading and provided that notice of such other method is given to the covered bondholders in such manner as the Bond Trustee will require.

Notices to be given by any covered bondholder will be in writing and given by lodging the same, together (in the case of any covered bond in definitive form) with the relevant covered bond or covered bonds, with the Registrar (in the case of Registered Covered Bonds). While any of the covered bonds are represented by a Global Covered Bond, such notice may be given by any holder of a covered bond to the Principal Paying Agent or the Registrar through DTC in such manner as the Principal Paying Agent, the Registrar and DTC may approve for this purpose.

 

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14.	Meetings of Covered Bondholders, Modification, Waiver and Substitution

Covered bondholders and other Secured Creditors should note that the Bank, the Guarantor and the Principal Paying Agent may without their consent or the consent of the Bond Trustee agree to modify any provision of any prospectus supplement which is of a formal, minor or technical nature or is made to correct a proven or manifest error or to comply with any mandatory provisions of law.

The Trust Deed contains provisions for convening meetings of the covered bondholders of any Series to consider any matter affecting their interests, including the modification by Extraordinary Resolution of these Terms and Conditions or the provisions of the Trust Deed. Such a meeting may be convened by the Bank, the Guarantor or the Bond Trustee and will be convened by the Bank at the request in writing of covered bondholders holding not less than 10 percent of the aggregate Principal Amount Outstanding of the covered bonds of such Series for the time being outstanding. The quorum at any such meeting in respect of any covered bonds of any Series for passing an Extraordinary Resolution is one or more persons holding or representing not less than a clear majority of the aggregate Principal Amount Outstanding of the covered bonds of such Series for the time being outstanding, or at any adjourned meeting one or more persons being or representing covered bondholders of such Series whatever the nominal amount of the covered bonds of such Series so held or represented, except that at any meeting the business of which includes the modification of any Series Reserved Matter, the quorum will be one or more persons holding or representing not less than two thirds of the aggregate Principal Amount Outstanding of the covered bonds of such Series for the time being outstanding, or at any adjourned such meeting one or more persons holding or representing not less than one third of the aggregate Principal Amount Outstanding of the covered bonds of such Series for the time being outstanding. An Extraordinary Resolution passed at any meeting of the covered bondholders of a Series will, subject as provided below, be binding on all the covered bondholders of such Series, whether or not they are present at the meeting. Pursuant to the Trust Deed, the Bond Trustee may convene a single meeting of the covered bondholders of more than one Series if in the opinion of the Bond Trustee there is no conflict between the holders of such covered bonds, in which event the provisions of this paragraph will apply thereto mutatis mutandis.

Notwithstanding the provisions of the immediately preceding paragraph, any Extraordinary Resolution to direct the Bond Trustee to accelerate the covered bonds pursuant to Condition 9 (Events of Default, Acceleration and Enforcement) or to direct the Bond Trustee to take any enforcement action pursuant to Condition 9 (Events of Default, Acceleration and Enforcement) (each a “Program Resolution”) will only be capable of being passed at a single meeting of the holders of the covered bonds of all Series then outstanding. Any such meeting to consider a Program Resolution may be convened by the Bank, the Guarantor or the Bond Trustee or by covered bondholders, in the case of a direction to accelerate the covered bonds pursuant to Conditions 9.1 (Issuer Events of Default) and 9.2 (Guarantor Events of Default) or to take enforcement action pursuant to Condition 9.3 (Enforcement), holding at least 25 percent of the aggregate Principal Amount Outstanding of the covered bonds of all Series then outstanding. The quorum at any such meeting for passing a Program Resolution is one or more persons holding or representing at least a clear majority of the aggregate Principal Amount Outstanding of the covered bonds of all Series for the time being outstanding, or at any adjourned such meeting one or more persons holding or representing covered bonds whatever the nominal amount of the

 

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covered bonds of all Series then outstanding. A Program Resolution passed at any meeting of the covered bondholders of all Series will be binding on all covered bondholders of all Series, whether or not they are present at the meeting.

In connection with any meeting of the covered bondholders of more than one Series where such covered bonds are not denominated in Canadian Dollars, the nominal amount of the covered bonds of any Series not denominated in Canadian Dollars will be converted into Canadian Dollars at the relevant exchange rate specified in the applicable Covered Bond Swap Agreement.

The Bond Trustee, the Guarantor and the Bank may also agree, without the consent of the covered bondholders and without the consent of the other Secured Creditors (and for this purpose the Bond Trustee may disregard whether any such modification relates to a Series Reserved Matter), to:

 

(a)

any modification of the terms and conditions applying to covered bonds of one or more Series (including these Terms and Conditions) or any Transaction Document provided that in the sole opinion of the Bond Trustee such modification is not materially prejudicial to the interests of any of the covered bondholders of any Series; or

 

(b)

any modification of the terms and conditions applying to covered bonds of any one or more Series (including these Terms and Conditions) or any Transaction Document which is in the sole opinion of the Bond Trustee of a formal, minor or technical nature or is to correct a manifest error or an error which is, in the sole opinion of the Bond Trustee, proven, or is to comply with mandatory provisions of law.

Notwithstanding the above, the Bank, the Guarantor and the Principal Paying Agent may agree, without the consent of the Bond Trustee, the covered bondholders or any of the other Secured Creditors, to any modification of any of the provisions of any prospectus supplement which is of a formal, minor or technical nature or is made to correct a proven or manifest error or to comply with any mandatory provisions of law.

The Bond Trustee may also agree, without the consent of the covered bondholders of any Series, to the waiver or authorization of any breach or proposed breach of any of the provisions of the covered bonds of any Series, or determine, without any such consent as aforesaid, that any Issuer Event of Default or Guarantor Event of Default or Potential Issuer Event of Default or Potential Guarantor Event of Default will not be treated as such, provided that, in any such case, it is not, in the sole opinion of the Bond Trustee, materially prejudicial to the interests of any of the covered bondholders of any Series. The Bond Trustee may also agree, without the consent of the covered bondholders of any Series or any other Secured Creditor, to the waiver or authorization of any breach or proposed breach of any of the provisions of the Transaction Documents, provided that, in any such case, it is not, in the sole opinion of the Bond Trustee, materially prejudicial to the interests of any of the covered bondholders of any Series.

Any such modification, waiver, authorization or determination will be binding on all covered bondholders of all Series of covered bonds and the other Secured Creditors, any such modification will be notified by the Bank to the covered bondholders of all Series of covered bonds for the time being outstanding and the other Secured Creditors in accordance with the

 

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relevant Terms and Conditions as soon as practicable thereafter. Notwithstanding any other provision of these Conditions, for so long as there are U.S. Registered Covered Bonds outstanding, any such modification, waiver, authorization or determination will be made in accordance with and subject to Section 316 of the Trust Indenture Act. The right of any holder of U.S. Registered Covered Bonds to receive payment of principal and interest will not be impaired unless made in accordance with Section 316 of the Trust Indenture Act.

In connection with the exercise by it of any of its trusts, powers, authorities and discretions (including, without limitation, any modification, waiver, authorization or determination), the Bond Trustee will have regard to the general interests of the covered bondholders of each Series as a class (but will not have regard to any interests arising from circumstances particular to individual covered bondholders (whatever their number)) and, in particular, but without limitation, will not have regard to the consequences of any such exercise for individual covered bondholders (whatever their number) resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory or any political subdivision thereof and the Bond Trustee will not be entitled to require, nor will any covered bondholder be entitled to claim, from the Bank, the Guarantor, the Bond Trustee or any other person any indemnification or payment in respect of any Tax or stamp duty consequences of any such exercise upon individual covered bondholders, except to the extent already provided for in Condition 7 (Taxation) and/or in any undertaking or covenant given in addition to, or in substitution for, Condition 7 (Taxation) pursuant to the Trust Deed.

Provided that the Bond Trustee has received a certificate signed by two authorized signatories of the Bank and a certificate from the Guarantor stating that immediately after giving effect to the matters set out below in this paragraph, no Issuer Event of Default or Potential Issuer Event of Default (in respect of the Bank) or Guarantor Event of Default or Potential Guarantor Event of Default (in respect of the Guarantor), respectively, has occurred and is continuing and certain other conditions as are specified in the Trust Deed are satisfied, but without the consent of the covered bondholders of any Series, or of any other Secured Creditor, another subsidiary of the Bank or any direct or indirect holding company of the Bank may assume the obligations of the Bank as principal obligor under the Trust Deed and the other Transaction Documents in respect of all Series of covered bonds on the same basis. The Trust Deed provides that any such assumption will be notified to the holders of all Series of covered bonds (in accordance with the relevant Terms and Conditions of such covered bonds).

For the purposes hereof:

“Potential Issuer Event of Default” means any condition, event or act which, with the lapse of time and/or the issue, making or giving of any notice, certification, declaration, demand, determination and/or request and/or the taking of any similar action and/or the fulfillment of any similar condition, would constitute an Issuer Event of Default; and

“Potential Guarantor Event of Default” means any condition, event or act which, with the lapse of time and/or the issue, making or giving of any notice, certification, declaration, demand, determination and/or request and/or the taking of any similar action and/or the fulfillment of any similar condition, would constitute a Guarantor Event of Default.

 

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15.	Indemnification of the Bond Trustee. Contracting with the Bank and/or the Guarantor

If, in connection with the exercise of its powers, trusts, authorities or discretions, the Bond Trustee is of the opinion that the interests of the covered bondholders of any one or more Series would be materially prejudiced thereby, the Bond Trustee will not exercise such power, trust, authority or discretion without the approval of such covered bondholders by Extraordinary Resolution or by a direction in writing of such covered bondholders of at least 25 percent of the aggregate Principal Amount Outstanding of covered bonds of the relevant Series then outstanding.

The Trust Deed and the Security Agreement contain provisions for the indemnification of the Bond Trustee and for its relief from responsibility, including provisions relieving it from taking any action unless indemnified and/or secured to its satisfaction.

The Trust Deed and the Security Agreement also contain provisions pursuant to which the Bond Trustee is entitled, inter alia: (i) to enter into business transactions with the Bank, the Guarantor and/or any of the Bank’s subsidiaries and to act as trustee for the holders of any other securities issued or guaranteed by, or relating to, the Bank, the Guarantor and/or any of the Bank’s subsidiaries; (ii) to exercise and enforce its rights, comply with its obligations and perform its duties under or in relation to any such transactions or, as the case may be, any such trusteeship without regard to the interests of, or consequences for, the covered bondholders or any other Secured Creditors; and (iii) to retain and not be liable to account for any profit made or any other amount or benefit received thereby or in connection therewith.

The Bond Trustee will not be responsible for any loss, expense or liability, which may be suffered as a result of any Loans or their Related Security, or any deeds or documents of title thereto, being uninsured or inadequately insured or being held by clearing organizations or their operators or by intermediaries such as banks, brokers or other similar persons on behalf of the Bond Trustee. The Bond Trustee will be responsible for: (i) supervising the performance by the Bank, the Guarantor or any other party to the Transaction Documents of their respective obligations under the Transaction Documents, and the Bond Trustee will be entitled to assume, until it has received written notice to the contrary, that all such persons are properly performing their duties; (ii) considering the basis on which approvals or consents are granted by the Bank, the Guarantor or any other party to the Transaction Documents under the Transaction Documents; (iii) monitoring the Portfolio, including, without limitation, whether the Portfolio is in compliance with the Asset Coverage Test or the Amortization Test; or (iv) monitoring whether Loans and their Related Security satisfy the Loan Representations and Warranties. The Bond Trustee will not be liable to any covered bondholder or other Secured Creditor for any failure to make or to cause to be made on its behalf the searches, investigations and enquiries which would normally be made by a prudent chargee in relation to the Security and has no responsibility in relation to the legality, validity, sufficiency and enforceability of the Security and the Transaction Documents.

 

16.	Further Issues

The Bank will be at liberty from time to time (but subject to the Terms and Conditions) without the consent of the covered bondholders or any Secured Creditors to create and issue further covered bonds (whether in bearer or registered form) having terms and conditions the same as the covered bonds of any Series or the same in all respects and guaranteed by the

 

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Guarantor save for the amount and date of the first payment of interest thereon, Issue Date and/or Issue Price and so that the same will be consolidated and form a single Series with the outstanding covered bonds of such Series.

 

17.	Rating Agency Condition

By subscribing for or purchasing the covered bond(s), each covered bondholder will be deemed to have acknowledged and agreed that a credit rating of a Series of covered bonds is an assessment of credit risk and does not address other matters that may be of relevance to covered bondholders, including, without limitation, in the case of satisfaction of the Rating Agency Condition, whether the related action or event is either (i) permitted by the terms of the relevant Transaction Document, or (ii) in the best interests of, or not prejudicial to, some or all of the covered bondholders.

With regard to the requirement for satisfaction of the Rating Agency Condition with respect to a particular Rating Agency, each of the Bank, the Guarantor, the Bond Trustee and the Secured Creditors (including the covered bondholders) is deemed to have acknowledged and agreed that the satisfaction of the Rating Agency Condition does not impose or extend any actual or contingent liability on the Rating Agencies to the Bank, the Guarantor, the Bond Trustee, the Secured Creditors (including the covered bondholders) or any other person or create any legal relations between the Rating Agencies and the Bank, the Guarantor, the Bond Trustee, the Secured Creditors (including the covered bondholders) or any other person whether by way of contract or otherwise.

By subscribing for or purchasing the covered bond(s), each covered bondholder will be deemed to have acknowledged and agreed that:

 

(a)

confirmation of the satisfaction of the Rating Agency Condition, to the extent required, may or may not be given at the sole discretion of each Rating Agency;

 

(b)

depending on the timing of delivery of the request and any information needed to be provided as part of any such request, it may be the case that a Rating Agency cannot provide confirmation of the satisfaction of the Rating Agency Condition in the time available, or at all, and the Rating Agency will not be responsible for the consequences thereof;

 

(c)

a confirmation of satisfaction of the Rating Agency Condition, if given, will be given on the basis of the facts and circumstances prevailing at the relevant time, and in the context of cumulative changes to the transaction of which the covered bonds form a part; and

 

(d)

a confirmation of satisfaction of the Rating Agency Condition represents only a restatement of the opinions given, and will not be construed as advice for the benefit of any covered bondholder or any other party.

If satisfaction of the Rating Agency Condition is a condition to any action or step under any Transaction Document or is otherwise required, or a written request for such a confirmation of satisfaction of the Rating Agency Condition is delivered to that Rating Agency by any of the Bank, the Guarantor, and/or the Bond Trustee, as applicable (each, a “Requesting Party”), and either (i) one or more of the Rating Agencies indicates that it does not consider satisfaction of the

 

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Rating Agency Condition necessary in the circumstances or (ii) no such confirmation or other response is received by one or more of the Rating Agencies within 30 days (or in the case of Moody’s or Fitch, 10 Business Days) of the date of actual receipt of such request by such Rating Agency (each, a “Non-Responsive Rating Agency”), the Requesting Party will be entitled to disregard the requirement for satisfaction of the Rating Agency Condition with respect to the Non-Responsive Rating Agency and proceed on the basis of the confirmations or other responses received by each other Rating Agency on the basis that satisfaction of the Rating Agency Condition with respect to the Non-Responsive Rating Agency is not required in the particular circumstances of the request. The failure by a Rating Agency to respond to a written request for a confirmation of satisfaction of the Rating Agency Condition will not be interpreted to mean that such Rating Agency has given any deemed confirmation or affirmation of rating or other response in respect of such action or step.

 

18.	Governing Law

The Trust Deed, the Agency Agreement, the covered bonds, the Interest Rate Swap Agreement, the Covered Bond Swap Agreement, the Security Agreement, the Mortgage Sale Agreement, the Servicing Agreement, the Guarantor Agreement, the Program Agreement, the Intercompany Loan Agreement, the Cash Management Agreement, the Cover Pool Monitor Agreement, the Bank Account Agreement, the Standby Bank Account Agreement, the Guaranteed Deposit Account Contract and the Standby Guaranteed Deposit Account Contract will be governed by and construed in accordance with, the laws of the Province of Ontario and the federal laws of Canada applicable therein, unless otherwise indicated. The Underwriting Agreement will be governed by the laws of the State of New York.

 

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SUMMARY OF THE PRINCIPAL DOCUMENTS

The principal document governing the relationship of the Bank and a purchaser of covered bonds is the Trust Deed and the Terms and Conditions attached to each covered bond. See “Terms and Conditions of the Covered Bonds.”

Prospectus Supplement

The prospectus supplement for a Series of covered bonds will set forth the specific terms of the covered bonds, including the currency for all payments, the applicable interest rate, interest payment dates, the maturity date, call or put option features applicable, and optional redemption features. The prospectus supplement may also provide modifications of or additions to the Terms and Conditions. Also, the prospectus supplement will include statistical disclosure of the Portfolio and historical information about the Portfolio, stratified by year of origination of the Loans.

Information about the providers of the Interest Rate Swap Agreement and the related Covered Bond Swap Agreement and, if not the Bank, the GDA Account will be included in the prospectus supplement.

A review by the Bank of randomly selected Loans in the Portfolio will be described in the prospectus supplement, together with the findings of that review.

Trust Deed

The Trust Deed, made between the Bank, the Guarantor and the Bond Trustee is the principal agreement governing the covered bonds. The Trust Deed contains provisions relating to, inter alia:

 

•

the constitution of the covered bonds and the Terms and Conditions of the covered bonds (as more fully set out under “Terms and Conditions of the Covered Bonds” above);

 

•

the covenants of the Bank and the Guarantor under the Covered Bond Guarantee;

 

•

the terms of the Covered Bond Guarantee (as described below);

 

•

the enforcement procedures relating to the covered bonds and the Covered Bond Guarantee; and

 

•

the appointment, powers and responsibilities of the Bond Trustee and the circumstances in which the Bond Trustee may resign, or retire or be removed.

The Bond Trustee

Computershare Trust Company of Canada has been appointed the Bond Trustee under the Trust Deed. The Bank may maintain other banking relationships in the ordinary course of business with the Bond Trustee.

 

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Computershare Trust Company of Canada is a trust company incorporated under the laws of Canada, whose registered office is at 100 University Avenue, 9th Floor, Toronto, Ontario, Canada M5J 2Y1. Computershare Trust Company of Canada has acted as trustee on numerous covered bond programs since November 2007 and on asset-backed securities transactions involving pools of mortgage loans since 1990. While the structure of the transactions referred to in the preceding sentence may differ among such transactions, Computershare Trust Company of Canada is experienced in administering transactions of the kind contemplated by this prospectus.

Computershare Trust Company of Canada has provided the information in the prior paragraph. Other than the prior paragraph, Computershare Trust Company of Canada has not participated in the preparation of, and is not responsible for, any other information contained in this prospectus or the prospectus supplement.

The Bond Trustee will be required to perform only those duties specifically required of it under the Transaction Documents, as described below. Upon receipt of the various certificates, statements, reports or other instruments required to be furnished to it, the Bond Trustee will be required to examine them to determine whether they are in the form required the applicable Transaction Document; however, the Bond Trustee will not be responsible for the accuracy or content of any documents furnished to it.

The Bond Trustee will not be responsible for (a) the calculation of payments to holders of the covered bonds; (b) compliance by others with covenants under the Transaction Documents; (c) the substitution, purchase or removal of Portfolio assets; or (d) the maintenance of data regarding the Asset Coverage Test, Amortization Test, Pre-Maturity Test or the Valuation Calculation, among others.

As compensation for the performance of its obligations under the Trust Deed, the Bond Trustee will receive reasonable compensation as provided in the Trust Deed.

The Trust Deed contains provisions for the indemnification of the Bond Trustee and its officers, directors, employees and agents for any loss, claims, damages, suits, liability or expense incurred without gross negligence, willful misconduct, dishonesty, reckless disregard or bad faith on its part, arising out of or in connection with the acceptance or administration of the Trust Deed.

The Bond Trustee may retire at any time on giving not less than three months’ prior written notice to the Bank and the Guarantor. The Bond Trustee may be removed (i) by the covered bondholders in accordance with the terms of an Extraordinary Resolution, or (ii) by the Guarantor in the event that there is a breach by the Bond Trustee of certain representations and warranties or a failure by the Bond Trustee to perform certain covenants made by it under the Trust Deed. Other than in respect of a removal described in clause (ii) of the previous sentence, no retirement or removal of the Bond Trustee will be effective until a replacement bond trustee that meets the requirements provided for in the Trust Deed and in the CMHC Guide has been appointed. In the event that a replacement bond trustee has not been appointed within 60 days of notice of retirement from the Bond Trustee or the Extraordinary Resolution of the covered bondholders, as applicable, the Bond Trustee will be entitled to appoint a replacement bond trustee that meets the requirements provided for in the Trust Deed and in the CMHC Guide, which appointment must be approved by an Extraordinary Resolution of the covered bondholders prior to taking effect.

 

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So long as there are U.S. Registered Covered Bonds outstanding, the Bond Trustee (or if there is more than one bond trustee at least one bond trustee) will be a trustee qualified to act under the US Trust Indenture Act of 1939, as amended (the “Trust Indenture Act”).

Trust Indenture Act

The Trust Deed includes certain provisions required by the Trust Indenture Act. These provisions include, but are not limited to:

 

•

maintenance of a covered bondholder list by the Bond Trustee;

 

•

provision of annual reports and other information by the Bank to the Bond Trustee;

 

•

ability of covered bondholders to waive certain past defaults of the Bank;

 

•

duty of the Bond Trustee (following an Issuer Event of Default) to use the same degree of care in exercising its responsibilities as would be exercised by a prudent person conducting their own affairs;

 

•

duty of the Bond Trustee to notify all covered bondholders of any Issuer Event of Default of which it has actual knowledge; and

 

•

the right of each covered bondholder to receive payments of principal and interest on a covered bond on or after the respective due dates expressed in the covered bond, or to bring suit for enforcement of any such payment on or after such respective dates.

Further, in compliance with Section 315(d) of the Trust Indenture Act, the Trust Deed provides that nothing in the Trust Deed will, in any case in which the Bond Trustee has failed to show the degree of care and diligence required of it as Bond Trustee having regard to the provisions of the Trust Deed conferring on the Bond Trustee any powers, authorities or any discretion, exempt the Bond Trustee from or indemnify the Bond Trustee against any liability for breach of trust. The Trust Deed will be discharged with respect to the Covered Bond Guarantee and collateral securing such Covered Bond Guarantee upon the delivery to the Bond Trustee for cancellation of all the covered bonds or, with certain limitations, upon deposit with the Bond Trustee of funds sufficient for the payment in full of all covered bonds outstanding.

Trust Indenture Act Prevails

The Trust Deed contains a stipulation that, if any provision of the Trust Deed limits, qualifies or conflicts with another provision which is required to be included in the Trust Deed by, and is not subject to a contractual waiver under, the Trust Indenture Act, the required provision of the Trust Indenture Act will be deemed to be incorporated into the Trust Deed and prevail; provided that all provisions relating to the Trust Indenture Act will only apply to U.S. Registered Covered Bonds.

 

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Covered Bond Guarantee

Under the terms of the Covered Bond Guarantee, if the Bank defaults in the payment on the due date of any funds due and payable under or pursuant to the Trust Deed or the covered bonds, or if any other Issuer Event of Default occurs (other than by reason of non-payment), and, in either case, if the Bond Trustee has served an Issuer Acceleration Notice, the Guarantor has agreed (subject as described below) to pay or procure to be paid (following service of a Notice to Pay) unconditionally and irrevocably to or to the order of the Bond Trustee (for the benefit of the covered bondholders) an amount equal to that portion of the Guaranteed Amounts which will become Due for Payment but would otherwise be unpaid, as of any Original Due for Payment Date or, if applicable, the Extended Due for Payment Date, by the Bank. Payment by the Guarantor of the Guaranteed Amounts pursuant to the Covered Bond Guarantee will be made on the later of (a) the day which is two Canadian Business Days following service of a Notice to Pay on the Guarantor and (b) the day on which the Guaranteed Amounts are otherwise Due for Payment (the “Guaranteed Amounts Due Date”). In addition, the Guarantor will, to the extent it has funds available to it, make payments in respect of the unpaid portion of the Final Redemption Amount on any Original Due for Payment Date up until the Extended Due for Payment Date. The Bond Trustee will be required to serve a Notice to Pay following the occurrence of an Issuer Event of Default and service of an Issuer Acceleration Notice.

Under the Covered Bond Guarantee, the Guaranteed Amounts will become due and payable on any earlier date on which, following the occurrence of a Guarantor Event of Default, a Guarantor Acceleration Notice is served in accordance with Condition 9.2 (Guarantor Events of Default) of the Terms and Conditions of the Covered Bonds. Following service of a Guarantor Acceleration Notice, the covered bonds will (if an Issuer Acceleration Notice has not already been served) become immediately due and payable as against the Bank and the obligations of the Guarantor under the Covered Bond Guarantee will be accelerated.

All payments of Guaranteed Amounts by or on behalf of the Guarantor will be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or other governmental charges of whatever nature, unless the withholding or deduction of such taxes, assessments or other governmental charges are required by law or regulation or administrative practice of Canada or any political subdivision thereof or any authority therein or thereof having the power to tax. If any such withholding or deduction is required, the Guarantor will pay the Guaranteed Amounts net of such withholding or deduction and will account to the appropriate tax authority for the amount required to be withheld or deducted. The Guarantor will not be obliged to pay any amount to the Bond Trustee or any holder of covered bonds in respect of the amount of such withholding or deduction. See further, “Taxation—Canadian Taxation—Payments by the Guarantor under the Covered Bond Guarantee.”

Under the terms of the Covered Bond Guarantee, the Guarantor has agreed that its obligations under the Covered Bond Guarantee will be as guarantor and will be absolute and unconditional (subject to Notice to Pay being given), irrespective of, and unaffected by, any invalidity, irregularity or unenforceability of, or defect in, any provisions of the Trust Deed or the covered bonds or the absence of any action to enforce the same or the waiver, modification or consent by the Bond Trustee or any of the covered bondholders in respect of any provisions of the same or the obtaining of any judgment or decree against the Bank or any action to enforce the same or any other circumstances which might otherwise constitute a legal or equitable discharge or defense of a guarantor.

 

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As consideration for providing the Covered Bond Guarantee, the Guarantor will be entitled to receive guarantee fees from the Bank as agreed between the Bank and the Guarantor from time to time in accordance with the Trust Deed. Any failure on the part of the Bank to pay all or any part of the guarantee fees will not affect the obligations of the Guarantor under the Covered Bond Guarantee.

Subject to the grace period specified in Condition 9.1(a) (Issuer Events of Default) of the Terms and Conditions of the Covered Bonds, failure by the Guarantor to pay the Guaranteed Amounts which are Due for Payment on the relevant Guaranteed Amounts Due Date will result in a Guarantor Event of Default.

The Trust Deed provides that any Excess Proceeds will be paid by the Bond Trustee on behalf of the covered bondholders of the relevant Series to the Guarantor for its own account, as soon as practicable, and will be held by the Guarantor in the GDA Account and the Excess Proceeds will thereafter form part of the Security and will be used by the Guarantor in the same manner as all other funds from time to time standing to the credit of the GDA Account.

By subscribing for or purchasing covered bond(s), each covered bondholder will be deemed to have irrevocably directed the Bond Trustee to pay the Excess Proceeds to the Guarantor in the manner as described above.

Exchange Rate Indemnity

Pursuant to the terms of the Trust Deed, each of the Bank and, following the occurrence of a Covered Bond Guarantee Activation Event, the Guarantor, will jointly and severally indemnify the Bond Trustee and the covered bondholders and keep them indemnified against:

 

(a)

any liability incurred by any of them arising from the non-payment by the Bank or the Guarantor of any amount due to the Bond Trustee or the covered bondholders hereunder by reason of any variation in the rates of exchange between those used for the purposes of calculating the amount due under a judgment or order in respect thereof and those prevailing at the date of actual payment by the Bank or the Guarantor; and

 

(b)

any deficiency arising or resulting from any variation in rates of exchange between (i) the date as of which the local currency equivalent of the amounts due or contingently due under the Trust Deed is calculated for the purposes of any bankruptcy, insolvency or liquidation of the Bank or, as the case may be, the Guarantor; and (ii) the final date for ascertaining the amount of claims in such bankruptcy, insolvency or liquidation. The amount of such deficiency will be deemed not to be reduced by any variation in rates of exchange occurring between the said final date and the date of any distribution of assets in connection with any such bankruptcy, insolvency or liquidation.

Such indemnities will constitute obligations of the Bank and the Guarantor separate and independent from their other obligations under the other provisions under the Trust Deed and will apply irrespective of any indulgence granted by the Bond Trustee or the covered bondholders or the couponholders from time to time and will continue in full force and effect notwithstanding the

 

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judgment or filing of any proof or proofs in any bankruptcy, insolvency or liquidation of the Bank or, as the case may be, the Guarantor for a liquidated sum or sums in respect of amounts due under the Trust Deed. Any deficiency will be deemed to constitute a loss suffered by the covered bondholders and the couponholders and no proof or evidence of any actual loss will be required by the Bank or the Guarantor or its or their liquidator or liquidators.

The Trust Deed, including the provisions of the Covered Bond Guarantee, is governed by the laws of the Province of Ontario and federal laws of Canada applicable therein.

Intercompany Loan Agreement

The Intercompany Loan Agreement between the Bank, the Guarantor and the Bond Trustee as amended and/or restated and/or supplemented from time to time, is the governing agreement with respect to the Intercompany Loan.

Under the Intercompany Loan Agreement, the Bank represents and warrants to, and covenants with, the Guarantor and the Bond Trustee that as of the date of the Intercompany Loan Agreement and for so long as it remains a party to the Intercompany Loan Agreement: (i) it possesses the necessary experience, qualifications, facilities and other resources to perform its responsibilities in relation to its duties and obligations thereunder and under the other Transaction Documents to which it is a party; (ii) it is and will continue to be in good standing with OSFI; (iii) it is and will continue to be in regulatory good standing and in material compliance with and under all laws applicable to its duties and obligations thereunder and under the other Transaction Documents to which it is a party; and (iv) it is and will continue to be in material compliance with its internal policies and procedures (including risk management policies) relevant to its duties and obligations thereunder and under the other Transaction Documents to which it is a party.

Under the terms of the Intercompany Loan Agreement, prior to the issuance of the first Series of covered bonds, the Bank will make available to the Guarantor an interest-bearing Intercompany Loan, comprised of a Guarantee Loan and a Demand Loan, in an initial combined aggregate amount equal to the Total Credit Commitment, subject to increases and decreases as described below. The initial advance on the Intercompany Loan will be an amount sufficient to acquire the Initial Portfolio. The Intercompany Loan is denominated in Canadian Dollars. The interest rate on the Intercompany Loan will be a Canadian Dollar floating rate determined by the Bank from time to time, subject to a maximum of the floating rate received by the Guarantor pursuant to the Interest Rate Swap Agreement less a minimum spread and an amount for certain expenses of the Guarantor.

The Guarantee Loan will be in an amount equal to the balance of outstanding covered bonds at any relevant time plus that portion of the Portfolio required to collateralize the covered bonds to ensure that the Asset Coverage Test is met (see “—Guarantor Agreement—Asset Coverage Test”). The Demand Loan is a revolving credit facility, the outstanding balance of which will be equal to the difference between the balance of the Intercompany Loan and the balance of the Guarantee Loan at any relevant time. The balance of the Guarantee Loan and Demand Loan will fluctuate with the issuances and redemptions of covered bonds and the requirements of the Asset Coverage Test.

At any time prior to a Demand Loan Repayment Event, the Guarantor may re-borrow any amount repaid by the Guarantor under the Intercompany Loan for a permitted purpose provided, among other things: (i) such drawing does not result in the Intercompany Loan exceeding the

 

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Total Credit Commitment; and (ii) no Issuer Event of Default or Guarantor Event of Default has occurred and is continuing. Unless otherwise agreed to by the Bank and subject to satisfaction of the Rating Agency Condition, no further advances will be made to the Guarantor under the Intercompany Loan following the occurrence of a Demand Loan Repayment Event.

To the extent the Portfolio increases or is required to be increased to meet the Asset Coverage Test, the Bank may increase the Total Credit Commitment to enable the Guarantor to acquire Loans and their Related Security from the Seller.

The Demand Loan or any portion thereof will be repayable no later than the first Canadian Business Day following 60 days after a demand therefor is served on the Guarantor, unless (i) a Demand Loan Repayment Event has occurred and is continuing (see below in respect of the repayment of the Demand Loan in such circumstance), or (ii) the Asset Coverage Test will not be satisfied on the date of repayment after giving effect to such repayment. At any time the Guarantor makes a repayment on the Demand Loan, in whole or in part, the Cash Manager will calculate the Asset Coverage Test, as of the date of repayment, to confirm the then outstanding balance on the Demand Loan and that the Asset Coverage Test will be met on the date of repayment after giving effect to such repayment.

If (i) the Bank is required to assign the Interest Rate Swap Agreement to a third party (due to a failure by the Bank to meet the ratings levels specified in the Interest Rate Swap Agreement or as otherwise required by the Interest Rate Swap Agreement); (ii) a Notice to Pay has been served on the Guarantor; (iii) the Intercompany Loan Agreement is terminated; or (iv) to the extent Fitch is a Rating Agency, if the Bank is assigned (x) a short-term issuer default rating by Fitch of less than F2, or (y) a long-term issuer default rating by Fitch of less than BBB+ (each of (i), (ii), (iii) and (iv), a “Demand Loan Repayment Event”), the Guarantor will, subject to the applicable Priorities of Payments, be required to repay any amount of the Demand Loan that exceeds the Demand Loan Contingent Amount on the first Guarantor Payment Date following 30 days, or if the Guarantor does not have sufficient funds on such date, following 60 days, in either case after the occurrence of such Demand Loan Repayment Event. Following such Demand Loan Repayment Event, the Guarantor will be required to repay the full amount of the then outstanding Demand Loan on the date on which the Asset Percentage is calculated (whether or not such calculation is a scheduled calculation or a calculation made at the request of the Bank); provided that the Asset Coverage Test will be met on the date of repayment after giving effect to such repayment. For the purposes of the foregoing, the “Demand Loan Contingent Amount” will be equal to the lesser of:

 

(i)

the aggregate amount of the Intercompany Loan then outstanding, minus the aggregate amount of the Guarantee Loan then outstanding (as determined by an Asset Coverage Test run on the relevant repayment date); and

 

(ii)

1 percent of the amount of the Guarantee Loan then outstanding (as determined by an Asset Coverage Test calculated on the relevant repayment date),

provided, for greater certainty, that in calculating the amount of the Guarantee Loan and the Demand Loan for purposes of determining the Demand Loan Contingent Amount, no credit will be given to the Guarantor in the Asset Coverage Test for any Excess Proceeds received by the Guarantor from the Bond Trustee.

 

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The Guarantor may repay the principal on the Intercompany Loan in accordance with the Priorities of Payments and the terms of the Intercompany Loan Agreement, using (i) funds being held for the account of the Guarantor by its service providers and/or funds in the Guarantor Accounts (other than any amount in the Pre-Maturity Liquidity Ledger); and/or, (ii) proceeds from the sale of Substitution Assets; and/or (iii) proceeds from the sale, pursuant to the Guarantor Agreement, of Portfolio assets to the Seller or to another person subject to a right of pre-emption on the part of the Seller; and/or (iv) by selling, transferring and assigning to the Seller all of the Guarantor’s right, title and interest in and to Loans and their Related Security (a “Payment in Kind”). The Guarantor is restricted from paying the Demand Loan in the manner described in clause (iii) if the proceeds of such sale are less than the True Loan Balance of the Loans and their Related Security included in the Portfolio. Upon any Payment in Kind, the outstanding amount of the Demand Loan will be reduced by the Fair Market Value of such Loans determined as of the date of the Payment in Kind, less an amount equal to the collections received by or on behalf of the Guarantor after the date of the notice of the Payment in Kind and prior to the date of the Payment in Kind in respect of the Loans listed in the notice of the Payment in Kind. In addition, if the Payment in Kind occurs on or after a Covered Bond Guarantee Activation Event and the Intercompany Loan Provider is the Limited Partner, the Limited Partner will be deemed to have made a Capital Contribution to the Guarantor on the date of the Payment in Kind in an amount equal to the excess, if any, of the True Loan Balance of the Loans and their Related Security applied towards the Payment in Kind over the aggregate Fair Market Value of such Loans and their Related Security, and such Capital Contribution will be deemed to have been applied by the Guarantor against the Demand Loan, such that the outstanding amount of the Demand Loan will be reduced by the greater of (x) the True Loan Balance of such Loans, and (y) the Fair Market Value of such Loans. See “Cashflows.”

The Guarantor will be entitled to set off amounts paid by the Guarantor under the Covered Bond Guarantee first against any amounts (other than interest and principal) owing by the Guarantor to the Bank in respect of the Intercompany Loan Agreement, then against interest due under the Intercompany Loan, and then against the outstanding principal balance owing on the Intercompany Loan.

The Guarantor will use advances under the Intercompany Loan (i) to purchase Loans and their Related Security pursuant to the terms of the Mortgage Sale Agreement; and/or (ii) to invest in Substitution Assets in an amount not exceeding the prescribed limit under the CMHC Guide; and/or (iii) subject to complying with the Asset Coverage Test, to make Capital Distributions to the Limited Partner; and/or (iv) to make deposits of the proceeds in the Guarantor Accounts (including, without limitation, to fund the Reserve Fund and the Pre-Maturity Liquidity Ledger (in each case up to an amount not exceeding the prescribed limit).

The Intercompany Loan Agreement is governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.

Mortgage Sale Agreement

The Seller

Loans and their Related Security will be sold to the Guarantor from time to time on a fully serviced basis pursuant to the terms of the Mortgage Sale Agreement between the Bank (in its capacity as Seller, Servicer and Cash Manager), the Guarantor, the Custodian and the Bond Trustee.

 

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Sale by the Seller of the Loans and Related Security

The Loans included in the Portfolio will be residential mortgages which are not insured by a Prohibited Insurer and which otherwise meet the Eligibility Criteria and with respect to which each of the Loan Representations and Warranties are correct as at the related Purchase Date. The types of Loans forming the Portfolio will vary over time provided that the Loan Representations and Warranties are met on the relevant Purchase Date. Accordingly, the Portfolio may, at any time, include Loans originated by different originators, Loans with different characteristics from Loans that were included in the Portfolio or being offered to borrowers on previous Purchase Dates.

The Guarantor may from time to time acquire Loans and their Related Security from the Seller as described below:

 

(a)

the Guarantor will use the proceeds of an advance under the Intercompany Loan (which may be applied in whole or in part by the Guarantor) and/or Available Principal Receipts to acquire Loans and their Related Security from the Seller. As consideration for the sale of the Loans and their Related Security to the Guarantor, the Seller will receive a cash payment or deemed cash payment equal to the Fair Market Value of those Loans sold by it as at the relevant Purchase Date; and

 

(b)

the Guarantor may receive Capital Contributions in Kind in accordance with the Guarantor Agreement. As consideration for the sale by way of Capital Contributions of the Loans and their Related Security to the Guarantor, the Seller will receive an additional interest in the capital of the Guarantor equal to the Fair Market Value of those Loans sold by it as at the relevant Purchase Date minus any cash considerations received by the Seller described in paragraph (a).

If Selected Loans are sold by or on behalf of the Guarantor as described below under “Guarantor Agreement—Sale of Selected Loans at any time an Asset Coverage Test Breach Notice is outstanding” and “Guarantor Agreement—Sale of Selected Loans following service of a Notice to Pay,” the obligations of the Seller insofar as they relate to those Selected Loans will cease to apply.

The Seller will also be required to repurchase Loans and their Related Security sold to the Guarantor in the circumstances described below under “—Repurchase of Loans.”

See “Loan Representations and Warranties” below for Loan Representations and Warranties relating Loans and their Related Security and “Servicing Agreement—Undertakings of the Servicer” below regarding undertakings of the Servicer in respect of the Loans comprised in the Portfolio.

Pursuant to the terms of the Mortgage Sale Agreement, the Seller will provide to the Custodian, on each Purchase Date, the Eligible Loan Details with respect to the Loans and Related Security to be sold to the Guarantor by the Seller on such Purchase Date. The Seller will also be required to provide updated Eligible Loan Details with respect to the Loans included in the Portfolio to the Custodian on a quarterly basis and forthwith upon the occurrence of a Registered Title Event. The “Eligible Loan Details” are as follows with respect to each Loan:

 

(a)

the Seller’s loan number;

 

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(b)

the mortgagor(s) full name;

 

(c)

the mortgaged property address (street number, city/town, province, postal code);

 

(d)

the principal balance amount;

 

(e)

the authorized loan amount (at origination or last renewal);

 

(f)

the interest adjustment date (at origination or last renewal);

 

(g)

the mortgage maturity date; and

 

(h)

the mortgage lender on title (if other than the Seller).

The Custodian is required to provide access to such Eligible Loan Details to CMHC in order to allow CMHC to ensure compliance by the Guarantor and the Seller with the CMHC Guide and the Transaction Documents. The Seller will pay to the Custodian such fees as may be agreed between the Seller and the Custodian from time to time. If the Seller breaches its obligation to pay such fees, the Custodian will be paid such fees by the Guarantor in accordance with the applicable Priorities of Payments.

Eligibility Criteria

The sale of Loans and their Related Security to the Guarantor will be subject to various conditions (the “Eligibility Criteria”) being satisfied on the relevant Purchase Date. These are as follows:

 

(a)

there has been neither an Issuer Event of Default and service of an Issuer Acceleration Notice nor a Guarantor Event of Default and service of a Guarantor Acceleration Notice as at the relevant Purchase Date;

 

(b)

the Guarantor, acting on the advice of the Cash Manager, is not aware, and could not reasonably be expected to be aware, that the proposed purchase by the Guarantor of the Loans and their Related Security on the relevant Purchase Date does not satisfy the Rating Agency Condition;

 

(c)

no Loan that is proposed to be sold to the Guarantor on the relevant Purchase Date has an Outstanding Principal Balance of more than $3,000,000.00;

 

(d)

if the Loans that are proposed to be sold constitute a New Loan Type, the Rating Agency Condition has been satisfied in accordance with the terms of the Mortgage Sale Agreement with respect to the sale of such Loans to the Guarantor;

 

(e)

such Loan is not secured by a Mortgage that also secures one or more other loans that has the benefit of insurance from any Prohibited Insurer;

 

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(f)

if the Loan is extended or advanced upon the security of a Mortgage that also secures (or is capable of securing) Retained Loans, the Loan and all Related Retained Loans have the benefit of cross-default provisions (whether contained in the terms and conditions of the Loan and Related Retained Loans, the Mortgage securing the Loan and Related Retained Loans or other documentation applicable to the Loan and Related Retained Loans, and enforceable against the borrower) such that a default under the Loan or a Related Retained Loan will constitute a default under the Loan and all Related Retained Loans or, in the case of a Loan or Related Retained Loan not having the benefit of cross-default provisions but repayable on demand, the Guarantor or the Seller (and each mortgage lender as may be on title) have covenanted in writing to demand repayment (in a manner and in circumstances customary for a prudent lender) of the Loan or such Related Retained Loan upon a default under the Loan or such Related Retained Loan, as the case may be;

 

(g)

at the time of transfer to the Guarantor, no payments of principal or interest thereunder are in arrears;

 

(h)

the first payment due in respect of such Loan has been paid by the relevant borrower;

 

(i)

the related Mortgage constitutes a valid first-ranking mortgage lien or hypothecary lien over the related Property under which no claims have been made and subject to certain permitted security interests;

 

(j)

at the time of transfer, the Guarantor will acquire the entire legal and beneficial ownership interest of the Seller in the applicable Loans and their Related Security, excluding registered title therein, free and clear of any encumbrances or ownership interests, other than (i) certain permitted security interests, and (ii) security interests that are reflected in a security sharing agreement and the subject of a release of security in favor of the Guarantor, in each case that complies with the CMHC Guide;

 

(k)

as at the Purchase Date, the Loan is not subject to any dispute proceeding, set-off, counterclaim or defense whatsoever;

 

(l)

to the extent the Loan is extended, advanced or renewed on or after July 1, 2014 (which for greater certainty will not include further advances under an existing non-amortizing Loan unless amended), an express waiver of set-off rights on the part of the borrower is included in the terms and conditions of the Loan or the provisions of any other documentation applicable to the Loan and enforceable against the borrower;

 

(m)

neither the Mortgage Conditions for the Loan nor the terms of any other documentation applicable to the Loan and enforceable by the borrower expressly affords the borrower a right of set-off;

 

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(n)

prior to the making of each advance under such Loan, the Lending Criteria and all preconditions to the making of that Loan were satisfied;

(o)

as at the Purchase Date immediately prior to the transfer by the Seller to the Guarantor of such Loan and the Related Security for such Loan, such Loan, the Related Security and each Related Retained Loan, if any, are owned or beneficially owned by the Seller; and

 

(p)

such Loan is an “Eligible Loan” as defined in the CMHC Guide from time to time.

The CMHC Guide currently defines an “Eligible Loan” as a loan (i) which is made on the security of residential property that is located in Canada and consists of not more than four residential units, (ii) which, together with the amount outstanding of any mortgage or hypothecary loan having an equal or prior claim against the property, does not exceed 80% of the value of the related property at the time of the loan, and (iii) which must, at a minimum, meet the following requirements or qualifications:

 

(a)

a loan will not qualify as an Eligible Loan if, at the time of transfer to the Guarantor, one or more payments of principal or interest payable thereunder are in arrears;

 

(b)

a loan will not qualify as an Eligible Loan until one or more payments of principal or interest (or blended payment(s) of principal and interest) have been made in accordance with the terms of the Loan;

 

(c)

a loan will not qualify as an Eligible Loan for so long as the mortgage or other hypothecary instrument charging the mortgaged property securing such loan does not represent a first priority perfected security interest (subject to encumbrances or claims customarily permitted by a prudent lender);

 

(d)

a loan will not qualify as an Eligible Loan (i) unless, at the time of transfer to the Guarantor, the loan, the Mortgage securing the Loan and (in the case of a loan extended or advanced upon the security of a mortgage or hypothecary instrument also securing Retained Loans) all Retained Loans are beneficially owned (or owned) by the Seller (disregarding, for such purposes, nominee title holders) and (ii) for so long as the loan, all sums derived from the loan (whether on account of principal, interest or otherwise and whether received from the borrower or a guarantor thereof) and the Mortgage charging the Property securing the loan are not clear of any ownership interests, security interests, encumbrances or other claims other than (A) encumbrances or claims customarily permitted by a prudent lender or that will cease to apply to such loan, sums and Mortgage upon the purchase by or contribution to the Guarantor of the loan, (B) those of the Guarantor, (C) those in favor of holders of covered bondholders (or the Bond Trustee on behalf of such holders) or in favor of other Secured Creditors (in each case to secure the payment of amounts owing to them by the Guarantor) and (D) those which may be reflected in a security sharing agreement and are the subject of a release of security delivered by each lender to the Custodian in trust upon and subject to the provisions of the security sharing agreement or are otherwise provided for (in compliance with the requirements of the CMHC Guide) under the Transaction Documents;

 

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(e)

a loan will not qualify as an Eligible Loan if one or more other loans advanced under the same Mortgage have been insured by a Prohibited Insurer;

 

(f)

a loan extended or advanced upon the security of a Mortgage also securing (or capable of securing) Retained Loans will not qualify as an Eligible Loan unless it and all Related Retained Loans have the benefit of cross-default provisions (whether contained in the terms and conditions of the loan and Related Retained Loans, the Mortgage securing the loan and Related Retained Loans or other documentation applicable to the loan and Related Retained Loans, and enforceable against the borrower) such that a default under the loan or a Related Retained Loan will constitute a default under the loan and all Related Retained Loans or, in the case of a loan or Related Retained Loan not having the benefit of cross-default provisions but repayable on demand, the Guarantor or the Seller (and each mortgage lender as may be on title) have covenanted in writing to demand repayment of the loan or such Related Retained Loan upon a default under the loan or the Related Retained Loan, as the case may be;

 

(g)

a loan will not qualify as an Eligible Loan if, at the time of transfer to the Guarantor, it is the subject of any dispute proceeding, set-off, counterclaim or defense whatsoever;

 

(h)

a loan will not qualify as an Eligible Loan if its terms and conditions or the provisions of the Mortgage securing the loan or other documentation applicable to the loan and enforceable by the borrower expressly afford the borrower a right of set-off;

 

(i)

a loan extended, advanced or renewed on or after July 1, 2014 (which for greater certainty will not include further advances under an existing non-amortizing loan unless amended) will not qualify as an Eligible Loan unless an express waiver of set-off rights on the part of the borrower is included in the terms and conditions of the loan and all Related Retained Loans, the Mortgage securing the loan and all Related Retained Loans or other documentation applicable to the loan and all Related Retained Loans, and enforceable against the borrower; and

 

(j)

a loan will not qualify as an Eligible Loan unless it was originated or otherwise complies with the Seller’s approved underwriting policies (in effect or otherwise applicable at the time the loan was originated).

On the relevant Purchase Date, the Loan Representations and Warranties (described below in “—Loan Representations and Warranties”) will be given by the Seller in respect of the Loans and their Related Security sold by the Seller to the Guarantor.

If the Seller or as applicable, an Originator, accepts an application from, or makes an offer (which is accepted) to, a borrower for a Product Switch which constitutes an unconditional obligation on the part of the Seller to make such Product Switch, then the Seller will be obligated to repurchase the relevant Loan and the Related Security to which the Product Switch relates.

 

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Transfer of Title to the Loans to the Guarantor

Loans sold, transferred and assigned by the Seller to the Guarantor pursuant to the Mortgage Sale Agreement will have legal title to the related Mortgages remain registered in the name of the Seller or the applicable Originator and notice of the sale, transfer and assignment will not be given to the borrowers or, in respect of the Related Security, any relevant guarantor of any borrower. Such notice and, where appropriate, the registration or recording in the appropriate land registry or land titles offices of the transfer by the Seller to the Guarantor of legal title to the Mortgages will be deferred and will only take place in the circumstances described below.

On each Purchase Date, the Seller will:

 

(a)

hold registered title to the related Loans and Related Security as agent, bare trustee and nominee in trust for and on behalf of the Guarantor; and

 

(b)

deliver such agreements and take all actions with respect to the Loans and Related Security as the Guarantor may direct in accordance with the Mortgage Sale Agreement and the Servicing Agreement. On the First Purchase Date, the Seller will deliver registrable powers of attorney appointing the Guarantor and the Bond Trustee, as its true and lawful attorney and agent, with full power of substitution, to execute, sign, seal and deliver, in the name of the Seller all conveyances, assignments, transfers, documents and instruments necessary to record the sale, assignment and transfer to the Guarantor, or any other person as the Guarantor and the Bond Trustee may direct, of all Loans and their Related Security (including all documents comprising the Customer Files) in all applicable land registry or land titles offices, including directions to borrowers directing them to remit all payments under their related Loans to the Guarantor (or as the Guarantor may otherwise direct), and to register and record all such sales, assignments, transfers, documents and instruments in such land registry or land titles offices. The powers of attorney will not be exercisable by the Guarantor or the Bond Trustee (or such other person) until the occurrence of a Registered Title Event (as described below).

Upon the occurrence of a Registered Title Event, the Seller will do or will cause to be done on its behalf the following:

 

(a)

give notice of the Guarantor’s ownership interest in the relevant Loans and Related Security to each borrower thereunder, which notice will direct that payments be made directly to the Guarantor or its designee, and upon such instruction from the Guarantor, the Seller will give such notice at the expense of the Seller; provided, that if the Seller fails to so notify each such borrower, the Guarantor may so notify such borrowers at the expense of such Seller;

 

(b)

direct the borrowers or any guarantor of such borrowers to pay all amounts payable under the relevant Loans included in the Portfolio directly to the Guarantor or a nominee on its behalf;

 

(c)

cause Registrable Transfers for each of the Loans and their Related Security to be prepared, executed and delivered by the Seller to the Guarantor and registered in the appropriate land registry or land titles office; and

 

(d)

(A) assemble all of the records then in its possession (including Customer Files, computer records and files) and which are necessary or desirable to collect the related Loans and make the same available to the Guarantor or its designee at a place selected by the Guarantor; (B) segregate all cash, checks and other instruments received by it from time to time constituting payments with respect to the relevant Loans in a manner acceptable to the Guarantor and, promptly upon receipt, remit all such cash, checks and instruments, duly endorsed or with duly executed instruments of transfer, to the Guarantor or its designee; and (C) name the Guarantor (or its designee) as loss payee on any applicable related insurance policies maintained by the Seller in respect of the Loans sold to the Guarantor in place of the Seller.

The duty of the Seller in paragraph (c) above will be fulfilled no later than the 60th day, and the duties in paragraphs (a), (b) and (d) will be fulfilled by the Guarantor no later than 20 Canadian Business Days, following the day on which the Registered Title Event occurs. The Seller will be liable for all costs and expenses associated with such duties. The Seller will co-operate fully to do all such further acts and things and execute any further documents that may be necessary or desirable by the Guarantor (or the Bond Trustee) to give full effect to such duties.

Subject to the following paragraph, notice of the sale, assignment and transfer of the Loans and their Related Security and a direction to make all future repayments of the Loans to the Standby Account Bank for the account of the Guarantor will be sent by the Seller or the applicable Originator, or, as necessary, by the Guarantor (or the Servicer on behalf of the Guarantor) on behalf of the Seller or the applicable Originator (under applicable powers of attorney granted to the Guarantor) and where required, registration of the transfer of legal title to the related Mortgages will be made in the appropriate land registry or land titles offices, as soon as practicable and in any event on or before the 60th day following the earliest to occur of any of the following (each, a “Registered Title Event”):

 

(a)

a Servicer Event of Default that has not been remedied within 30 days or such shorter period permitted by the Servicing Agreement;

 

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(b)

an Issuer Event of Default (other than an actual or impending Insolvency Event with respect to the Bank) that has not been remedied within 30 days or such shorter period permitted by Condition 9.1 (Issuer Events of Default) as described in Terms and Conditions of the Covered Bonds;

 

(c)

an Insolvency Event with respect to the Seller (without regard to the parenthetical language in clause (a) of such definition);

 

(d)

the acceptance by an applicable Purchaser of any offer by the Guarantor to sell Loans and their Related Security (only in respect of the Loans being sold and their Related Security) to any such Purchaser who is not the Seller or the relevant Originator, unless otherwise agreed by such Purchaser and the Guarantor, with the consent of the Bond Trustee, which consent will not be unreasonably withheld;

 

(e)

the Seller, the Originators and/or the Guarantor being required: (i) by law; (ii) by an order of a court of competent jurisdiction; or (iii) by a regulatory authority which has jurisdiction over the Seller, the Originators or the Guarantor, to effect such notice and registration; and

 

(f)

the date on which the rating of the Bank’s unsecured, unsubordinated and unguaranteed debt obligations or its issuer default rating ceases to be at least A3 by Moody’s, BBB (low) or R-1 (middle) by DBRS or BBB- by Fitch.

Notwithstanding the occurrence of any event or circumstance described in clauses (a) through (c) immediately above, none of the steps relating to a Registered Title Event are required to be taken if (A) the Rating Agency Condition has been satisfied with respect to the Seller not fulfilling such requirements, and (B) satisfactory assurances are provided to the Guarantor and the Bond Trustee by OSFI or such other supervisory authority having jurisdiction over the Seller permitting registered title to the Mortgages to remain with the Seller until such time as (i) the Loans and their Related Security are to be sold or otherwise disposed of by the Guarantor or the Bond Trustee in the performance of their respective obligations under the Transaction Documents, or (ii) the Guarantor or the Bond Trustee is required to take actions to enforce or otherwise deal with the Loans and their Related Security.

If the Seller fails to co-operate in the performance of any of the foregoing duties, the Guarantor will use the powers of attorney to transfer registered or recorded title to the Mortgages evidencing and securing the Loans sold by the Seller and their Related Security into its name or the name of a nominee on its behalf.

The Seller will undertake in the Mortgage Sale Agreement to pay the cost associated with the transfer of registered title or recorded title to the Loans.

The Seller will be required to provide updated powers of attorney to the Custodian from time to time under the Mortgage Sale Agreement, together with related opinions of counsel, in order to ensure the continued effectiveness of such powers of attorney.

 

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Seller Representations and Warranties

Under the Mortgage Sale Agreement, the Seller makes the following representations and warranties (in addition to the Loan Representations and Warranties described below) in favor of the Guarantor on each Purchase Date:

 

(a)

it is a Canadian chartered bank under the Bank Act and has, in all material respects, full power and authority to own its properties and conduct its business as presently owned or conducted, and to execute, deliver and perform its obligations under the Mortgage Sale Agreement;

 

(b)

it is qualified under all applicable law, and has obtained all necessary licenses and approvals and is in good standing thereunder, in each jurisdiction in which failure to so qualify or to obtain such licenses and approvals would render any Mortgage unenforceable by the Seller, any other purchaser, the Guarantor or the Bond Trustee, as applicable, or would have a material adverse effect on the Guarantor’s rights thereunder;

 

(c)

the execution and delivery of the Mortgage Sale Agreement and each of the documents, agreements or instruments to be executed and delivered thereunder by the Seller, and the performance by the Seller of its obligations thereunder, have been duly authorized by the Seller by all necessary corporate action on the part of the Seller and are enforceable against the Seller in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws, now or hereafter in effect, affecting the enforcement of creditors’ rights in general and except as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity);

 

(d)

the execution and delivery by the Seller of the Mortgage Sale Agreement and each of the documents, agreements or instruments to be executed and delivered thereunder, the performance of the transactions contemplated thereunder, and the fulfillment of the terms thereof applicable to the Seller, will not (i) conflict with or violate the constating documents or by-laws of the Seller, any resolution of the board of directors (or any committee thereof) or, to the knowledge of the Seller, the shareholders of the Seller or any law applicable to the Seller or (ii) conflict with, or result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, any indenture, contract, agreement, mortgage, deed of trust or other instrument to which the Seller is a party or by which it or its properties are bound, in any such case in a manner that would have a material adverse effect on the Guarantor’s rights thereunder or would materially and adversely affect the validity or enforceability of the Mortgage Sale Agreement;

 

(e)

there are no proceedings or investigations, to the best knowledge of the Seller, pending or threatened against the Seller before any governmental authority: (i) asserting the invalidity of the Mortgage Sale Agreement, (ii) seeking to prevent the consummation of any of the transactions contemplated by the Mortgage Sale Agreement, (iii) seeking any determination or ruling that, in the reasonable judgment of the Seller, would materially and adversely affect the performance by

 

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the Seller of its obligations under the Mortgage Sale Agreement, or (iv) seeking any determination or ruling that would materially and adversely affect the validity or enforceability of the Mortgage Sale Agreement;

 

(f)

all authorizations, consents, orders or approvals of or registrations or declarations with any governmental authority required to be obtained, effected or given by the Seller in connection with the execution and delivery by the Seller of the Mortgage Sale Agreement and the performance of the transactions contemplated by the Mortgage Sale Agreement have been duly obtained, effected or given and are in full force and effect, other than any such authorizations, consents, orders or approvals of or registrations or declarations the absence of which would not materially and adversely affect the validity or enforceability of the Mortgage Sale Agreement or any Mortgage;

 

(g)

it is not a non-resident of Canada for purposes of the ITA;

 

(h)

none of the transactions contemplated thereunder require compliance with any applicable bulk sales legislation; and

 

(i)

it has duly and timely paid all amounts that it is liable to pay under the ITA, including all installments on account of such amounts for the current year, that are due and payable by it whether or not assessed by the appropriate governmental authority and, in respect of amounts that it is liable to pay under the ITA in or in respect of the current year that are not yet due and payable, will pay such amounts when due, other than such amounts that are subject to a continued dispute or reassessment and for which the Seller has established sufficient reserves.

Loan Representations and Warranties

Neither the Guarantor nor the Bond Trustee has made or has caused to be made on its behalf any enquiries, searches or investigations in respect of the Loans and their Related Security to be sold to the Guarantor. Instead, each is relying entirely on the Loan Representations and Warranties by the Seller contained in the Mortgage Sale Agreement. The parties to the Mortgage Sale Agreement may, with the prior written consent of the Bond Trustee (which consent will only be given if the Rating Agency Condition has been satisfied in respect of the proposed amendments), amend or waive the Loan Representations and Warranties in the Mortgage Sale Agreement. The loan representations and warranties set out in the Mortgage Sale Agreement (the “Loan Representations and Warranties”) as of the date of this prospectus are as follows and are given on the relevant Purchase Date to the Guarantor, the Custodian and the Bond Trustee in respect of the Loans and Related Security to be sold to the Guarantor only on that date:

 

•

the Loan meets the Eligibility Criteria and is an “Eligible Loan” as defined in the CMHC Guide from time to time;

 

•

the Loan is a Fixed Rate Loan or a variable rate loan;

 

•

the borrower thereunder is a resident of Canada and is not, to the knowledge of the Seller, the subject of any insolvency proceeding;

 

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•

the Seller or the relevant Originator is permitted to assign its rights under the Loan (including all Related Security) in whole or in part without notice to or the consent of the borrower or any other person and neither the Loan nor the Related Security contains any restriction on the sale, assignment or transfer of the Loan and the Related Security or an interest therein, and the Loan permits its assignment without the consent of the borrower;

 

•

the Loan is fully advanced as of the date of transfer and is not subject to any contingent performance requirements of the Seller or the relevant Originator unless such requirements are guaranteed or insured by third parties acceptable to a reasonable and prudent institutional mortgage lender in the Seller’s market;

 

•

the Loan is payable in Canada only and is denominated in Canadian Dollars;

 

•

the Loan has a remaining amortization period of less than 40 years as of the relevant Purchase Date;

 

•

the Loan contains standard terms and conditions generally contained in conventional residential first mortgages originated by the Seller or the relevant Originator and contains a restriction on the borrower’s ability to set-off any payments owing thereunder against any amounts payable by the Seller or, as applicable, the relevant Originator to such borrower;

 

•

the Property subject to the related Mortgage is a freehold or condominium interest in real or immovable property located in Canada which is zoned residential, or is zoned agricultural or rural and residential use is permitted by such zoning, and on which, at the time the Loan was underwritten or purchased by the Seller or the applicable Originator, a family dwelling has been constructed;

 

•

the related Mortgage has been duly registered or recorded in the name of the Seller or, as applicable, the applicable Originator, in the appropriate land titles or land registry office or similar place of public registration for the province or territory in which the Property is located;

 

•

the Loan is accompanied by a solicitor’s or notary’s report on title from a solicitor or notary qualified to practice law in the province or territory in which the Property is located to the effect that, at the time of origination of such Loan, the borrower had good title to, and the related Mortgage created a first charge, mortgage or hypothec against, such Property, subject only to adverse claims which, in the reasonable opinion of the Seller, do not in the aggregate materially impair the marketability of the title to such property or, if no such report on title was obtained, the Loan is accompanied by a policy of title insurance to the same effect from a provider acceptable to a reasonable and prudent institutional mortgage lender in the Seller’s market;

 

•

the Loan has been duly authorized, executed and delivered by the Seller or the applicable Originator and the borrower, which Loan, together with all Related Security, is in full force and effect and constitutes the legal, valid and binding obligation of the borrower enforceable in accordance with its terms, subject to

 

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applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors’ rights generally and to equitable principles of general application (regardless of whether endorsements is sought in a proceeding at law or in equity);

 

•

the Loan or applicable law permits realization by the Seller or the applicable Originator and their respective assigns against the Property securing such Loan in accordance with the terms of such Loan, subject to applicable law, including, without limitation, the notice requirements and other limitations contained in the Bankruptcy and Insolvency Act (Canada) and statutory limitations on the rights of mortgagees to exercise their remedies, and the Loan constitutes the borrower’s obligation to pay to the Seller or the applicable Originator and their respective assigns, in accordance with the scheduled payments set forth therein, the amounts owing thereunder;

 

•

the Loan was, when underwritten or purchased by the Seller or the applicable Originator, and is, on the date of transfer to the Guarantor, in compliance, in all material respects, with all requirements of applicable law that would affect the validity or enforceability thereof, including consumer protection legislation, privacy and interest rate disclosure legislation;

 

•

the Seller has ensured, in accordance with its customary servicing procedures, or, as applicable, has procured the relevant Originator to ensure in accordance with its customary servicing procedures, that policies of insurance satisfying the requirements set forth in the Credit and Collection Policy are in force and the Seller, or as applicable, the relevant Originator, is named as first mortgagee or hypothecary creditor, as the case may be, under such policies with the benefit of a standard mortgage clause or endorsement;

 

•

the Loan has not been satisfied or rescinded, no rights of the mortgagee thereunder have been postponed or subordinated, no Property has been discharged, reconveyed or released from the charge created by the related Mortgage in whole or in part, and no provision of the Loan has been waived, altered or modified in any respect, except in each case, (x) as permitted pursuant to Credit and Collection Policy, and (y) pursuant to a document, instrument or writing included in the related Customer File; and

 

•

the Loan has not been originated in, and is not subject to the laws of, any jurisdiction under which the sale, transfer and assignment of such Loan by the applicable Originator to the Seller, if applicable, and by the Seller to the Guarantor, is unlawful, void or voidable.

 

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If New Loan Types are proposed to be sold to the Guarantor, then the Loan Representations and Warranties and Eligibility Criteria may be modified as required, with the prior consent of the Bond Trustee and subject to satisfaction of the Rating Agency Condition and compliance with the CMHC Guide, to accommodate these New Loan Types. The prior consent of the covered bondholders to the requisite amendments will not be required to be obtained.

Repurchase of Loans

If the Seller receives a Loan Repurchase Notice from the Guarantor identifying a Loan or its Related Security in the Portfolio which (i) did not, as at the relevant Purchase Date, materially comply with the Loan Representations and Warranties set out in the Mortgage Sale Agreement or, (ii) is subject to a Product Switch or a request by a borrower for an advance under the relevant Loan in respect of amounts previously paid by the borrower thereunder, in accordance with the terms of the Loan, then the Seller will be required to repurchase (a) any such Loan and its Related Security and (b) any other Loan secured or intended to be secured by that Related Security or any part of it. The repurchase price payable upon the repurchase of any Loans and their Related Security in such circumstances will be an amount equal to the greater of (i) the aggregate fair market value of all such Loans, and (ii) the aggregate Repurchase Amount of all such Loans. The repurchase proceeds received by the Guarantor will be applied (other than accrued interest and arrears of interest and other than in cases where the repurchase is made in connection with the repayment of an advance) in accordance with the Pre-Acceleration Principal Priorities of Payments (see “Cashflows” below). Any breach of the Loan Representations and Warranties with respect to a Loan meeting the Eligibility Criteria will be deemed to be material and incapable of being cured.

A Loan will be deemed to be subject to a “Product Switch” if there is a variation in the financial terms and conditions applicable to the relevant borrower’s Loan other than:

 

•

any variation agreed with a borrower to control or manage arrears on the Loan;

 

•

any variation imposed by statute;

 

•

any change in the repayment method of the Loan; or

 

•

any change to a borrower under the Loan or the addition of a new borrower under a Loan.

Since the Bank holds substantially all of the interests in the Guarantor, there are conflicts of interest associated with the Guarantor’s performance of its role in identifying a Loan or Related Security in the Portfolio that may be subject to repurchase by the Seller. See “Risk Factors — Reliance on certain transaction parties.”

General ability to repurchase

Prior to the occurrence of an Issuer Event of Default and service of an Issuer Acceleration Notice or a Guarantor Event of Default and service of a Guarantor Acceleration Notice, the Seller may from time to time offer to repurchase a Loan (including a Non-Performing Loan) and its Related Security from the Guarantor for a purchase price equal to the Fair Market Value of such Loan. The Guarantor may accept such offer at its sole discretion, provided such repurchase will be subject to the Asset Coverage Test being met on the date of such repurchase, after giving effect thereto, and any such Loans and their Related Security will have been selected in a manner that would not reasonably be expected to adversely affect the interests of the covered bondholders. If an Issuer Event of Default has

 

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occurred but no liquidator has been appointed to the Seller, the Seller’s right to request the repurchase of Loans and their Related Security will be conditional upon the delivery by the Seller of a solvency certificate to the Guarantor and the Bond Trustee. Amounts paid by the Seller pursuant to such option will be deposited into the GDA Account.

Defaulted Loans

The Cash Manager will identify any Loans that are not Performing Eligible Loans in the Portfolio and upon identification serve a Non-Performing Loans Notice on the Bank and the Servicer. Loans that are not Performing Eligible Loans (as defined below) will be given no credit in the Asset Coverage Test or the Amortization Test, as applicable.

Since both the Seller and the Cash Manager will be the Bank (or an affiliate), there are conflicts of interest associated with the Cash Manager’s performance of its role in identifying Loans that are Non-Performing Loans in the Portfolio. See “Risk Factors—Reliance on certain transaction parties.”

Maturing Loans

Without prejudice to the Seller’s general ability to repurchase, the Seller (or an affiliate of the Seller designated by the Seller) will have the option exercisable at any time prior to the date which is 90 days prior to the date of maturity of a Loan to repurchase such Loan on the maturity date thereof at the purchase price of not less than the aggregate Outstanding Principal Balance of the relevant Loan and all arrears of interest and accrued interest relating thereto in accordance with the Mortgage Sale Agreement as at the date of repurchase.

If the Seller does not deliver to the Guarantor on or before the required date a written notice specifying the Loans in respect of which it will not exercise such option, the Seller will be deemed to have irrevocably exercised its option to repurchase and will repurchase each such Loan on the Calculation Date next following the applicable maturity date of such Loan, provided, however, that the Seller will not repurchase and will not be required to repurchase any Loan which (i) is or becomes a Non-Performing Loan on its maturity date, or (ii) is repaid in full on its maturity date from funding provided to the borrower under such Loan by a person other than the Seller. On the Calculation Date next following the maturity date on which the Seller purchases any such Loan, such Seller will pay to the GDA Account an amount equal to the greater of (i) the Fair Market Value of such Loan at such maturity date, and (ii) the Repurchase Amount of such Loan at such maturity date.

Right of Pre-emption

Under the terms of the Mortgage Sale Agreement, the Seller has a right of pre-emption in respect of any sale, in whole or in part, of Selected Loans; provided, however, that such right will not be available at any time during which the Seller is in default of any of its obligations under the Transaction Documents.

If, (i) following service of an Asset Coverage Test Breach Notice (which has not been revoked), (ii) following service of a Notice to Pay, (iii) following a breach of the Pre-Maturity Test or (iv) prior to the service of an Asset Coverage Test Breach Notice or a Notice to Pay, a Demand Loan Repayment Event has occurred or the Bank has demanded that the Demand Loan

 

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be repaid, the Guarantor may be required to sell Selected Loans, and in certain circumstances may elect to sell certain Selected Loans, in accordance with the Guarantor Agreement, and provided that the Seller is not in default of any of its obligations in the Mortgage Sale Agreement or under any other Transaction Document to which it is a party, the Guarantor will by serving on the Seller a Selected Loan Offer Notice, prior to the Guarantor making any offer to sell Selected Loans to other Purchasers, offer immediately to sell to the Seller those Selected Loans in accordance with the Guarantor Agreement for an offer price equal to the amount specified in the Guarantor Agreement. See “—Guarantor Agreement—Method of sale of Portfolio assets” below.

If the Seller accepts the Guarantor’s offer to sell the relevant Selected Loans by signing the Selected Loan Offer Notice in a manner indicating acceptance and delivering it to the Guarantor with a copy to the Bond Trustee within 10 Canadian Business Days from and including the date of the Selected Loan Offer Notice and provided that (if an Issuer Event of Default has occurred and is continuing) the Seller has provided a solvency certificate in a form acceptable to the Guarantor and the Bond Trustee (each acting reasonably), the Guarantor will within three Canadian Business Days of receipt of such acceptance serve a notice accepting the offer set out in the Selected Loan Offer Notice (a “Selected Loan Repurchase Notice”) on the Seller.

The Guarantor will offer for sale the Selected Loans in respect of which the Seller rejects or fails within the requisite time limit to accept the Guarantor’s offer to sell to Purchasers in the manner and on the terms set out in the Guarantor Agreement. See “—Guarantor Agreement—Sale of Selected Loans at any time an Asset Coverage Test Breach Notice is outstanding or a Notice to Pay has been served to the Guarantor.”

Upon receipt of the Selected Loan Repurchase Notice duly signed on behalf of the Guarantor, the Seller will promptly sign and return the Selected Loan Repurchase Notice and will repurchase from the Guarantor, and the Guarantor will re-assign or re-transfer to the Seller the Selected Loans (and any other Loan secured or intended to be secured by that Related Security or any part of it) referred to in the relevant Selected Loan Repurchase Notice and, subject to the Security Agreement, upon execution of the Selected Loan Repurchase Notice by the Bond Trustee, on its own behalf such Selected Loans will be re-assigned or re-transferred to the Seller free from the Security created by and pursuant to the Security Agreement and all related rights of the Bond Trustee and the Guarantor in respect thereof, without the need for any further action. Completion of such repurchase will take place on the Guarantor Payment Date next occurring after receipt by the Seller of such Selected Loan Repurchase Notice or such other date as the Guarantor may direct in the Selected Loan Repurchase Notice (provided that, where a Notice to Pay has been served, such date is not to be later than the earlier to occur of the date which is (a) 10 Canadian Business Days after receipt by the Guarantor of the returned Selected Loan Repurchase Notice, or (b) the Final Maturity Date of, as applicable, the Hard Bullet Covered Bonds or the Earliest Maturing Covered Bonds) and the Seller will pay to the GDA Account (or as the Guarantor will direct) an amount in cash equal to the offer price specified in the relevant Selected Loan Repurchase Notice.

At any time when there is no Asset Coverage Test Breach Notice outstanding and no Notice to Pay or Guarantor Acceleration Notice has been served on the Guarantor, it will be a condition to the Guarantor’s right to sell Loans and their Related Security that the Asset Coverage Test will be met on the date of such sale after giving effect to the sale and taking into account amounts that will be paid or provided for on the next following Guarantor Payment Date in accordance with the Priorities of Payments.

 

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Termination of Custodian

The Guarantor may, at any time, but subject to the prior written consent of the Bond Trustee (if the Custodian is not the Bond Trustee), terminate the appointment of the Custodian upon providing the Custodian with at least 60 days’ prior written notice, provided that, subject to the following sentence, such termination may not be effected unless and until a replacement approved by the Bond Trustee, acting reasonably, has been found by the Guarantor which agrees to perform the duties (or substantially similar duties) of the Custodian set out in the Mortgage Sale Agreement. In the event that there is a breach by the Custodian of certain representations and warranties or a failure by the Custodian to perform certain covenants made by it under the Mortgage Sale Agreement, the Guarantor will have the right to terminate the Custodian and appoint a replacement Custodian, without the need for a replacement having been appointed upon such termination.

The Mortgage Sale Agreement is governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.

Servicing Agreement

Pursuant to the terms of the Servicing Agreement between the Seller, the Guarantor, the Servicer and the Bond Trustee, the Servicer has agreed to service on behalf of the Guarantor the Loans and their Related Security comprised in the Portfolio.

The Servicer, as agent for the Guarantor (to the extent provided in the Servicing Agreement), will perform its duties under the Servicing Agreement with reasonable care and diligence, using that degree of skill and attention that the Servicer exercises in managing, servicing, administering, collecting on and performing similar functions relating to comparable loans that it services for itself or other persons and in accordance with the Credit and Collection Policy.

The Servicer’s actions in servicing the Loans in accordance with its procedures will be binding on the Guarantor, the Seller and the other Secured Creditors.

The Servicer will have the power to exercise the rights, powers and discretions and to perform the duties of the Guarantor and the Seller (according to their respective estates and interests) in relation to the Loans and their Related Security that it is servicing pursuant to the terms of the Servicing Agreement, and to do anything which it reasonably considers necessary, convenient or incidental to the administration of the Loans and their Related Security.

 

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Right of delegation by the Servicer

Subject to certain conditions, the Servicer may from time to time sub-contract or delegate the performance of its duties under the Servicing Agreement, provided that it will nevertheless remain responsible for the performance of those duties to the Guarantor and the Bond Trustee and, in particular, will remain liable at all times for servicing the Loans and their Related Security and for the acts or omissions of any delegate or sub-contractor. Any such sub-contracting or delegation will be at the expense of the Servicer, may be varied or terminated at any time by the Servicer and will be subject to the prior consent of the Guarantor and the Bond Trustee and subject to satisfaction of the Rating Agency Condition.

Undertakings of the Servicer

Pursuant to the terms of the Servicing Agreement, the Servicer will undertake in relation to those Loans and their Related Security that it is servicing, inter alia, to:

 

•

keep records and books of account on behalf of the Guarantor in relation to the Loans and their Related Security comprised in the Portfolio;

 

•

keep the Customer Files in its possession or under its control in safe custody and maintain records necessary to enforce each Mortgage and to provide the Guarantor and the Bond Trustee with access to the Customer Files and other records relating to the administration of the Loans and their Related Security in its possession;

 

•

keep and maintain records in respect of the Portfolio for the purposes of identifying amounts paid by each borrower, any amount due from a borrower and the Outstanding Principal Balance of each Loan and such other records as would be kept by a reasonable and prudent institutional mortgage lender in the Seller’s market;

 

•

take such steps as are necessary to maintain the perfection and priority of the security interests created pursuant to the Loans and their Related Security;

 

•

notify each Rating Agency of any changes made to its credit and collection policy;

 

•

assist the Cash Manager in the preparation of Investor Reports in accordance with the Cash Management Agreement;

 

•

take all reasonable steps to recover all sums due to the Guarantor, including instituting proceedings and enforcing any relevant Loan or its Related Security using the discretion of a reasonable and prudent institutional mortgage lender in the Seller’s market in applying the enforcement procedures forming part of the Seller’s policy;

 

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•

hold as trust property for and on behalf of the Guarantor, free of any adverse claim and the proceeds of any claims made in respect thereof; and

 

•

enforce any Loan which is in default in accordance with the Seller’s or, as applicable, an Originator’s enforcement procedures or, to the extent that such enforcement procedures are not applicable having regard to the nature of the default in question, with the procedures that would be undertaken by a reasonable and prudent institutional mortgage lender in the Seller’s market on behalf of the Guarantor.

Remuneration

Pursuant to the Mortgage Sale Agreement, the Seller will sell Loans and their Related Security to the Guarantor on a fully serviced basis, and will not receive a fee for such services. If the Servicer is not the Seller, or an affiliate of the Seller, the Guarantor will pay to the Servicer a servicing fee (inclusive of applicable taxes) for its services agreed upon by the Guarantor and the Servicer. Such fee will be calculated in relation to each Calculation Period and will be payable to the Servicer in arrears on each Guarantor Payment Date in accordance with the applicable Priorities of Payments.

Representations and Warranties of the Servicer

Under the Servicing Agreement, the Servicer represents and warrants to the Guarantor, the Seller, the Cash Manager and the Bond Trustee that (i) it possesses the necessary experience, qualifications, facilities and other resources to perform its responsibilities in relation to its duties and obligations thereunder; (ii) it is and will continue to be in good standing with OSFI; (iii) it is and will continue to be in regulatory good standing and in material compliance with and under all laws applicable to its duties and obligations thereunder and under the other Transaction Documents to which it is a party; (iv) the unsecured, unsubordinated and unguaranteed debt obligations (or in the case of Fitch, the issuer default ratings) of the Servicer are rated by each of the Rating Agencies at ratings that are at or above (a) Baa2 (in respect of Moody’s), (b) F2 (in respect of Fitch), and (c) either BBB (low) or R-1 (middle) (in respect of DBRS) as applicable, of the unsecured, unsubordinated and unguaranteed debt obligations (or, in the case of Fitch, the issuer default rating); and (v) it is and will continue to be in material compliance with its internal policies and procedures (including risk management policies) relevant to its duties and obligations thereunder.

Removal or resignation of the Servicer

The Guarantor and the Bond Trustee may, upon written notice to the Servicer, terminate the Servicer’s rights and obligations (unless otherwise specified below) if any of the following events (each a “Servicer Termination Event” and, each of the events set out in (a), (b), (d) and (g) below, a “Servicer Event of Default”) occurs:

 

(a)

one or more Rating Agencies downgrades the Servicer’s unsecured, unguaranteed and unsubordinated debt obligations, or its issuer default rating, below the Servicer Replacement Ratings;

 

(b)

the Servicer defaults in the payment of any amount due to the Guarantor under the Servicing Agreement and fails to remedy that default for a period of three Canadian Business Days after the earlier of the Servicer becoming aware of the default and receipt by the Servicer of written notice from the Bond Trustee or the Guarantor requiring the same be remedied;

 

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(c)

an Insolvency Event occurs in relation to the Servicer;

 

(d)

default is made by the Servicer (or any delegate thereof) in the performance of its obligations under the Servicing Agreement with respect to the requirements with respect to the deposit of funds at any time that one or more Rating Agencies has downgraded the Servicer’s unsecured, unguaranteed and unsubordinated debt obligations, or its issuer default ratings, below the Servicer Deposit Threshold Ratings, and such default continues unremedied for a period of one (1) Canadian Business Day after the earlier of the Servicer becoming aware of such default and receipt by the Servicer of written notice from the Bond Trustee or the Guarantor requiring the same to be remedied;

 

(e)

there is a breach by the Servicer of certain representations and warranties or a failure by the Servicer to perform certain covenants made by it under the Servicing Agreement;

 

(f)

if the Servicer is the Bank or an affiliate of the Bank, an Issuer Event of Default (i) occurs and is continuing, or (ii) previously occurred and is continuing, at any time that the Guarantor is not Independently Controlled and Governed; or

 

(g)

the Servicer fails to comply with any of its other covenants and obligations under the Servicing Agreement which failure in the reasonable opinion of the Bond Trustee is materially prejudicial to the interests of the holders of the covered bonds and does not remedy such failure within the earlier of 20 Canadian Business Days after becoming aware of the failure and receipt by the Servicer of written notice from the Bond Trustee or the Guarantor requiring the same to be remedied.

In the case of the occurrence of the first Servicer Termination Event described above at any time that the Guarantor is not Independently Controlled and Governed, the Guarantor will by notice in writing to the Servicer terminate its appointment as Servicer with effect from a date (not earlier than the date of the notice) specified in the notice.

Any resolution to terminate the Servicer’s appointment under the Servicing Agreement will be notified to the Rating Agencies. Any such termination will become effective upon the appointment of a successor Servicer in place of the Servicer.

Subject to the fulfillment of a number of conditions, the Servicer may voluntarily resign by giving not less than 12 months’ written notice to the Bond Trustee, the Guarantor and each Rating Agency provided that a Servicer or sub-Servicer duly licensed to act as such under applicable provincial mortgage broker legislation and with a management team with experience of administering mortgages in Canada of the type then comprised in the Portfolio has been appointed and enters into a servicing agreement with the Guarantor substantially on the same terms as the Servicing Agreement and subject to the consent of the Bond Trustee having been received in respect of such appointment if the Servicer is the Bank. The resignation of the Servicer is also conditional upon satisfaction of the Rating Agency Condition unless the covered bondholders agree otherwise by Extraordinary Resolution.

If the appointment of the Servicer is terminated, the Servicer must promptly deliver the Customer Files relating to the Loans comprised in the Portfolio in its possession to, or at the direction of, the Guarantor. The Servicing Agreement will terminate at such time as the Guarantor has no further interest in any of the Loans or their Related Security serviced under the Servicing Agreement that have been comprised in the Portfolio.

 

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The Bond Trustee is not obliged to act as Servicer in any circumstances.

The Servicing Agreement is governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.

Cover Pool Monitor Agreement

Under the terms of the Cover Pool Monitor Agreement entered into on the Program Date between the Cover Pool Monitor, the Guarantor, the Bank, the Cash Manager and the Bond Trustee, the Cover Pool Monitor has agreed, subject to due receipt of the information to be provided by the Cash Manager to the Cover Pool Monitor, to carry out arithmetic testing of, and report on the arithmetic accuracy of the calculations performed by the Cash Manager once each year and more frequently in certain circumstances as required by the terms of the Cover Pool Monitor Agreement with a view to (i) confirming that the Asset Coverage Test or the Amortization Test, as applicable, is met on each applicable Calculation Date, and (ii) confirming the accuracy of the Valuation Calculation.

If the arithmetic testing conducted by the Cover Pool Monitor reveals any errors in the calculations performed by the Cash Manager, the Cover Pool Monitor will be required to conduct such arithmetic tests and report on such arithmetic accuracy for (a) the last Calculation Period of each calendar quarter of the preceding year, (b) each Calculation Period of the current year until such arithmetic testing demonstrates no arithmetical inaccuracy for three consecutive Calculation Periods, and (c) thereafter, the last Calculation Period of each remaining calendar quarter of the current year.

In addition to the arithmetic testing described above, the Cover Pool Monitor will also perform certain specified procedures in relation to the Portfolio and verify compliance by the Bank, the Guarantor and the Program with certain aspects of the Legislative Framework and the CMHC Guide.

The Cover Pool Monitor is entitled, in the absence of manifest error, to assume that all information provided to it by the Cash Manager for the purpose of performing its duties under the Cover Pool Monitor Agreement is true and correct and not misleading and is not required to report as such or otherwise take steps to verify the accuracy of any such information. Each report of the Cover Pool Monitor delivered in accordance with the terms of the Cover Pool Monitor Agreement will be delivered to the Cash Manager, the Guarantor, the Bank, the Bond Trustee and CMHC.

The Guarantor will pay to the Cover Pool Monitor a fee per report (exclusive of applicable taxes), equal to the amount set out in the Cover Pool Monitor Agreement from time to time, for the reports to be performed by the Cover Pool Monitor.

The Guarantor may, at any time, but subject to the prior written consent of the Bond Trustee, terminate the appointment of the Cover Pool Monitor by giving at least 60 days’ prior written notice to the Cover Pool Monitor (unless the Cover Pool Monitor defaults in the performance or observance of certain of its covenants or breaches certain of its representations and warranties made, respectively, under the Cover Pool Monitor Agreement, in which case such

 

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consent will not be required), provided that such termination may not be effected unless and until a replacement Cover Pool Monitor has been appointed by the Guarantor (such replacement to be approved by the Bond Trustee (such approval to be given if the replacement is an accountancy firm of national standing in Canada)) which agrees to perform the duties of the Cover Pool Monitor set out in the Cover Pool Monitor Agreement (or substantially similar duties).

The Cover Pool Monitor may, at any time, resign by giving at least 60 days’ prior written notice to the Guarantor (or the Cash Manager on its behalf) and the Bond Trustee. The Cover Pool Monitor may resign immediately by giving written notice if any action taken by a recipient of a report delivered by the Cover Pool Monitor causes a professional conflict of interest for the Cover Pool Monitor under the rules of the professional and/or regulatory bodies regulating the activities of the Cover Pool Monitor. The Cover Pool Monitor will inform the recipients of its report as soon as reasonably practicable of any action of which the Cover Pool Monitor is aware that may cause a professional conflict of interest for the Cover Pool Monitor which could result in its resignation.

If the Guarantor has not, using all commercially reasonable endeavors, appointed a replacement Cover Pool Monitor (such replacement to be approved by the Bond Trustee) within 60 days of the giving of notice of resignation or termination or by the date which is 30 days prior to the date when tests are to be carried out in accordance with the terms of the Cover Pool Monitor Agreement, then the Guarantor will use all commercially reasonable endeavors to appoint an accountancy firm of national standing in Canada which meets the requirements of a cover pool monitor in the CMHC Guide to carry out the duties of the Cover Pool Monitor set out in the Cover Pool Monitor Agreement on a one-off basis, provided that such appointment is approved by the Bond Trustee, acting reasonably.

The Bond Trustee will not be obliged to act as Cover Pool Monitor in any circumstances.

The Cover Pool Monitor Agreement is governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.

Guarantor Agreement

The general and limited partners of the Guarantor operate the business of the Guarantor in accordance with the terms of the Guarantor Agreement between the Managing GP, as managing general partner, the Liquidation GP, as liquidation general partner, the Bank, as Limited Partner and the Bond Trustee, together with such other persons as may become partners of the Guarantor. Any Partner must be a resident of Canada for purposes of the ITA.

General Partner and Limited Partners of the Guarantor

The Managing GP is the initial managing general partner and the Liquidation GP is the initial liquidation general partner and the Bank is currently the sole limited partner of the Guarantor. The Partners have the duties and obligations, rights, powers and privileges specified in the Limited Partnership Act (Ontario) and pursuant to the terms of the Guarantor Agreement.

No new limited partner may be otherwise appointed, and no new general partner may be added or general partner replaced without, among other requirements, (i) the consent of the Partners and, while there are covered bonds outstanding, the Bond Trustee, and (ii) satisfaction of the Rating Agency Condition.

Under the Guarantor Agreement, the Limited Partner represents and warrants to the other Partners that (i) it is a validly created chartered bank under the laws of Canada and is validly

 

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subsisting under such laws; (ii) it has taken all necessary action to authorize the execution, delivery and performance of the Guarantor Agreement; (iii) it has the capacity and corporate authority to enter into and perform its obligations under the Guarantor Agreement and such obligations do not conflict with nor do they result in a breach of any of its constating documents or by-laws or any agreement by which it is bound; (iv) no authorization, consent or approval of, or filing with or notice to, any person is required in connection with the execution, delivery or performance of the Guarantor Agreement by the Limited Partner, other than whose which have been obtained; (v) it is not a non-resident of Canada for purposes of the ITA and will retain such status during the term of the partnership governed by the Guarantor Agreement; (vi) it will not transfer any interest it holds in the Guarantor to a non-resident of Canada for purposes of the ITA; (vii) it will at all times comply with the CMHC Guide; and (viii) it will at all times comply with, and perform its obligations under, the provisions of the Guarantor Agreement and each other Transaction Document to which it is a party in any capacity.

Capital Contributions

The Managing GP and the Liquidation GP hold 99 percent and 1 percent respectively of the 0.05 percent general partner interest. The Limited Partner holds the substantial economic interest in the Guarantor (approximately 99.95 percent). The Limited Partner may from time to time make additional Capital Contributions. Such Capital Contributions may be Cash Capital Contributions or Capital Contributions in Kind. In the case of the latter, the Limited Partner will have an additional interest in the capital of the Guarantor equal to the Fair Market Value of those Loans contributed by it as at the Purchase Date recorded in the Capital Account Ledger.

New Limited Partners

In the future, any person that wishes to become a new Limited Partner will, subject to the following paragraph, require the consent of the Limited Partner and, while there are covered bonds outstanding, the Bond Trustee, and be required to accede to the Mortgage Sale Agreement and any other Transaction Documents to which the Limited Partner is a party and deliver such other agreements and provide such other assurances as may be required by the Guarantor and/or the Bond Trustee (acting reasonably). Subject to compliance with the foregoing, the consent of the covered bondholders will not be required to the accession of a new Limited Partner to the Guarantor. The admission of a new Limited Partner will also be subject to satisfaction of the Rating Agency Condition.

Subject to the satisfaction of the Rating Agency Condition and the requirement that such assignment will not cause, or would not reasonably be expected to cause, a breach of the related provisions of the Guarantor Agreement, the Limited Partner may assign all or some portion of its interest in the Guarantor to any subsidiary by giving written notice of such assignment to CMHC, the Managing GP, the Liquidation GP, and the Bond Trustee, and the assignee of such interest acceding to the Guarantor Agreement. Any such assignment will not require the consent of the general partners, Bond Trustee, the holders of the covered bonds or, if applicable, any other Limited Partner, provided that such subsidiary is not a non-resident of Canada for the purposes of the ITA.

Capital Distributions

Provided the Asset Coverage Test will be met after giving effect to any Capital Distribution, the Managing GP, may from time to time, in its discretion, make Capital

 

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Distributions to the Partners in accordance with the Guarantor Agreement, and provided that such Capital Distributions are permitted under the applicable Priorities of Payments and the Security Agreement. Pursuant to the terms of the Guarantor Agreement distributions to the Liquidation GP will be limited to an amount which may be less than the Liquidation GP’s pro rata interest in the Guarantor.

Asset Coverage Test

Under the terms of the Guarantor Agreement, the Guarantor is required to ensure that, as of each Calculation Date, the ACT Asset Value (as defined below) is in an amount at least equal to the ACT Liability Value (as defined below) as calculated as of the relevant Calculation Date.

If as of any Calculation Date the ACT Asset Value (as defined below) is less than the ACT Liability Value (as defined below) as of the relevant Calculation Date, then the Managing GP (or the Cash Manager on its behalf) will notify the Guarantor, CMHC, the Partners and the Bond Trustee thereof. In such circumstances, the Partners (other than the Liquidation GP) will use all reasonable efforts to ensure that the Guarantor satisfies the Asset Coverage Test prior to the next Calculation Date. If the ACT Asset Value is less than the ACT Liability Value as of the next following Calculation Date, the Asset Coverage Test will be breached and the Managing GP (or the Cash Manager on its behalf) the Bond Trustee will serve an Asset Coverage Test Breach Notice on the Guarantor, the Partners and the Bond Trustee in accordance with the Guarantor Agreement. Under the Guarantor Agreement, the Managing GP (or the Cash Manager on its behalf) will revoke an Asset Coverage Test Breach Notice if, as of any Calculation Date falling on or prior to the Guarantor Payment Date immediately following the Calculation Date after the service of an Asset Coverage Test Breach Notice, the Asset Coverage Test is subsequently satisfied and neither a Notice to Pay nor a Guarantor Acceleration Notice has been served. In such circumstances where the Asset Coverage Test is not satisfied, the Limited Partner will use all reasonable efforts to, in its sole discretion, (i) make advances under the Intercompany Loan, (ii) sell Loans and their Related Security to the Guarantor, or (iii) make a Capital Contribution in cash or in kind, in any case on or before the next Calculation Date in amounts sufficient to ensure that the Guarantor is in compliance with the Asset Coverage Test prior to the next following Calculation Date.

Following service of an Asset Coverage Test Breach Notice (which has not been revoked):

 

(a)

the Guarantor may be required to sell Selected Loans (as described further under Sale of Selected Loans following service of an Asset Coverage Test Breach Notice below); and

 

(b)

prior to the occurrence of an Issuer Event of Default and service of an Issuer Acceleration Notice or, if earlier, the occurrence of a Guarantor Event of Default and service of a Guarantor Acceleration Notice, the Pre-Acceleration Revenue Priorities of Payments and the Pre-Acceleration Principal Priorities of Payments will be modified as more particularly described in “Cashflows—Allocation and distribution of Available Revenue Receipts and Available Principal Receipts when an Asset Coverage Test Breach Notice is outstanding but no Covered Bond Guarantee Activation Event has occurred” below.

If an Asset Coverage Test Breach Notice has been served and not revoked on or before the Guarantor Payment Date immediately following the Calculation Date after service of such

 

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Asset Coverage Test Breach Notice, then an Issuer Event of Default will occur and the Bond Trustee will be entitled (and, in certain circumstances may be required) to serve an Issuer Acceleration Notice. Following service of an Issuer Acceleration Notice, the Bond Trustee will be required to serve a Notice to Pay on the Guarantor.

For the purposes hereof:

“Asset Coverage Test” = ACT Asset Value – ACT Liability Value

“ACT Asset Value” = A + B + C + D + E – F

where:

 

A =

the lower of (1) and (2):

 

(1)

the sum of the LTV Adjusted Loan Balance of each Loan in the Portfolio, net of Adjustments; and

 

(2)

the sum of the Asset Percentage Adjusted Loan Balance of each Loan in the Portfolio, net of Adjustments

 

B =

Principal Receipts up to the related Calculation Date not otherwise applied on such Calculation Date

 

C =

the aggregate Cash Capital Contributions made by Partners or proceeds advanced under the Intercompany Loan Agreement or proceeds from any sale of Eligible Loans or other cash exclusive of Revenue Receipts up to the related Calculation Date

 

D =

the outstanding principal amount of any Substitution Assets

 

E =

the amount credited to the Reserve Fund balance and/or amount credited to the Pre-Maturity Liquidity Ledger, as applicable

 

F =

the product of:

 

(1)

the weighted average remaining maturity of all outstanding covered bonds (in years and, where less than a year, deemed to be a year);

 

(2)

the Principal Amount Outstanding of all covered bonds; and

 

(3)

the Negative Carry Factor

“LTV Adjusted Loan Balance” = the lower of (1) and (2):

 

(1)

the True Loan Balance of the relevant Loan; and

 

(2)

if such Loan is a Performing Eligible Loan, 80% of the Market Value of the related Property or, if such loan is not a Performing Eligible Loan, zero

 

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“Asset Percentage Adjusted Loan Balance” = the Asset Percentage x the lower of (1) and (2):

 

(1)

the True Loan Balance of the relevant Loan; and

 

(2)

if such Loan is a Performing Eligible Loan, the Market Value of the related Property or, if such loan is not a Performing Eligible Loan, zero

“Performing Eligible Loans” = Eligible Loans that are less than three months in arrears

“Adjustments” = the sum of:

 

(1)

the LTV Adjusted Loan Balance or Asset Percentage Adjusted Loan Balance (as the case may be) of any Performing Eligible Loan in breach of the Loan Representations and Warranties or otherwise subject to the Seller’s repurchase obligation (but yet to be repurchased) under the Mortgage Sale Agreement; and

 

(2)

financial losses (yet to be recompensed) resulting from any breach by the Seller of any other material warranty in the Mortgage Sale Agreement or from any breach by the Servicer of a material term of the Servicing Agreement

“True Loan Balance” = sum of:

 

(1)

the outstanding loan balance of the relevant Loan; and

 

(2)

all arrears of interest and accrued interest in respect of the relevant Loan

“Asset Percentage” = As determined below

“Negative Carry Factor” =

 

(1)

if the weighted average margin of the interest rate payable on the outstanding covered bonds relative to the interest rate receivable on the Portfolio is less than or equal to 0.1% per annum, then 0.5%; and

 

(2)

if the weighted average margin of the interest rate payable on the outstanding covered bonds relative to the interest rate receivable on the Portfolio is greater than 0.1% per annum, then the sum of (x) 0.5% and (y) the weighted average margin of the interest rate payable on the outstanding covered bonds less 0.1 %,

unless the interest rate risk represented by the weighted average margin of the interest rate payable on the outstanding covered bonds relative to the interest rate receivable on the Portfolio is addressed or mitigated by the Interest Rate Swap Agreement, whereupon the Negative Carry Factor will be nil

“ACT Liability Value” = the nominal amount of covered bond liabilities outstanding in Canadian Dollars (with currency transaction undertaken using or at foreign exchange rates reflected in the related Covered Bond Swap Agreement)

 

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The “Asset Percentage” will be determined as follows:

On or prior to the Guarantor Payment Date immediately following the Calculation Date falling in February, May, August and November of each year, and on such other date as the Limited Partner may request following the date on which the Limited Partner is required to assign the Interest Rate Swap Agreement to a third party (each such date a “Cash Flow Model Calculation Date”), the Managing GP (or the Cash Manager on its behalf) will determine the percentage figure selected by it as the Asset Percentage based on such methodologies as the Rating Agencies may prescribe from time to time (to ensure sufficient credit enhancement for the Covered Bond Guarantee will be maintained) for the Portfolio based on the value of the Loans and their Related Security in the Portfolio as at the Calculation Date immediately preceding the Cash Flow Model Calculation Date as a whole or on the basis of a sample of Randomly Selected Loans (as described below) in the Portfolio, such calculations to be made on the same basis throughout unless the Rating Agency Condition has been satisfied in respect thereof.

The Asset Percentage will from time to time be adjusted in accordance with the various methodologies of the Rating Agencies to ensure that sufficient credit enhancement for the Covered Bond Guarantee will be maintained.

The Managing GP (or the Cash Manager on its behalf) will, or will use all reasonable efforts to cause one or more Rating Agencies to, determine the Asset Percentage at least two days prior to the Guarantor Payment Date following the Cash Flow Model Calculation Date and the Asset Percentage so determined will be the lowest percentage so determined by any of the Rating Agencies in the manner set forth above and will apply to any calculations in respect of the Calculation Period ending on such Cash Flow Model Calculation Date and each Calculation Period thereafter to but excluding the last day of the following Calculation Period ending on a Cash Flow Model Calculation Date. To the extent a Rating Agency does not respond to a request for a newly-determined Asset Percentage, the Asset Percentage last determined by such Rating Agency will continue to be the applicable percentage with respect to such Rating Agency.

The Asset Percentage will at all times be less than or equal to [95]%, as determined in accordance with the Guarantor Agreement, provided that the Asset Percentage will not be less than [80]% unless otherwise agreed by the Bank (and following an Issuer Event of Default, the Guarantor for the purposes of making certain determinations in respect of the Intercompany Loan). Any increase in the maximum Asset Percentage will be deemed to be a material amendment to the Trust Deed and will require satisfaction of the Rating Agency Condition.

“Randomly Selected Loans” means Loans and, if applicable, their Related Security, in the Portfolio, selected in accordance with the terms of the Guarantor Agreement on a basis that (i) such Loans would not, or would not reasonably be expected to, adversely affect the interests of the covered bondholders, and (ii) such Loans are not designed to favor the selection of any identifiable class or type or quality of Loans and their Related Security over all Loans and their Related Security in the Portfolio.

 

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Amortization Test

The Guarantor must ensure that as of each Calculation Date following an Issuer Event of Default that is continuing, the Amortization Asset Value will be in an amount at least equal to the Amortization Liability Value as calculated as of the relevant Calculation Date.

If on any Calculation Date following an Issuer Event of Default that is continuing, the Amortization Asset Value is less than the Amortization Liability Value as calculated as of the relevant Calculation Date, then the Amortization Test will be deemed to be breached and a Guarantor Event of Default will occur. The Guarantor or the Cash Manager, as the case may be, will immediately notify the Partners, CMHC and the Bond Trustee of any breach of the Amortization Test.

“Amortization Test” = Amortization Asset Value – Amortization Liability Value

“Amortization Asset Value” = A + B + C – D

where:

 

A =

the aggregate Amortization True Loan Balance of each Loan in the Portfolio:

 

B =

the amount of any cash standing to the GDA Account (exclusive of any Revenue Receipts up to the Calculation Date not otherwise applied)

 

C =

the outstanding principal amount of any Substitution Assets

 

D =

the product of:

 

(1)

the weighted average remaining maturity of all outstanding covered bonds (in years and, where less than a year, deemed to be a year);

 

(2)

the Principal Amount Outstanding of all covered bonds; and

 

(3)

the Negative Carry Factor

“Amortization True Loan Balance” = the lower of (1) and (2)

 

(1)

the True Loan Balance of the relevant Loan; and

 

(2)

if such Loan is a Performing Eligible Loan, 80% of the Market Value of the related Property, or if such Loan is not a Performing Eligible Loan, zero

“Negative Carry Factor” =

 

(1)

if the weighted average margin of the interest rate payable on the outstanding covered bonds relative to the interest rate receivable on the Portfolio is less than or equal to 0.1% per annum, then 0.5%; and

 

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(2)

if the weighted average margin of the interest rate payable on the outstanding covered bonds relative to the interest rate receivable on the Portfolio is greater than 0.1% per annum, then the sum of (x) 0.5% and (y) the weighted average margin of the interest rate payable on the outstanding covered bonds less 0.1%,

unless the interest rate risk represented by the weighted average margin of the interest rate payable on the outstanding covered bonds relative to the interest rate receivable on the Portfolio is addressed or mitigated by the Interest Rate Swap Agreement whereupon the Negative Carry Factor will be nil

“Amortization Liability Value” = the nominal amount of covered bond liabilities outstanding in Canadian Dollars (with currency translations undertaken using or at foregoing exchange rates reflected in the related Covered Bond Swap Agreement or, to the extent the foreign exchange risk of a non-Canadian Dollar denominated covered bond liability is not or no longer the subject of (or otherwise addressed or mitigated by) a Covered Bond Swap Agreement (by reason of termination or otherwise) end of day spot foreign exchange rates).

Valuation Calculation

The “Valuation Calculation” is equal to the VC Asset Value (as defined below) minus the Canadian Dollar Equivalent of the Trading Value of the aggregate Principal Amount Outstanding of the covered bonds as calculated on the relevant Calculation Date. For greater certainty, references in this Schedule to “immediately preceding Calculation Date” and “previous Calculation Date” are to the Calculation Period ending on the Calculation Date.

For the purposes of the Valuation Calculation, the “VC Asset Value” means the amount calculated as at each Calculation Date as follows:

A + B + C + D + E + F

where:

A    =    the aggregate “LTV Adjusted Loan Present Value” of (i) each Loan that is a Performing Eligible Loan, which will be the lower of (1) the Present Value of the relevant Loan on such Calculation Date, and (2) 80% multiplied by the Latest Valuation relating to that Loan, and (ii) each Loan that is not a Performing Eligible Loan, which will be equal to zero

minus

the aggregate sum of the following deemed reductions to the aggregate LTV Adjusted Loan Present Value of the Performing Eligible Loans in the Portfolio if any of the following occurred during the previous Calculation Period:

(1) a Loan or its Related Security was, in the immediately preceding Calculation Period, in breach of the Loan Representations and Warranties contained in the Mortgage Sale Agreement or subject to any other obligation of the Seller to repurchase the relevant Loan and its Related Security, and in each case the Seller has not repurchased the Loan or Loans of the relevant borrower and its or their Related Security to the extent required by

 

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the terms of the Mortgage Sale Agreement. In this event, the aggregate LTV Adjusted Loan Present Value of the Loans in the Portfolio on such Calculation Date will be deemed to be reduced by an amount equal to the LTV Adjusted Loan Present Value of the relevant Loan or Loans on such Calculation Date of the relevant borrower; and/or

(2) the Seller, in any preceding Calculation Period, was in breach of any other material warranty under the Mortgage Sale Agreement and/or the Servicer was, in any preceding Calculation Period, in breach of a material term of the Servicing Agreement. In this event, the aggregate LTV Adjusted Loan Present Value of the Loans in the Portfolio on such Calculation Date will be deemed to be reduced by an amount equal to the resulting financial loss incurred by the Guarantor in the immediately preceding Calculation Period (such financial loss to be calculated by the Cash Manager without double counting and to be reduced by any amount paid (in cash or in kind) to the Guarantor by the Seller to indemnify the Guarantor for such financial loss);

B    =    the aggregate amount of any Principal Receipts on the Loans and their Related Security up to such Calculation Date (as recorded in the Principal Ledger) which have not been applied as at such Calculation Date to acquire further Loans and their Related Security or otherwise applied in accordance with the Priorities of Payments of the Guarantor Agreement and/or the other Transaction Documents;

C    =    the aggregate amount of (i) any Cash Capital Contributions made by the Partners (as recorded in the Capital Account Ledger for each Partner of the Guarantor), (ii) proceeds advanced under the Intercompany Loan Agreement or (iii) proceeds from any sale of Selected Loans which, in each case, have not been applied as at such Calculation Date to acquire further Loans and their Related Security or otherwise applied in accordance with the Priorities of Payments and/or the other Transaction Documents;

D    =    the Trading Value of any Substitution Assets;

E    =    the balance, if any, of the Reserve Fund and the amounts credited to the Pre-Maturity Liquidity Ledger, as applicable; and

F    =    the Trading Value of the Swap Collateral, if applicable.

“Trading Value” = The value determined with reference to one of the methods set forth in (a) through (f) below which can reasonably be considered the most accurate indicator of institutional market value in the circumstances:

 

(a)

the last selling price;

 

(b)

the average of the high and low selling price on the calculation date;

 

(c)

the average selling price over a given period of days (not exceeding 30) preceding the calculation date;

 

(d)

the close of day bid price on the calculation date (in the case of an asset);

 

(e)

the close of day ask price on the calculation date (in the case of a liability);

 

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(f)

such other value as may be indicated by at least two actionable quotes obtained from appropriate market participants instructed to have regard for the nature of the asset or liability, its liquidity and the current interest rate environment

plus accrued return where applicable (with currency translations undertaken using or at the average close of day foreign exchange rates posted on the Bank of Canada website for the month in relation to which the calculation is made), provided that, in each case, the methodology selected, the reasons therefor and the determination of value pursuant to such selected methodology will be duly documented.

Sale of Selected Loans following a breach of the Pre-Maturity Test

The Pre-Maturity Test will be breached if one or more Rating Agencies downgrades the Bank’s unsecured, unsubordinated and unguaranteed debt obligations or issuer default rating, as applicable, below the Pre-Maturity Required Ratings and a Hard Bullet Covered Bond is due for repayment within a specified period of time thereafter. See “Description of the Covered Bonds—Credit Structure—Pre-Maturity Test.” If the Pre-Maturity Test is breached, the Guarantor will offer to sell Selected Loans pursuant to the terms of the Guarantor Agreement (see “—Method of sale of Portfolio assets” below), subject to:

 

(a)

any right of pre-emption of the Seller pursuant to the terms of the Mortgage Sale Agreement;

 

(b)

a Capital Contribution in Kind made by one or more of the Partners (as recorded in the Capital Account Ledger for such Partners) of certain Substitution Assets in accordance with the Guarantor Agreement with an aggregate principal amount up to the Pre-Maturity Liquidity Required Amount (which will be a credit to the Pre-Maturity Liquidity Ledger); or

 

(c)

Cash Capital Contributions made by one or more of the Partners (as recorded in the Capital Account Ledger for each applicable Partner) or proceeds advanced under the Intercompany Loan Agreement which have not been applied to acquire further Portfolio assets or otherwise applied in accordance with the Guarantor Agreement and/or the other Transaction Documents with an aggregate principal amount up to the Pre-Maturity Liquidity Required Amount (which will be a credit to the Pre-Maturity Liquidity Ledger).

If the Bank fails to repay any Series of Hard Bullet Covered Bonds on the Final Maturity Date thereof, then following the occurrence of an Issuer Event of Default and service of a Notice to Pay on the Guarantor, funds standing to the credit of the Pre-Maturity Liquidity Ledger will be applied to repay the relevant Series of Hard Bullet Covered Bonds. Otherwise, the proceeds will be applied as set out in “Description of the Covered Bonds—Credit Structure—Pre-Maturity Test” above.

Sale of Selected Loans after a Demand Loan Repayment Event has occurred or the Bank has otherwise demanded that the Demand Loan be repaid

If, prior to the service of an Asset Coverage Test Breach Notice or a Notice to Pay, a Demand Loan Repayment Event has occurred or the Bank has demanded that the Demand Loan be repaid, the Guarantor may (a) sell Selected Loans in accordance with the Guarantor

 

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Agreement (see “—Method of sale of Portfolio assets” below), subject to the rights of pre-emption enjoyed by the Seller to purchase the Portfolio assets pursuant to the terms of the Mortgage Sale Agreement, or (b) make a Payment in Kind in accordance with the terms of the Intercompany Loan Agreement. Any such sale will be subject to the condition that the Asset Coverage Test is satisfied after the receipt of the proceeds of such sale and repayment, after giving effect to such repayment.

Sale of Selected Loans at any time an Asset Coverage Test Breach Notice is outstanding or a Notice to Pay has been served to the Guarantor

At any time an Asset Coverage Test Breach Notice is outstanding or a Notice to Pay has been served to the Guarantor, but prior to service of a Guarantor Acceleration Notice on the Guarantor, the Guarantor will be obliged to sell Selected Loans in accordance with the Guarantor Agreement (see “—Method of sale of Portfolio assets” below), subject to the rights of pre-emption enjoyed by the Seller to buy the Portfolio assets pursuant to the terms of the Mortgage Sale Agreement and subject to additional advances on the Intercompany Loan and any Cash Capital Contribution made by the Limited Partner. The proceeds from any such sale or refinancing will be credited to the GDA Account and applied as set out in the Priorities of Payments (see “Cashflows” below).

Method of sale of Portfolio assets

If the Guarantor is required to sell Selected Loans to Purchasers following a breach of the Pre-Maturity Test, the occurrence of a Demand Loan Repayment Event, the Demand Loan being demanded by the Bank, the service of an Asset Coverage Test Breach Notice (if not revoked) or a Notice to Pay on the Guarantor, the Guarantor will be required to ensure that before offering Selected Loans for sale:

 

(a)

the Loans being sold are Randomly Selected Loans (as described above); and

 

(b)

the Selected Loans have an aggregate True Loan Balance in an amount that is as close as possible to the amount calculated as follows:

 

(i)

following a Demand Loan Repayment Event or the Demand Loan being demanded by the Bank but prior to service of an Asset Coverage Test Breach Notice, such amount that would ensure that, if the Selected Loans were sold at their True Loan Balance, the Demand Loan as calculated on the date of the demand could be repaid, subject to satisfaction of the Asset Coverage Test; or

 

(ii)

following the service of an Asset Coverage Test Breach Notice (but prior to service of a Notice to Pay on the Guarantor), such amount that would ensure that, if the Selected Loans were sold at their True Loan Balance, the Asset Coverage Test would be satisfied as at the next Calculation Date taking into account the payment obligations of the Guarantor on the Guarantor Payment Date following that Calculation Date (assuming for this purpose that the Asset Coverage Test Breach Notice is not revoked on the next Calculation Date); or

 

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(iii)

following a breach of the Pre-Maturity Test or service of a Notice to Pay on the Guarantor:

N x A/B

where:

“N” is an amount equal to

 

(x)

in respect of Selected Loans being sold following a breach of the Pre-Maturity Test, the Pre-Maturity Liquidity Required Amount less amounts standing to the credit of the Pre-Maturity Liquidity Ledger; or

 

(y)

in respect of Selected Loans being sold following service of a Notice to Pay, the Canadian Dollar Equivalent of the Required Redemption Amount of the Earliest Maturing Covered Bonds less amounts standing to the credit of the Guarantor Accounts and the principal amount of any Substitution Assets (excluding all amounts to be applied on the next following Guarantor Payment Date to repay higher ranking amounts in the Guarantee Priorities of Payments and those amounts that are required to repay any Series of covered bonds which mature prior to or on the same date as the relevant Series of covered bonds);

“A” is an amount equal to the True Loan Balance of all the Loans and their Related Security in the Portfolio; and

“B” is an amount equal to the Canadian Dollar Equivalent of the Required Redemption Amount in respect of each Series of covered bonds then outstanding less the Canadian Dollar Equivalent of the Required Redemption Amount in respect of each Series of covered bonds then outstanding which has been provided for in cash.

“Required Redemption Amount” is an amount, in respect of a Series of covered bonds, equal to the product of (i) the Principal Amount Outstanding of the relevant Series of covered bonds multiplied by (ii) the sum of 1 plus the Negative Carry Factor multiplied by (iii) the quotient of the number of days to maturity of the relevant Series of covered bonds divided by 365.

The Guarantor will offer the Selected Loans for sale to Purchasers for the best price reasonably available but in any event:

 

(a)

following (i) a Demand Loan Repayment Event, the Demand Loan being demanded by the Bank or (ii) the service of an Asset Coverage Test Breach Notice (but prior to the service of a Notice to Pay on the Guarantor), in each case, for an amount not less than the True Loan Balance of the Loans;

 

(b)

following a breach of the Pre-Maturity Test or service of a Notice to Pay on the Guarantor, for an amount not less than the Adjusted Required Redemption Amount; and

 

(c)

at any other time, for an amount not less than the Fair Market Value of such Selected Loans.

 

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Following the service of a Notice to Pay on the Guarantor, if the Selected Loans have not been sold (in whole or in part) in an amount equal to the Adjusted Required Redemption Amount by the date which is six months prior to, as applicable, if the covered bonds are not subject to an Extended Due for Payment Date in respect of the Covered Bond Guarantee, the Final Maturity Date or, if the covered bonds are subject to an Extended Due for Payment Date in respect of the Covered Bond Guarantee, the Extended Due for Payment Date in respect of the Earliest Maturing Covered Bonds (after taking into account all payments, provisions and credits to be made in priority thereto), or the Final Maturity Date of the relevant Series of Hard Bullet Covered Bonds in respect of a sale in connection with the Pre-Maturity Test, then the Guarantor will offer the Selected Loans for sale for the best price reasonably available notwithstanding that such amount may be less than the Adjusted Required Redemption Amount.

The Guarantor will through a tender process appoint a portfolio manager of recognized standing on a basis intended to incentivize the portfolio manager to achieve the best price for the sale of the Portfolio assets (if such terms are commercially available in the market) and to advise it in relation to the sale of the Portfolio assets to Purchasers (except where the Seller is buying the Portfolio assets in accordance with its right of pre-emption in the Mortgage Sale Agreement). The terms of the agreement giving effect to the appointment in accordance with such tender will be approved by the Bond Trustee.

In respect of any sale or refinancing (as applicable) of Selected Loans at any time an Asset Coverage Test Breach Notice is outstanding, there has been a breach of the Pre-Maturity Test, or a Notice to Pay has been served to the Guarantor, the Guarantor will instruct the portfolio manager to use all reasonable efforts to procure that Selected Loans are sold or refinanced (as applicable) as quickly as reasonably practicable (in accordance with the recommendations of the portfolio manager) taking into account the market conditions at that time and the scheduled repayment dates of the covered bonds and the terms of the Guarantor Agreement.

The terms of any sale and purchase agreement with respect to the sale of Selected Loans (which will give effect to the recommendations of the portfolio manager) will be subject to the prior written approval of the Bond Trustee. The Bond Trustee will not be required to release the Loans and their Related Security from the Security unless the conditions relating to the release of the Security (as described under “Security Agreement—Release of Security”, below) are satisfied.

Any such sale will not include any representations, warranties or indemnities from the Guarantor.

Following the service of a Notice to Pay on the Guarantor, if Purchasers accept the offer or offers from the Guarantor so that some or all of the Selected Loans will be sold prior to the next following Final Maturity Date or, if the covered bonds are subject to an Extended Due for Payment Date in respect of the Covered Bond Guarantee, the next following Extended Due for Payment Date in respect of the Earliest Maturing Covered Bonds, then the Guarantor will, subject to the foregoing paragraph, enter into a sale and purchase agreement with the relevant Purchasers which will require among other things a cash payment from the relevant Purchasers.

Covenants of the General Partner and Limited Partner of the Guarantor

Each of the Partners covenants that, subject to the terms of the Transaction Documents, it will not sell, transfer, convey, create or permit to arise any security interest on, create any beneficial interest in or otherwise dispose of its interest in the Guarantor without the prior written consent of the Managing GP and, while the covered bonds are outstanding, the Bond Trustee.

 

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The Guarantor covenants that it will not, save with the prior written consent of the Limited Partner (and, for so long as any covered bonds are outstanding, the consent of the Bond Trustee) or as envisaged by the Transaction Documents:

 

(a)

have an interest in a bank account;

 

(b)

have any employees, premises or subsidiaries;

 

(c)

acquire any material assets;

 

(d)

sell, exchange, deal with or grant any option, present or future right to acquire any of the assets or undertakings of the Guarantor or any interest therein or thereto;

 

(e)

enter into any contracts, agreements or other undertakings;

 

(f)

incur any indebtedness or give any guarantee or indemnity in respect of any such indebtedness;

 

(g)

create or permit to subsist any security interest over the whole or any part of the assets or undertakings, present or future of the Guarantor;

 

(h)

change the name or business of the Guarantor or do any act in contravention of, or make any amendment to, the Guarantor Agreement;

 

(i)

do any act which makes it impossible to carry on the ordinary business of the Guarantor, including winding up the Guarantor;

 

(j)

compromise, compound or release any debt due to it;

 

(k)

commence, defend, consent to a judgment, settle or compromise any litigation or other claims relating to it or any of its assets;

 

(l)

permit a person to become a general or limited partner (except in accordance with the terms of the Guarantor Agreement); or

 

(m)

consolidate or merge with another person or convey or transfer its properties or assets substantially as an entirety to any other person.

Limit on investing in Substitution Assets

At any time that no Asset Coverage Test Breach Notice is outstanding and prior to a Notice to Pay having been served to the Guarantor, the Guarantor will be permitted to hold Substitution Assets provided that the aggregate value of the Substitution Assets does not at any time exceed an amount equal to 10 percent of the aggregate value of (i) the aggregate loan balance of the Loans in the Portfolio, (ii) the face value of the Substitution Assets in the Portfolio, and (iii) all cash held by the Guarantor (subject to the Prescribed Cash Limitation), and provided that investments in Substitution Assets are made in accordance with the terms of the Cash Management Agreement and subject to the applicable Priorities of Payments.

 

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At any time an Asset Coverage Test Breach Notice is outstanding or a Covered Bond Guarantee Activation Event has occurred, the Substitution Assets held by or on behalf of the Guarantor must be sold as quickly as reasonably practicable with proceeds credited to the GDA Account, subject at all times to the Prescribed Cash Limitation.

The Guarantor may not hold cash in excess of (such limitation, the “Prescribed Cash Limitation”) (i) the amount necessary to meet its payment obligations for the immediately succeeding six months pursuant to the terms of the Transaction Documents, or (ii) such greater amount as CMHC may at its discretion permit in accordance with the Legislative Framework and the CMHC Guide; provided that to the extent that cash receipts of the Guarantor cause it to hold cash in excess of the amount in clause (i), the Guarantor will not be in breach of this covenant if it uses such excess amount to (x) purchase Loans and their Related Security for the Portfolio pursuant to the terms of the Mortgage Sale Agreement; and/or (y) to invest in Substitution Assets in an amount not exceeding the prescribed limit under the CMHC Guide; and/or (z) subject to complying with the Asset Coverage Test, to make Capital Distributions to the Limited Partner, in each case, within 31 days of receipt.

For greater certainty, amounts standing to the credit of the Pre-Maturity Liquidity Ledger and the Reserve Fund (other than, in each case, those amounts that constitute Substitution Assets) constitute cash and are subject to the Prescribed Cash Limitation. In the event that the Guarantor is required to fund the Pre-Maturity Liquidity Ledger and/or the Reserve Fund in accordance with the Transaction Documents and such funding would cause the Guarantor to hold cash in excess of the Prescribed Cash Limitation, any cash held by the Guarantor in excess of such cash standing to the credit of the Pre-Maturity Liquidity Ledger and the Reserve Fund will be used by the Guarantor in accordance with clauses (x), (y) and (z) in the immediately preceding paragraph above to ensure that the Guarantor is not in breach of the Prescribed Cash Limitation. In the event that (i) the Guarantor is in breach of the Prescribed Cash Limitation and it does not hold any cash other than the amounts it is required to hold in order to fund the Pre-Maturity Liquidity Ledger and the Reserve Fund in accordance with the Transaction Documents or (ii) a Notice to Pay has been served to the Guarantor, the Guarantor will request that CMHC, in accordance with the discretion granted to it under the Legislative Framework and the CMHC Guide, permit the Guarantor to hold such amount of cash in excess of the Prescribed Cash Limitation as may be required to allow it to comply with the Transaction Documents in the circumstances.

The Guarantor Agreement provides that, upon the occurrence of any of the following events:

 

(a)

the passing of any resolution of the directors or the shareholder of the Managing GP requiring or approving the bankruptcy, dissolution, liquidation or winding up of the Managing GP;

 

(b)

the making of any assignment for the benefit of creditors of the Managing GP, or upon the appointment of a receiver of the assets and undertaking of the Managing GP,

 

(c)

the appointment of a receiver of the assets and undertaking of the Managing GP, or

 

(d)

the occurrence of a Covered Bond Guarantee Activation Event,

 

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(each a “Managing GP Default Event”), the initial Managing GP (being BMO Covered Bond GP, Inc.) will cease to be the Managing GP of the Guarantor, and the Liquidation GP will be automatically appointed the new Managing GP without the need for consent on the part of any person.

Other Provisions

The allocation and distribution of Revenue Receipts, Principal Receipts and all other amounts received by the Guarantor is described under “Cashflows” below.

For so long as any covered bonds are outstanding, each of the Partners has agreed that it will not terminate or purport to terminate the Guarantor or institute any winding-up, administration, insolvency or other similar proceedings against the Guarantor or any of its general partners. Furthermore, each of the Partners has agreed, among other things, except as otherwise specifically provided in the Transaction Documents not to demand or receive payment of any amounts payable to such Partners by the Guarantor (or the Cash Manager on its behalf) or the Bond Trustee unless all amounts then due and payable by the Guarantor to all other creditors ranking higher in the relevant Priorities of Payments have been paid in full.

Each of the Partners will be responsible for the payment of its own tax liabilities and will be required to indemnify the other from any liabilities which they incur as a result of the relevant partner’s non-payment.

Following the appointment of a liquidator or receiver to any partner, any decisions of the Guarantor that are reserved to the Partners or a unanimous decision of the Partners in the Guarantor Agreement will be made by the Partner(s) not in liquidation or receivership only.

The Guarantor Agreement is governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.

Cash Management Agreement

The Cash Manager (initially the Bank) will provide certain cash management services to the Guarantor pursuant to the terms of the Cash Management Agreement between the Guarantor, the Cash Manager, GDA Provider, Seller and Servicer and the Bond Trustee.

The Cash Manager’s services include but are not limited to:

 

(a)

maintaining the Ledgers on behalf of the Guarantor;

 

(b)

distributing the Revenue Receipts and the Principal Receipts in accordance with the Priorities of Payments described under “Cashflows” below;

 

(c)

determining whether the Asset Coverage Test is satisfied as of each Calculation Date in accordance with the Guarantor Agreement, as more fully described under “Description of the Covered Bonds—Credit Structure—Asset Coverage Test” below;

 

(d)

determining whether the Amortization Test is satisfied as of each Calculation Date following the service of a Notice to Pay in accordance with the Guarantor Agreement, as more fully described under “Description of the Covered Bonds—Credit Structure—Amortization Test” above;

 

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(e)

preparation of Investor Reports for the covered bondholders, the Rating Agencies and the Bond Trustee; and

 

(f)

on each Canadian Business Day, determining whether the Pre-Maturity Test for each Series of Hard Bullet Covered Bonds, if any, is satisfied as more fully described under “Description of the Covered Bonds—Credit Structure—Pre-Maturity Test” above.

Under the Cash Management Agreement, the Cash Manager represents and warrants to the Guarantor and the Bond Trustee that (i) it possesses the necessary experience, qualifications, facilities and other resources to perform its responsibilities under the Cash Management Agreement and the other Transaction Documents to which it is a party and it will devote all due skill, care and diligence to the performance of its obligations and the exercise of its discretions thereunder; (ii) it is rated at or above each of the Cash Manager Required Ratings by each of the Rating Agencies; (iii) it is and will continue to be in regulatory good standing; (iv) it is and will continue to be in material compliance with its internal policies and procedures relevant to the services to be provided by it pursuant to the Cash Management Agreement and the other Transaction Documents to which it is party; and (v) it is and will continue to be in material compliance with all laws, regulations and rules applicable to it in relation to the services provided by it pursuant to the Cash Management Agreement and the other Transaction Documents to which it is a party.

In the event of a Rating Agency withdrawing or downgrading the unsecured, unsubordinated and unguaranteed debt obligations or issuer default rating of the Cash Manager by one or more Rating Agency below any of the Cash Management Deposit Ratings or the occurrence of a Covered Bond Guarantee Activation Event, the Cash Manager will be required to direct the Servicer to deposit all Revenue Receipts and Principal Receipts received by the Servicer directly into the GDA Account.

In the event of a Rating Agency withdrawing or downgrading the unsecured, unsubordinated and unguaranteed debt obligations or issuer default rating of the Cash Manager below any of the Cash Manager Required Ratings, the Guarantor and the Bond Trustee will, in certain circumstances, each have the right to terminate the appointment of the Cash Manager, and will be obligated to terminate the appointment of the Cash Manager if its ratings fall below the Cash Manager Required Ratings at any time that the Guarantor is not Independently Controlled and Governed. Upon any such termination, the Guarantor will appoint a substitute (the identity of which will be subject to the Bond Trustee’s written approval). Any substitute cash manager will have substantially the same rights and obligations as the Cash Manager (although the fee payable to the substitute cash manager may be higher).

Pursuant to the Cash Management Agreement, for so long as the Bank or an affiliate of the Bank is the Cash Manager no fee will be payable to the Cash Manager for its services thereunder. Any substitute Cash Manager that is not an affiliate of the Bank will be entitled to such fee as may be agreed between such substitute Cash Manager and the Guarantor, which fee will be paid by the Guarantor pursuant to the applicable Priorities of Payments.

The Cash Management Agreement is governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.

 

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Interest Rate Swap Agreement

To provide a hedge against possible variances in the rates of interest payable on the Portfolio assets and related amounts in the Portfolio (which may, for instance, include variable rates of interest or fixed rates of interest) and the interest amounts payable on the Intercompany Loan and (following the Covered Bond Swap Effective Date) the Covered Bond Swap Agreement, the Guarantor will enter into the Interest Rate Swap Agreement with the Interest Rate Swap Provider (initially the Bank). The Guarantor and the Interest Rate Swap Provider will agree to swap the amount of interest received by the Guarantor from borrowers and related amounts in the Portfolio in exchange for an amount sufficient to pay the interest payable on the Intercompany Loan plus a certain amount for expenses. Amounts payable under the Interest Rate Swap Agreement will be in Canadian Dollars.

The Interest Rate Swap Agreement will terminate (unless terminated earlier by an Interest Rate Swap Early Termination Event) on the date on which the notional amount thereunder is reduced to zero.

The Interest Rate Swap Agreement may also be terminated in certain other circumstances (each referred to as an “Interest Rate Swap Early Termination Event”), including:

 

•

at the option of any party to the Interest Rate Swap Agreement, if there is a failure by the other party to pay any amounts due under the Interest Rate Swap Agreement, however, no such failure to pay by the Guarantor will entitle the Interest Rate Swap Provider to terminate the Interest Rate Swap Agreement, if such failure is due to the assets available at such time to the Guarantor being insufficient to make the required payment in full;

 

•

at the option of the Guarantor, if the Interest Rate Swap Provider is the Bank and an Issuer Event of Default has occurred which has resulted in the covered bonds becoming due and payable under their respective terms;

 

•

at the option of the Guarantor, in the event that (i) the short-term unsecured, unsubordinated and unguaranteed debt obligations or, respectively, the long-term unsecured, unsubordinated and unguaranteed debt obligations of the Interest Rate Swap Provider or any credit support provider, as applicable, cease to be rated at least P-1 or A2, respectively, by Moody’s, or, if the short-term unsecured, unsubordinated and unguaranteed debt obligations of any such person do not have a rating assigned by Moody’s, the long-term unsecured, unsubordinated and unguaranteed debt obligations of such person cease to be rated at least A1 by Moody’s, (ii) the short-term issuer default rating and the long-term issuer default rating of the Interest Rate Swap Provider or any credit support provider, as applicable, cease to be at least F1 and A, respectively, by Fitch, or (iii) the short-term unsecured, unsubordinated and unguaranteed debt obligations or, respectively, the long-term unsecured, unsubordinated and unguaranteed debt obligations of the Interest Rate Swap Provider or any credit support provider, as applicable, cease to be rated at least R-1(middle) or A (high), respectively, by DBRS, (each such event, an “Initial Downgrade Trigger Event”) and the Interest Rate Swap Provider does not provide credit support to the Guarantor within 10 Canadian Business Days of the occurrence of such Initial Downgrade Trigger Event pursuant to the terms of the applicable credit support annex, or arrange for its obligations under the Interest Rate Swap Agreement to be guaranteed by, or transferred to, an entity with rating(s) required by the relevant Rating Agencies;

 

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•

at the option of the Guarantor, in the event that (i) the short-term unsecured, unsubordinated and unguaranteed debt obligations or, respectively, the long-term unsecured, unsubordinated and unguaranteed debt obligations of the Interest Rate Swap Provider or any credit support provider, as applicable, cease to be rated at least P-2 or A3, respectively, by Moody’s, (ii) the short-term issuer default rating and the long-term issuer default rating of the Interest Rate Swap Provider or any credit support provider, as applicable, cease to be at least F3 and BBB-, respectively, by Fitch, or (iii) the short-term unsecured, unsubordinated and unguaranteed debt obligations or, respectively, the long-term unsecured, unsubordinated and unguaranteed debt obligations of the Interest Rate Swap Provider or any credit support provider, as applicable, cease to be rated at least R-2 (high) or BBB (high), respectively, by DBRS, (each such event, a “Subsequent Downgrade Trigger Event,” and together with the Initial Downgrade Trigger Events, the “Downgrade Trigger Events”) and the Interest Rate Swap Provider does not arrange for its obligations under the Interest Rate Swap Agreement to be guaranteed by, or transferred to, an entity with rating(s) required by the relevant Rating Agencies, and does not provide additional credit support to the Guarantor within 10 Canadian Business Days of the occurrence of such Subsequent Downgrade Trigger Event pursuant to the terms of the applicable credit support annex; and

 

•

upon the occurrence of the insolvency of the Interest Rate Swap Provider, or any credit support provider and certain insolvency-related events in respect of the Guarantor, or the merger of the Interest Rate Swap Provider without an assumption of the obligations under the Interest Rate Swap Agreement,

provided, however, that if, at any time, the Guarantor (a) is Independently Controlled and Governed, the Guarantor has the discretion, but is not required to, (i) waive any requirement of the Interest Rate Swap Provider to provide credit support, obtain an eligible guarantee or replace itself upon the occurrence of a Downgrade Trigger Event, and (ii) refrain from forthwith terminating the Interest Rate Swap Agreement or finding a replacement Interest Rate Swap Provider, in each case, upon the occurrence of an event of default or additional termination event caused solely by the Interest Rate Swap Provider, and (b) is not Independently Controlled and Governed, the Guarantor will not have the rights set out under clause (a)(i) and (a)(ii) of this paragraph.

Upon the termination of the Interest Rate Swap Agreement pursuant to an Interest Rate Swap Early Termination Event, the Guarantor or the Interest Rate Swap Provider may be liable to make a termination payment to the other in accordance with the provisions of the Interest Rate Swap Agreement.

Swap Collateral Excluded Amounts, if applicable, will be paid to the Interest Rate Swap Provider directly and not via the Priorities of Payments.

The notional amount of the Interest Rate Swap Agreement will generally be equal to the aggregate value of the Portfolio, and will be adjusted to correspond to any sale of Portfolio assets following each of a Demand Loan Repayment Event, the Demand Loan being demanded by the Bank, breach of the Pre-Maturity Test, service of an Asset Coverage Test Breach Notice and service of a Notice to Pay and swap termination payments may be due and payable in accordance with the terms of the Interest Rate Swap Agreement as a consequence thereof.

 

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If withholding taxes are imposed on payments made by the Interest Rate Swap Provider under the Interest Rate Swap Agreement, the Interest Rate Swap Provider will always be obliged to gross up these payments. If withholding taxes are imposed on payments made by the Guarantor to the Interest Rate Swap Provider under the Interest Rate Swap Agreement, the Guarantor will not be obliged to gross up those payments.

All of the interest and obligations of the Interest Rate Swap Provider under the Interest Rate Swap Agreement may be transferred by it to a replacement swap counterparty upon the Interest Rate Swap Provider providing five Canadian Business Days’ prior written notice to Guarantor and the Bond Trustee, provided that (i) such replacement swap counterparty has the rating(s) required by the relevant Rating Agencies (or the obligations of such replacement swap counterparty under the Interest Rate Swap Agreement are guaranteed by an entity having the rating(s) required by the relevant Rating Agencies), (ii) as of the date of such transfer, such replacement swap counterparty will not be required to withhold or deduct any taxes under the Interest Rate Swap Agreement as a result of such transfer, (iii) no termination event or event of default will occur under the Interest Rate Swap Agreement as a result of such transfer, (iv) no additional amount will be payable by the Guarantor under the Interest Rate Swap Agreement as a result of such transfer, (v) the Rating Agency Condition will have been satisfied, and (vi) such replacement swap counterparty enters into documentation substantially identical to the Interest Rate Swap Agreement. The Bond Trustee’s consent to such transfer is required if such transfer is obligatory due to a ratings downgrade, provided that such consent will be given if such replacement swap counterparty has the rating(s) required by the relevant Rating Agencies and the Rating Agency Condition has been satisfied.

The Interest Rate Swap Agreement will be in the form of an ISDA Master Agreement, including a schedule and confirmation thereto and credit support annex. Under the Interest Rate Swap Agreement, the Guarantor makes the following representations with respect to itself and/or the Interest Rate Swap Agreement, as applicable, and the Interest Rate Swap Provider makes the following representations (other than those in (x)) with respect to itself and/or the Interest Rate Swap Agreement: (i) that it is duly organized and validly existing, (ii) that it has the power and authority to enter into the Interest Rate Swap Agreement, (iii) that it is not in violation or conflict with any applicable law, its constitutional documents, any court order or judgment or any contractual restriction, (iv) it has obtained all necessary consents, (v) its obligations under the Interest Rate Swap Agreement are valid and binding, (vi) no event of default, potential event of default or termination event has occurred and is continuing under the Interest Rate Swap Agreement, (vii) there is no pending or, to its knowledge, any threatened litigation which is likely to affect its ability to perform under the Interest Rate Swap Agreement, (viii) all information furnished in writing is true, accurate and complete in every material respect, (ix) all payments will be made without any withholding and deduction, (x) that it is a “Canadian partnership” under the ITA and a limited partnership organized under the laws of the Province of Ontario, (xi) that it is entering into the agreement as principal and not as agent, and (xii) that it is not relying on the other party for any investment advice, that is capable of assessing the merits of and understanding the risks of entering into the relevant transaction and that the Interest Rate Swap Provider is not acting as fiduciary to it.

Under the Interest Rate Swap Agreement, the Guarantor’s obligations will be limited in recourse to the Portfolio.

The Interest Rate Swap Agreement will be governed by, and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.

 

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Covered Bond Swap Agreement

To provide a hedge against currency risks in respect of amounts received by the Guarantor under the Interest Rate Swap Agreement and amounts payable in respect of its obligations under the Covered Bond Guarantee, the Guarantor will enter into the Covered Bond Swap Agreement with the Covered Bond Swap Provider (initially the Bank), and may enter into a new ISDA Master Agreement, schedule and confirmation(s) and credit support annex, if applicable, for each Tranche and/or Series of covered bonds issued at the time such covered bonds are issued. The Covered Bond Swap Provider and the Guarantor will agree to swap Canadian Dollar floating rate amounts received by the Guarantor under the Interest Rate Swap Agreement (described above) into the exchange rate specified in the Covered Bond Swap Agreement relating to the relevant Tranche or Series of covered bonds to hedge certain currency risks in respect of amounts received by the Guarantor under the Interest Rate Swap Agreement and amounts payable or that may become payable in respect of its obligations under the Covered Bond Guarantee. No cash flows will be exchanged under the Covered Bond Swap Agreement unless and until the Covered Bond Swap Effective Date has occurred.

If prior to (i) the Final Maturity Date in respect of the relevant Series or Tranche of covered bonds, or (ii) any Interest Payment Date or the Extended Due for Payment Date following a deferral of the Original Due for Payment Date to the Extended Due for Payment Date by the Guarantor pursuant to Condition 6.1 (Final redemption) (if an Extended Due for Payment Date is specified as applicable in the prospectus supplement for a Series of covered bonds and the payment of the Final Redemption Amount or any part of it by the Guarantor under the Covered Bond Guarantee is deferred pursuant to Condition 6.1 (Final redemption)) of the Terms and Conditions of the Covered Bonds, the Guarantor notifies the Covered Bond Swap Provider (pursuant to the terms of the Covered Bond Swap Agreement) of the amount in the specified currency to be paid by such Covered Bond Swap Provider on such Final Maturity Date or Interest Payment Date thereafter (such amount being equal to the Final Redemption Amount or the relevant portion thereof payable by the Guarantor on such Final Maturity Date or Interest Payment Date under the Covered Bond Guarantee in respect of the relevant Series or Tranche of covered bonds), then the Covered Bond Swap Provider will pay the Guarantor such amount and the Guarantor will pay the Covered Bond Swap Provider the Canadian Dollar Equivalent of such amount. Further, if on any day an Early Redemption Amount is payable pursuant to Condition 9.2 (Guarantor Events of Default) of the Terms and Conditions of the Covered Bonds, the Covered Bond Swap Provider will pay the Guarantor such Early Redemption Amount (or the relevant portion thereof) and the Guarantor will pay the Covered Bond Swap Provider the Canadian Dollar Equivalent thereof, following which the notional amount of the Covered Bond Swap Agreement will reduce accordingly.

The Covered Bond Swap Agreement will (unless terminated earlier by a Covered Bond Swap Early Termination Event) terminate in respect of any relevant Tranche or Series of covered bonds, on the earlier of:

 

(a)

the Final Maturity Date for, or if earlier, the date of redemption in whole of, such Series of covered bonds or, if the Guarantor notifies the Covered Bond Swap Provider, prior to the Final Maturity Date for such Tranche or Series of covered bonds, of the inability of the Guarantor to pay in full Guaranteed Amounts corresponding to the Final Redemption Amount in respect of such Tranche or Series of covered bonds, the final Interest Payment Date on which an amount representing the Final Redemption Amount for such Tranche or Series of covered bonds is paid (but in any event not later than the Extended Due for Payment Date for such Tranche or Series of covered bonds); and

 

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(b)

the date designated therefor by the Bond Trustee and notified to the Covered Bond Swap Provider and the Guarantor for purposes of realizing the Security in accordance with the Security Agreement and distributing the proceeds therefrom in accordance with the Post-Enforcement Priorities of Payments following the enforcement of the Security pursuant to Condition 9.3 (Enforcement) of the Terms and Conditions of the Covered Bonds.

The Covered Bond Swap Agreement may also be terminated in certain other circumstances (each referred to as a “Covered Bond Swap Early Termination Event”), including:

 

•

at the option of any party to the Covered Bond Swap Agreement, if there is a failure by the other party to pay any amounts due under the Covered Bond Swap Agreement, however, no such failure to pay by the Guarantor will entitle the Covered Bond Swap Provider to terminate the Covered Bond Swap Agreement, if such failure is due to the assets available at such time to the Guarantor being insufficient to make the required payment in full);

 

•

at the option of the Guarantor, if the Covered Bond Swap Provider is the Bank and an Issuer Event of Default has occurred which has resulted in the covered bonds becoming due and payable under their respective terms;

 

•

an Initial Downgrade Trigger Event has occurred and the Covered Bond Swap Provider does not provide credit support to the Guarantor within 10 Canadian Business Days of the occurrence of such Initial Downgrade Trigger Event pursuant to the terms of the applicable credit support annex, or arrange for its obligations under the Covered Bond Swap Agreement to be guaranteed by, or transferred to, an entity with rating(s) required by the relevant Rating Agencies;

 

•

at the option of the Guarantor, a Subsequent Downgrade Trigger Event has occurred and the Covered Bond Swap Provider does not arrange for its obligations under the Covered Bond Swap Agreement to be guaranteed by, or transferred to, an entity with rating(s) required by the relevant Rating Agencies, and does not provide additional credit support to the Guarantor within 10 Canadian Business Days of the occurrence of such Subsequent Downgrade Trigger Event pursuant to the terms of the applicable credit support annex; and

 

•

upon the occurrence of the insolvency of the Covered Bond Swap Provider or any credit support provider, and certain insolvency-related events in respect of the Guarantor or the merger of the Covered Bond Swap Provider without an assumption of the obligations under the Covered Bond Swap Agreement.

Provided, however, that if, at any time, the Guarantor (a) is Independently Controlled and Governed, the Guarantor has the discretion, but is not required to, (i) waive any requirement of the Covered Bond Swap Provider to provide credit support, obtain an eligible guarantee or replace itself upon the occurrence of a Downgrade Trigger Event, and (ii) refrain from forthwith terminating the Covered Bond Swap Agreement or finding a replacement Covered Bond Swap Provider, in each case, upon the occurrence of an event of default or additional termination event

 

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caused solely by the Covered Bond Swap Provider, and (b) is not Independently Controlled and Governed, the Guarantor will not have the rights set out under clause (a)(i) and (a)(ii) of this paragraph.

Upon the termination of the Covered Bond Swap Agreement pursuant to a Covered Bond Swap Early Termination Event, the Guarantor or the Covered Bond Swap Provider may be liable to make a termination payment to the other in accordance with the provisions of the Covered Bond Swap Agreement.

Any termination payment made by the Covered Bond Swap Provider to the Guarantor in respect of the Covered Bond Swap Agreement will first be used to the extent necessary (prior to the occurrence of a Guarantor Event of Default and service of a Guarantor Acceleration Notice) to pay a replacement Covered Bond Swap Provider to enter into a replacement Covered Bond Swap Agreement with the Guarantor, unless a replacement Covered Bond Swap Agreement has already been entered into on behalf of the Guarantor. Any premium received by the Guarantor from a replacement Covered Bond Swap Provider entering into a Covered Bond Swap Agreement will first be used to make any termination payment due and payable by the Guarantor with respect to the Covered Bond Swap Agreement, unless such termination payment has already been made on behalf of the Guarantor.

Swap Collateral Excluded Amounts, if applicable, will be paid to the Covered Bond Swap Provider directly and not via the Priorities of Payments.

All of the interest and obligations of the Covered Bond Swap Provider under the Covered Bond Swap Agreement may be transferred by it to a replacement swap counterparty upon the Covered Bond Swap Provider providing five Canadian Business Days’ prior written notice to Guarantor and the Bond Trustee, provided that (i) such replacement swap counterparty has the rating(s) required by the relevant Rating Agencies (or the obligations of such replacement swap counterparty under the Covered Bond Swap Agreement are guaranteed by an entity having the rating(s) required by the relevant Rating Agencies), (ii) as of the date of such transfer, such replacement swap counterparty will not be required to withhold or deduct any taxes under the Covered Bond Swap Agreement as a result of such transfer, (iii) no termination event or event of default will occur under the Covered Bond Swap Agreement as a result of such transfer, (iv) no additional amount will be payable by the Guarantor under the Covered Bond Swap Agreement as a result of such transfer, (v) the Rating Agency Condition will have been satisfied, and (vi) such replacement swap counterparty enters into documentation substantially identical to the Covered Bond Swap Agreement. The Bond Trustee’s consent to such transfer is required if such transfer is obligatory due to a ratings downgrade, provided that such consent will be given if such replacement swap counterparty has the rating(s) required by the relevant Rating Agencies and the Rating Agency Condition has been satisfied.

If withholding taxes are imposed on payments made by the Covered Bond Swap Provider to the Guarantor under the Covered Bond Swap Agreement, the Covered Bond Swap Provider will always be obliged to gross up those payments. If withholding taxes are imposed on payments made by the Guarantor to the Covered Bond Swap Provider under the Covered Bond Swap Agreement, the Guarantor will not be obliged to gross up those payments.

The Covered Bond Swap Agreement will be in the form of an ISDA Master Agreement, including a schedule and confirmation and credit support annex, if applicable, in relation to each particular Tranche or Series of covered bonds, as the case may be. Under the Covered Bond

 

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Swap Agreement, the Guarantor makes the following representations with respect to itself and/or the Covered Bond Swap Agreement, as applicable, and the Covered Bond Swap Provider makes the following representations (other than those in (x)) with respect to itself and/or the Covered Bond Swap Agreement: (i) that it is duly organized and validly existing, (ii) that it has the power and authority to enter into the Covered Bond Swap Agreement, (iii) that it is not in violation or conflict with any applicable law, its constitutional documents, any court order or judgment or any contractual restriction, (iv) it has obtained all necessary consents, (v) its obligations under the Covered Bond Swap Agreement are valid and binding, (vi) no event of default, potential event of default or termination event has occurred and is continuing under the Covered Bond Swap Agreement, (vii) there is no pending or, to its knowledge, any threatened litigation which is likely to affect its ability to perform under the Covered Bond Swap Agreement, (viii) all information furnished in writing is true, accurate and complete in every material respect, (ix) all payments will be made without any withholding and deduction, (x) that it is a “Canadian partnership” under the ITA and a limited partnership organized under the laws of the Province of Ontario, (xi) that it is entering into the agreement as principal and not as agent, and (xii) that it is not relying on the other party for any investment advice, that is capable of assessing the merits of and understanding the risks of entering into the relevant transaction and that the Covered Bond Swap Provider is not acting as fiduciary to it.

Under the Covered Bond Swap Agreement, the Guarantor’s obligations will be limited in recourse to the Portfolio.

The Covered Bond Swap Agreement will be governed by, and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.

Bank Account Agreement

Pursuant to the terms of the Bank Account Agreement between the Guarantor, the Account Bank (initially the Bank), the GDA Provider (initially the Bank), the Cash Manager (initially the Bank) and the Bond Trustee, the Guarantor will maintain with the Account Bank the Transaction Account (to the extent maintained), into which amounts may be deposited by the Guarantor prior to their transfer to the GDA Account. Funds standing to the credit of the Transaction Account will be transferred to the GDA Account on each Guarantor Payment Date and applied by the Cash Manager in accordance with the Priorities of Payments described below under “Cashflows.” The Transaction Account will be operated in accordance with the Cash Management Agreement, the Guarantor Agreement, and the Security Agreement.

Under the Bank Account Agreement, the Account Bank represents and warrants to the Cash Manager, the GDA Provider, the Guarantor and the Bond Trustee on the Program Date and on each date on which an amount is credited to the Guarantor Accounts and on each Guarantor Payment Date that: (i) it is a bank listed in Schedule I to the Bank Act and duly qualified to do business in every jurisdiction where the nature of its business requires it to be so qualified, (ii) the execution, delivery and performance by it of the Bank Account Agreement (x) are within its corporate powers, (y) have been duly authorized by all necessary corporate action, and (z) do not contravene or result in a default under or conflict with (A) its charter or by-laws, (B) any law, rule or regulation applicable to it, or (C) any order, writ, judgment, award, injunction, decree or contractual obligation binding on or affecting it or its property, (iii) it is not a non-resident of Canada for purposes of the ITA, (iv) it possesses the necessary experience, qualifications, facilities and other resources to perform its responsibilities under the Transaction Documents to which it is a party, (v) it is rated at or above the Account Bank Threshold Ratings by each of the

 

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Rating Agencies, (vi) it is and will continue to be in good standing with OSFI, (vii) it is and will continue to be in material compliance with its internal policies and procedures (including risk management policies) relevant to the services to be provided by it pursuant to the Bank Account Agreement and the other Transaction Documents to which it is party, (ix) it will exercise reasonable skill and care in the performance of its obligations hereunder and the other Transaction Documents to which it is a party, and (x) it will comply with the CMHC Guide and all Transaction Documents to which it is a party and all material legal and regulatory requirements applicable to the conduct of its business so that it can lawfully attend to the performance of its obligations under the Bank Account Agreement and the other Transaction Documents to which it is a party.

If one or more Rating Agencies downgrade the unsecured, unsubordinated and unguaranteed debt obligations of the Account Bank below the Account Bank Required Ratings (as defined below), or if certain other events occur and the Account Bank is terminated, then the GDA Account and the Transaction Account (to the extent maintained) will be required to be closed and all amounts standing to the credit thereof transferred to accounts held with the Standby Account Bank.

“Account Bank Required Ratings” means the threshold ratings of (i) P-1 (in respect of Moody’s), (ii) A and F1 (in respect of Fitch), and (iii) AA (low) or R-1(middle) (in respect of DBRS), as applicable, of the unsecured, unsubordinated and unguaranteed debt obligations (or, in the case of Fitch, the issuer default rating) of the Account Bank by the Rating Agencies.

In addition to the requirement that the Guarantor Accounts be moved to the Standby Account Bank if the Account Bank breaches the Account Bank Required Ratings as described above, the Guarantor may (in the case of (i) through (iii) below) or will (in the case of (iv) through (vii) below) (in the case of each of the events below other than (vii), with the prior consent of the Bond Trustee, which consent will not be withheld unless the Bond Trustee determines that the termination of the Bank Account Agreement would be materially prejudicial to the covered bondholders) terminate the Bank Account Agreement and move the Guarantor Accounts to the Standby Account Bank if: (i) a deduction or withholding for or on account of any taxes is imposed or is likely to be imposed in respect of the interest payable on any Guarantor Account, (ii) there is a breach by the Account Bank of certain representations and warranties or a failure by the Account Bank to perform certain covenants made by it under the Bank Account Agreement, (iii) the Account Bank fails to comply with any of its other covenants and obligations under the Bank Account Agreement, which failure in the reasonable opinion of the Bond Trustee is materially prejudicial to the interests of the covered bondholders and such failure is not remedied within 30 days of the earlier of the Account Bank becoming aware of the failure and receipt by the Account Bank of notice from the Bond Trustee requiring the same to be remedied, (iv) the Account Bank ceases or threatens to cease carrying on the business of the Account Bank, (v) an order is made for the winding up of the Account Bank, (vi) an Insolvency Event occurs with respect to the Account Bank, or (vii) if the Account Bank is the Bank or an affiliate thereof, an Issuer Event of Default has occurred.

The Bank Account Agreement is governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.

Standby Bank Account Agreement

Pursuant to the terms of a standby bank account agreement (the “Standby Bank Account Agreement”) between the Guarantor, Royal Bank of Canada (the “Standby Account Bank”), the Standby GDA Provider, the Cash Manager, the Bank and the Bond Trustee (as amended and/or restated and/or supplemented from time to time), the Standby Account Bank will open and

 

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maintain a standby GDA account (the “Standby GDA Account”) and standby transaction account (the “Standby Transaction Account”) in the name of the Guarantor following delivery by the Guarantor (or the Cash Manager on its behalf) of a standby account bank notice (the “Standby Account Bank Notice”) to the Standby Account Bank.

Pursuant to the terms of the Cash Management Agreement, the Cash Manager will deliver a Standby Account Bank Notice to the Standby Account Bank if the funds held in the GDA Account and the Transaction Account (to the extent maintained) are required to be transferred to the Standby Account Bank pursuant to the terms of the Bank Account Agreement or the Bank Account Agreement is terminated for any reason.

The Standby Bank Account Agreement provides that the Standby GDA Account and the Standby Transaction Account, when opened, will be subject to the security interest in favor of the Bond Trustee (for itself and on behalf of the other Secured Creditors) granted under the Security Agreement and that payments of amounts owing to the Standby Account Bank in respect of fees or otherwise will be subject to the relevant Priorities of Payments set out in the Guarantor Agreement and the Security Agreement.

Under the Standby Bank Account Agreement, the Standby Account Bank represents and warrants to the Guarantor and the Bond Trustee on the Program Date and on each date on which an amount is credited to any Guarantor Account that is held with the Standby Account Bank and on each Guarantor Payment Date that: (i) it is a bank listed in Schedule I to the Bank Act and duly qualified to do business in every jurisdiction where the nature of its business requires it to be so qualified, (ii) the execution, delivery and performance by it of the Standby Bank Account Agreement (x) are within its corporate powers, (y) have been duly authorized by all necessary corporate action, and (z) do not contravene or result in a default under or conflict with (A) its charter or by-laws, (B) any law, rule or regulation applicable to it, or (C) any order, writ, judgment, award, injunction, decree or contractual obligation binding on or affecting it or its property, (iii) it is not a non-resident of Canada for purposes of the ITA, (iv) it possesses the necessary experience, qualifications, facilities and other resources to perform its responsibilities under the other Transaction Documents to which it is a party, (v) it is rated at or above the Standby Account Bank Required Ratings by each of the Rating Agencies, (vi) it is and will continue to be in good standing with OSFI, (vii) it is and will continue to be in material compliance with its internal policies and procedures (including risk management policies) relevant to the services to be provided by it pursuant to the Standby Bank Account Agreement and the other Transaction Documents to which it is party, (viii) it will exercise reasonable skill and care in the performance of its obligations hereunder and the other Transaction Documents to which it is a party, (ix) it will comply with the CMHC Guide and all Transaction Documents to which it is a party and all material legal and regulatory requirements applicable to the conduct of its business so that it can lawfully attend to the performance of its obligations under the Standby Bank Account Agreement and the other Transaction Documents to which it is a party.

The Standby Bank Account Agreement further provides that if one or more Rating Agencies downgrades or withdraws the ratings of the unsecured, unsubordinated and unguaranteed debt obligations, or issuer default rating, as applicable, of the Standby Account Bank below the Standby Account Bank Required Ratings, then the Standby GDA Account and the Standby Transaction Account (to the extent maintained) will be required to be closed and all amounts standing to the credit thereof transferred to accounts held with a bank having the Standby Account Bank Required Ratings.

 

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“Standby Account Bank Required Ratings” means the threshold ratings of (i) P-1 with respect to the short-term unsecured, unsubordinated and unguaranteed debt obligations of the Standby Account Bank by Moody’s, (ii) F1 with respect to the short-term issuer default rating of the Standby Account Bank by Fitch, (iii) A with respect to long-term issuer default rating of the Standby Account Bank by Fitch; and (iv) either (A) R-1 (middle) with respect to the short-term unsecured, unsubordinated and unguaranteed debt obligations of the Standby Account Bank by DBRS, or (B) A (low) with respect to the long-term unsecured, unsubordinated and unguaranteed debt obligations of the Standby Account Bank by DBRS.

In addition to the requirement that the Guarantor Accounts be moved from the Standby Account Bank to a bank having the Standby Account Bank Required Ratings if one or more Rating Agencies downgrades or withdraws the ratings of the unsecured, unsubordinated and unguaranteed debt obligations of the Standby Account Bank, or the issuer default rating of the Standby Account Bank, as applicable, below the Standby Account Bank Required Ratings as described above, the Guarantor may (in the case of (i) through (iii) below) or will (in the case of (iv) through (vi) below) (in the case of each of the events below other than (vii), with the prior consent of the Bond Trustee, which consent will not be withheld unless the Bond Trustee determines that the termination of the Standby Bank Account Agreement would be materially prejudicial to the covered bondholders) terminate the Standby Bank Account Agreement and move the Guarantor Accounts from the Standby Account Bank to a bank having the Standby Account Bank Required Ratings if: (i) a deduction or withholding for or on account of any taxes is imposed or is likely to be imposed in respect of the interest payable on any Guarantor Account, (ii) there is a breach by the Standby Account Bank of certain representations and warranties or a failure by the Standby Account Bank to perform certain covenants made by it under the Standby Bank Account Agreement, (iii) the Standby Account Bank materially breaches any of its other covenants and obligations under the Standby Bank Account Agreement or the Standby Guaranteed Deposit Account Contract, (iv) the Standby Account Bank ceases or threatens to cease carrying on the business of the Standby Account Bank, (v) an order is made for the winding up of the Standby Account Bank, or (vi) an Insolvency Event occurs with respect to the Standby Account Bank.

References herein to the GDA Account or the Transaction Account include, unless otherwise stated, references to the Standby GDA Account or the Standby Transaction Account when the Standby GDA Account and the Standby Transaction Account become operative.

The Standby Bank Account Agreement is governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.

Guaranteed Deposit Account Contract

The Guarantor has entered into a guaranteed deposit account contract (“Guaranteed Deposit Account Contract” or “GDA”) with the GDA Provider, the Cash Manager and the Bond Trustee pursuant to which the GDA Provider has agreed to pay interest on the moneys standing to the credit thereof at the GDA Rate. Under the Guaranteed Deposit Account Contract, the GDA Provider makes the same representations and warranties to the Cash Manager, the Guarantor and the Bond Trustee on the Program Date and on each date on which an amount is credited to the GDA Account and on each Guarantor Payment Date as are made by the Account Bank and which are described under “Bank Account Agreement” above.

The Guaranteed Deposit Account Contract is governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.

 

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Standby Guaranteed Deposit Account Contract

The Guarantor has entered into a standby guaranteed deposit account contract with Royal Bank of Canada (the “Standby GDA Provider”), the Cash Manager, and the Bond Trustee on the Program Date (as amended and/or supplemented and/or restated from time to time, the “Standby Guaranteed Deposit Account Contract”), pursuant to which the Standby GDA Provider has agreed to pay interest on the Standby GDA Account at the Standby GDA Rate. Under the Standby Guaranteed Deposit Account Contract, the Standby GDA Provider makes the same representations and warranties to the Guarantor and the Bond Trustee on the Program Date and on each date on which an amount is credited to the Standby GDA Account and on each Guarantor Payment Date as are made by the Standby Account Bank and which are described under “—Standby Bank Account Agreement” above.

Funds on deposit in the GDA Account and the Transaction Account (to the extent maintained) will be transferred to the Standby GDA Account if the Cash Manager has delivered a Standby Account Bank Notice to the Standby Account Bank that such funds are required to be transferred to the Standby Account Bank pursuant to the terms of the Bank Account Agreement or the Bank Account Agreement is terminated for any reason, and funds that were previously required to be deposited to the GDA Account and the Transaction Account (to the extent maintained) pursuant to the terms of the Transaction Documents will thereafter be deposited only to the Standby GDA Account.

The Standby Guaranteed Deposit Account Contract is governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.

Security Agreement

Pursuant to the terms of the Security Agreement entered into on the Program Date by the Guarantor, the Bond Trustee and other Secured Creditors, the secured obligations of the Guarantor and all other obligations of the Guarantor under or pursuant to the Transaction Documents to which it is a party owed to the Bond Trustee and the other Secured Creditors are secured by a first ranking security interest (the “Security”) over all present and future assets of the Guarantor, including without limitation the Portfolio, certain contractual rights and any Excess Proceeds, subject to the right of the Guarantor to sell such Portfolio pursuant to and in accordance with the Transaction Documents.

Representations and Warranties of the Guarantor

Under the Security Agreement, the Guarantor represents and warrants to the Secured Creditors that:

 

(a)

The Security Agreement creates a valid first priority security interest in the present and future personal property and undertaking of the Guarantor and all proceeds thereof (the “Collateral”).

 

(b)

It is the legal and beneficial owner of all Collateral.

 

(c)

The Collateral, including the Portfolio, is free and clear of all liens other than those created in favor of the Bond Trustee and customary permitted liens and the Security in the Collateral has been perfected.

 

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(d)

The Bond Trustee has obtained control pursuant to the applicable personal property security legislation of the Portfolio that consists of investment property, the Bond Trustee is a “protected purchaser” within the meaning of such legislation, and no other person has control or the right to obtain control of such investment property.

 

(e)

No authorization, consent or approval from, or notices to, any governmental authority or other person is required for the due execution and delivery by it of the Security Agreement or the performance or enforcement of its obligations thereunder, other than those that have been obtained or made.

 

(f)

The address of the Guarantor’s chief executive office is that given at the end of the Security Agreement.

 

(g)

No encumbrance exists over or in respect of any of its assets except for encumbrances created by the Security Agreement and certain permitted security interests.

 

(h)

It is validly formed and existing as a limited partnership under the Limited Partnership Act (Ontario) pursuant to a declaration of limited partnership filed under the Limited Partnership Act (Ontario).

 

(i)

Since the date of registration of its limited partnership declaration there has been no material adverse change in its financial position or prospects.

 

(j)

It is not the subject of any governmental or official investigation or inquiry and to its knowledge, none is progressing or pending or has been threatened in writing against it, which may have a material adverse effect on any of it, any relevant Transaction Document (other than the Guarantor Agreement), and/or the issue and offering of covered bonds under the Program.

 

(k)

No litigation, arbitration or administrative proceedings of or before any court, tribunal or governmental body has been commenced or, so far as it is aware are pending or threatened against it or any of its assets or revenues which may have a material adverse effect on it, any relevant Transaction Document and/or the issuance and offering of covered bonds under the Program.

 

(l)

The Managing GP has at all times carried on and conducted the affairs and business of the Guarantor in the name of the Guarantor as a separate entity and in accordance with the Guarantor Agreement and all laws and regulations applicable to it and will continue to do so throughout the continuation of the Guarantor.

 

(m)

The Managing GP has at all times kept or procured the keeping of proper books of account and records for the Guarantor separate from any person or entity.

 

(n)

The Managing GP for and on behalf of the Guarantor has duly executed the relevant Transaction Documents.

 

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(o)

Its entry into and the execution (and, where appropriate, delivery) of the relevant Transaction Documents and the performance by it of its obligations under the relevant Transaction Documents do not and will not conflict with or constitute a breach or infringement of:

 

(i)

its declaration of limited partnership under the Limited Partnership Act (Ontario);

 

(ii)

any law applicable to it; or

 

(iii)

any agreement, indenture, contract, mortgage, deed or other instrument to which it is a party or which is binding on it or any of its assets.

 

(p)

The obligations expressed to be assumed by it under the relevant Transaction Documents are legal and valid obligations, binding on it and enforceable against it in accordance with their terms.

 

(q)

The Transaction Documents to which it is a party have been entered into in good faith for its own benefit and on arm’s length commercial terms.

 

(r)

It is not in breach of or default under any agreement, indenture, contract, mortgage, deed or other instrument to which it is a party or which is binding on it or any of its assets which would be reasonably likely to have a material adverse effect on the ability of the Guarantor to perform its obligations under the Transaction Documents, or have a material adverse effect on the Collateral.

 

(s)

It is not necessary that any relevant Transaction Document in relation to it be filed, recorded or enrolled with any court or other authority in any jurisdiction in which the assets of the Guarantor are located.

 

(t)

It does not require the consent of any other party except for such consents as have been obtained by it prior to the date hereof or the consent, license, approval or authorization of any governmental authority in connection with the entering into or performance of the relevant Transaction Documents.

 

(u)

The Security Agreement and the other Transaction Documents have been properly authorized by all necessary action on the part of the Guarantor and its partners in accordance with the term of the Guarantor Agreement and constitutes a legal, valid and binding obligation of the Guarantor enforceable in accordance with its terms except as may be limited by applicable bankruptcy, insolvency, moratorium, and other similar laws affecting creditors’ rights generally and except that orders for specific performance, injunctions and other equitable remedies are discretionary remedies which may be granted only in the discretion of the court; the making and performance of the Security Agreement will not result in the breach of, constitute a default under, contravene any provision of, or result in the creation of, any lien upon the Collateral other than a permitted security interest.

 

(v)

There are no futures accounts currently in existence. In the event that any futures accounts were to come into existence, it will take all necessary actions in connection therewith.

 

(w)

Consumer goods held by the Guarantor are not material in value.

 

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(x)

The Guarantor and/or the Bond Trustee have control over all investment property.

Release of Security

In the event of any sale of Loans (including Selected Loans) and their Related Security by the Guarantor pursuant to and in accordance with the Transaction Documents, the Bond Trustee will (subject to the written request of the Guarantor), release those Loans from the Security created by and pursuant to the Security Agreement on the date of such sale but only if (i) the Bond Trustee provides its prior written consent to the terms of such sale in accordance with the Guarantor Agreement, and (ii) the Guarantor provides a certificate to the Bond Trustee that such sale of Loans and their Related Security has been made in accordance with the terms of the Transaction Documents.

In the event of the repurchase of a Loan and its Related Security by the Seller pursuant to and in accordance with the Transaction Documents, the Bond Trustee will release that Loan from the Security created by and pursuant to the Security Agreement on or prior to the date of the repurchase.

Enforcement

If a Guarantor Event of Default occurs and a Guarantor Acceleration Notice is served on the Bank and the Guarantor, the Bond Trustee will be entitled to appoint a Receiver, and/or enforce the Security constituted by the Security Agreement (including selling the Portfolio), and/or take such steps as it will deem necessary, subject in each case to being indemnified and/or secured to its satisfaction. All proceeds (other than any Third Party Amount or Swap Collateral Excluded Amounts) received by the Bond Trustee from the enforcement of the Security will be applied in accordance with the Post-Enforcement Priorities of Payments described under “Cashflows.”

The Security Agreement is governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein (other than certain other provisions relating to real property located outside of the Province of Ontario which will be governed by the law of the jurisdiction in which such property is located).

Corporate Services Agreement

Pursuant to the terms of a corporate services agreement (such corporate services agreement as amended and/or restated and/or supplemented from time to time, the “Corporate Services Agreement”) between the Corporate Services Provider, the Liquidation GP, the Bank and the Guarantor, the Corporate Services Provider will provide corporate services to the Liquidation GP.

The Corporate Services Agreement is governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.

Agency Agreement

Under the terms of the Agency Agreement between the Agents, the Bank, the Guarantor and the Bond Trustee, the Agents have been appointed by the Bank and the Guarantor to carry out various issuing and paying agency, exchange agency, transfer agency, calculation agency and registrar duties in respect of the covered bonds. Such duties include, but are not limited to, dealing with any applicable stock exchanges and clearing system on behalf of the Bank and the Guarantor in connection with an issuance of covered bonds and making payments of interest and principal in respect of the covered bonds upon receipt of such amounts from the Bank or the Guarantor, as applicable.

 

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Upon the occurrence of an Issuer Event of Default, Potential Issuer Event of Default, a Guarantor Event of Default or Potential Guarantor Event of Default, as applicable, the Bond Trustee may, by notice in writing to the Bank, the Guarantor and the Agents, require the Agents to thereafter act as agents of the Bond Trustee.

Any Agent or Calculation Agent may resign its appointment under the Agency Agreement and/or in relation to any Series of covered bonds upon 60 days’ notice to the Bank, the Guarantor and the Bond Trustee, provided that any such resignation by the Principal Paying Agent, the Registrar or any Calculation Agent will not be effective unless a successor has been appointed.

The Bank or the Guarantor may, with the prior written consent of the Bond Trustee, revoke its appointment of any Agent or Calculation Agent under the Agency Agreement and/or in relation to any Series of covered bonds upon 45 days’ notice to such Agent or Calculation Agent, provided that in certain circumstances, such revocation will not be effective unless a successor has been appointed. Notwithstanding the foregoing, the Guarantor may revoke the appointment of any Agent or Calculation Agent in the event that there is a breach by such Agent or Calculation Agent of certain representations and warranties or a failure by such Agent or Calculation Agent to perform certain covenants made by it under the Agency Agreement. In addition, if the unsecured, unsubordinated and unguaranteed debt obligations or issuer default ratings of a Paying Agent cease to be rated by the Rating Agencies at or above each of the Paying Agent Required Ratings at any time that (a) the Guarantor is Independently Controlled and Governed, the Guarantor may, and (b) the Guarantor is not Independently Controlled and Governed, the Guarantor will, terminate the appointment of such Paying Agent and appoint one or more further or other Agents. Furthermore, if an Issuer Event of Default (A) occurs and is continuing, or (B) has previously occurred and is continuing, at any time that the Guarantor is Independently Controlled and Governed, the Guarantor may terminate the appointment of an Agent which is the Bank or an affiliate of the Bank and appoint one or more further or other Agents.

The appointment of any Agent or Calculation Agent under the Agency Agreement and in relation to each relevant Series of covered bonds will terminate if any of the following events or circumstances will occur or arise, namely: such Agent or Calculation Agent becomes incapable of acting; such Agent or Calculation Agent is adjudged bankrupt or insolvent; such Agent or Calculation Agent files a voluntary petition in bankruptcy or makes an assignment for the benefit of its creditors or consents to the appointment of a receiver, administrator or other similar official of all or any substantial part of its property or admits in writing its inability to pay or meet its debts as they mature or suspends payment thereof; a receiver, administrator or other similar official of such Agent or Calculation Agent or of all or any substantial part of its property is appointed; an order of any court is entered approving any petition filed by or against such Agent or Calculation Agent under the provisions of any applicable bankruptcy or insolvency law; or any public officer takes charge or control of such Agent or Calculation Agent or of its property or affairs for the purpose of rehabilitation, conservation or liquidation.

The Agency Agreement is governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein.

Modification of Transaction Documents

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Transaction Document will be subject to satisfaction of the Rating Agency Condition. Pursuant to the terms of the Security Agreement and the Trust Deed, the Bond Trustee is permitted to consent to and/or execute amendments without consulting the other Secured Creditors if the amendment is of a minor or technical nature or the Bond Trustee is otherwise satisfied that the amendment is not reasonably expected to be materially prejudicial to the interests of the covered bondholders.

In addition to the general amendment provisions, the Managing GP has the authority to make amendments to the Guarantor Agreement without the consent of any other party in order to cure any ambiguity or correct or supplement any provision thereof, provided that such amendments do not adversely affect the interests of the other Partners, or, while covered bonds are outstanding, the Bond Trustee (on behalf of the covered bondholders). If the interests of any such party would be adversely affected by a proposed amendment to the Guarantor Agreement, such amendment may only be made by the Managing GP with the consent of such adversely affected Partner and/or the Bond Trustee, as applicable.

For greater certainty, all amendments to the Transaction Documents must comply with the CMHC Guide.

Modification of Ratings Triggers and Consequences

Any amendment to (a) a Ratings Trigger provided for in any Transaction Document that lowers the threshold ratings specified therein, or (b) the consequences of breaching any such Ratings Trigger provided for in any Transaction Document that makes such consequences less onerous, will, with respect to each affected Rating Agency only, be deemed to be a material amendment and will be subject to satisfaction of the Rating Agency Condition with respect to each affected Rating Agency.

Notwithstanding the foregoing, if at any time the Bank determines that any one of DBRS, Fitch or Moody’s will not be a Rating Agency in respect of the Program, then, so long as (a) the Program is in compliance with the terms of the CMHC Guide with respect to ratings of the covered bonds, and (b) each outstanding Series of covered bonds is rated by at least two Rating Agencies, the Ratings Triggers for such rating agency will not be applicable to the Program without any further action or formality, including for greater certainty satisfaction of the Rating Agency Condition or consent or approval of the Bond Trustee or the holders of the covered bonds. Any amendments to the Transaction Documents to reflect the foregoing will be deemed not to be a material amendment and may be made by the parties thereto without the requirement for satisfaction of the Rating Agency Condition with respect to any Rating Agency or consent or approval of the Bond Trustee or the holders of the covered bonds.

 

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CASHFLOWS

As described above under “Description of the Covered Bonds—Credit Structure,” until the occurrence of a Covered Bond Guarantee Activation Event, the covered bonds will be obligations of the Bank only. The Bank is liable to make payments when due on the covered bonds, whether or not it has received any corresponding payment from the Guarantor under the Intercompany Loan.

This section summarizes the Priorities of Payments of the Guarantor, as to the allocation and distribution of amounts standing to the credit of the Guarantor on the Ledgers and their order of priority:

 

(a)

when no Asset Coverage Test Breach Notice is outstanding and no Covered Bond Guarantee Activation Event has occurred;

 

(b)

when an Asset Coverage Test Breach Notice is outstanding but no Covered Bond Guarantee Activation Event has occurred;

 

(c)

following service of a Notice to Pay on the Guarantor; and

 

(d)

following service of a Guarantor Acceleration Notice and enforcement of the Security.

Allocation and distribution of Available Revenue Receipts when no Asset Coverage Test Breach Notice is outstanding and no Covered Bond Guarantee Activation Event has occurred.

At any time when no Asset Coverage Test Breach Notice is outstanding and no Covered Bond Guarantee Activation Event has occurred, Available Revenue Receipts will be allocated and distributed as described below.

The Guarantor or the Cash Manager on its behalf will, as of each Calculation Date, calculate:

 

(i)

the amount of Available Revenue Receipts available for distribution on the immediately following Guarantor Payment Date;

 

(ii)

the Reserve Fund Required Amount (if applicable);

 

(iii)

where the Pre-Maturity Test has been breached in respect of a Series of Hard Bullet Covered Bonds, on each Calculation Date falling in the twelve months prior to the Final Maturity Date of the relevant Series of Hard Bullet Covered Bonds, whether or not the amount standing to the credit of the Pre-Maturity Liquidity Ledger including the principal amount of any Substitution Assets standing to the credit of the Pre-Maturity Liquidity Ledger at such date is less than the Pre-Maturity Liquidity Required Amount.

On each Guarantor Payment Date, the Guarantor (or the Cash Manager on its behalf) will transfer Available Revenue Receipts from the Revenue Ledger to the Payment Ledger, and use

 

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Available Revenue Receipts held by the Cash Manager for and on behalf of the Guarantor and, as necessary, transfer Available Revenue Receipts from the GDA Account to the Transaction Account (to the extent maintained), in an amount equal to the lower of (a) the amount required to make the payments or credits described below, and (b) the amount of Available Revenue Receipts.

Pre-Acceleration Revenue Priorities of Payments

At any time no Asset Coverage Test Breach Notice is outstanding and no Covered Bond Guarantee Activation Event has occurred, Available Revenue Receipts will be applied by or on behalf of the Guarantor (or the Cash Manager on its behalf) on each Guarantor Payment Date (except for amounts due to third parties by the Guarantor under paragraph (a) or Third Party Amounts, which will be paid when due) in making the following payments and provisions (the “Pre-Acceleration Revenue Priorities of Payments”) (in each case only if and to the extent that payments or provisions of a higher priority have been made in full):

 

(a)

first, in or towards satisfaction of any amounts due and payable by the Guarantor to third parties and incurred without breach by the Guarantor of the Transaction Documents to which it is a party (and for which payment has not been provided for elsewhere in the relevant Priorities of Payments) and to provide for any such amounts expected to become due and payable by the Guarantor in the immediately succeeding Guarantor Payment Period and to pay and discharge any liability of the Guarantor for taxes;

 

(b)

second, any amounts in respect of interest due to the Bank in respect of the Demand Loan pursuant to the terms of the Intercompany Loan;

 

(c)

third, in or towards satisfaction pro rata and pari passu according to the respective amounts thereof of:

 

(i)

any remuneration then due and payable to the Servicer and any costs, charges, liabilities and expenses then due or to become due and payable to the Servicer under the provisions of the Servicing Agreement in the immediately succeeding Guarantor Payment Period, together with applicable Goods and Services Tax (“GST”) (or other similar taxes) thereon to the extent provided therein;

 

(ii)

any remuneration then due and payable to the Cash Manager and any costs, charges, liabilities and expenses then due or to become due and payable to the Cash Manager under the provisions of the Cash Management Agreement in the immediately succeeding Guarantor Payment Period, together with applicable GST (or other similar taxes) thereon to the extent provided therein, provided that if the Cash Manager is the Bank or a member of the BMO Group, it will not receive any fees;

 

(iii)

amounts (if any) due and payable to the Account Bank (or, as applicable, the Standby Account Bank) (including costs) pursuant to the terms of the Bank Account Agreement (or, as applicable, the Standby Bank Account Agreement), together with applicable GST (or other similar taxes) thereon to the extent provided therein;

 

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(iv)

amounts due and payable to the Cover Pool Monitor pursuant to the terms of the Cover Pool Monitor Agreement (other than the amounts referred to in paragraph (j) below), together with applicable GST (or other similar taxes) thereon to the extent provided therein; and

 

(v)

amounts due and payable to the Custodian pursuant to the terms of the Mortgage Sale Agreement, together with applicable GST (or other similar taxes) thereon to the extent provided therein;

 

(d)

fourth, in or towards satisfaction pro rata and pari passu according to the respective amounts thereof of:

 

(i)

payment due to the Interest Rate Swap Provider (including any termination payment due and payable by the Guarantor under the Interest Rate Swap Agreement (but excluding any Excluded Swap Termination Amount)) pursuant to the terms of the Interest Rate Swap Agreement; and

 

(ii)

payment due to the Covered Bond Swap Provider (including any termination payment due and payable by the Guarantor under the Covered Bond Swap Agreement (but excluding any Excluded Swap Termination Amount)) pursuant to the terms of the Covered Bond Swap Agreement;

 

(e)

fifth, in or towards payment on the Guarantor Payment Date of, or to provide for payment on such date in the future of such proportion of the relevant payment falling due in the future as the Cash Manager may reasonably determine (in the case of any such payment or provision, after taking into account any provisions previously made and any amounts receivable from the Interest Rate Swap Provider under the Interest Rate Swap Agreement) any amounts due or to become due and payable (excluding principal amounts) to the Bank in respect of the Guarantee Loan pursuant to the terms of the Intercompany Loan Agreement;

 

(f)

sixth, if a Servicer Event of Default has occurred, all remaining Available Revenue Receipts to be credited to the GDA Account (with a corresponding credit to the Revenue Ledger maintained in respect of that account) until such Servicer Event of Default is either remedied by the Servicer or waived by the Bond Trustee or a new servicer is appointed to service the Portfolio (or the relevant part thereof);

 

(g)

seventh, in or towards a credit to the GDA Account (with a corresponding credit to the Reserve Ledger) of an amount up to but not exceeding the amount by which the Reserve Fund Required Amount (if applicable) exceeds the existing balance on the Reserve Ledger as calculated on the immediately preceding Calculation Date;

 

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(h)

eighth, if the Guarantor is required to make a deposit to the Pre-Maturity Liquidity Ledger due to a breach of the Pre-Maturity Test in respect of any Series of Hard Bullet Covered Bonds, towards a credit to the GDA Account (with a corresponding credit to the Pre-Maturity Liquidity Ledger) of an amount up to but not exceeding the difference between:

 

(i)

the Pre-Maturity Liquidity Required Amount as calculated on the immediately preceding Calculation Date; and

 

(ii)

the sum of any amounts standing to the credit of the Pre-Maturity Liquidity Ledger on the immediately preceding Calculation Date;

 

(i)

ninth, in or towards satisfaction pro rata and pari passu according to the respective amounts thereof of:

 

(i)

payment of any Excluded Swap Termination Amounts due and payable by the Guarantor under the Interest Rate Swap Agreement; and

 

(ii)

payment of any Excluded Swap Termination Amounts due and payable by the Guarantor under the Covered Bond Swap Agreement;

 

(j)

tenth, in or towards payment pro rata and pari passu in accordance with the respective amounts thereof of any indemnity amount due to the Cover Pool Monitor pursuant to the Cover Pool Monitor Agreement, and any indemnity amount due to any Partner pursuant to the Guarantor Agreement;

 

(k)

eleventh, in or towards payment of the fee due to the Corporate Services Provider by the Guarantor pursuant to the terms of the Corporate Services Agreement; and

 

(l)

twelfth, towards such distributions of profit to the Partners as may be payable in accordance with the terms of the Guarantor Agreement.

See “—Summary of Fees and Expenses” for further details on the fees and expenses expected to be paid from the Available Revenue Receipts.

Any amounts received by the Guarantor under the Interest Rate Swap Agreement and the Covered Bond Swap Agreement (other than, in each case, amounts in respect of Swap Collateral Excluded Amounts) on or after the Guarantor Payment Date but prior to the next following Guarantor Payment Date will be applied, together with any provision for such payments made on any preceding Guarantor Payment Date, to make payments (other than in respect of principal) due and payable in respect of the Intercompany Loan Agreement and then the expenses of the Guarantor unless an Asset Coverage Test Breach Notice is outstanding or otherwise to make provision for such payments on such date in the future of such proportion of the relevant payment falling due in the future as the Cash Manager may reasonably determine.

Any amounts received under the Interest Rate Swap Agreement and the Covered Bond Swap Agreement on the Guarantor Payment Date or on any date prior to the next succeeding Guarantor Payment Date which are not applied towards a payment or provision in accordance with paragraph (d) above or the preceding paragraph will be credited to the Revenue Ledger and applied as Available Revenue Receipts on the next succeeding Guarantor Payment Date.

Amounts (if any) held by the Cash Manager for and on behalf of the Guarantor or standing to the credit of the Transaction Account which are not required to be applied in accordance with paragraphs (a) to (k) of the Pre-Acceleration Revenue Priorities of Payments or paragraphs (a) to (g) of the Pre-Acceleration Principal Priorities of Payments below will, if applicable, be deposited by the Cash Manager and, in each case be credited to the appropriate ledger in the GDA Account on the Guarantor Payment Date.

 

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If any Swap Collateral Available Amounts are received by the Guarantor on a Guarantor Payment Date, such amounts will be applied by the Guarantor (or by the Cash Manager on its behalf) on that Guarantor Payment Date in the same manner as it would have applied the receipts which such Swap Collateral Available Amounts replace.

Each Partner acknowledges that the distribution paid pursuant to paragraph (l) above to such Partner represents a reasonable commercial return to the Partner from its involvement in the Guarantor and also agrees that such profits will not be paid to the Partners at a time when they know or ought to know that there was no reasonable prospect of avoiding an insolvent liquidation of the Guarantor as a result of such profit distribution.

Allocation and Distribution of Available Principal Receipts when no Asset Coverage Test Breach Notice is outstanding and no Covered Bond Guarantee Activation Event has occurred

At any time no Asset Coverage Test Breach Notice is outstanding and no Covered Bond Guarantee Activation Event has occurred, Available Principal Receipts will be allocated and distributed as described below.

The Guarantor or the Cash Manager on its behalf will, as of each Calculation Date, calculate the amount of Available Principal Receipts available for distribution on the immediately following Guarantor Payment Date.

On each Guarantor Payment Date, the Guarantor (or the Cash Manager on its behalf) will transfer Available Principal Receipts from the Principal Ledger to the Payment Ledger, and use Available Principal Receipts held by the Cash Manager for and on behalf of the Guarantor and, as necessary, transfer Available Principal Receipts from the GDA Account to the Transaction Account (to the extent maintained), in an amount equal to the lower of (a) the amount required to make the payments or credits described below, and (b) the amount of Available Principal Receipts.

Pre-Acceleration Principal Priorities of Payments

At any time no Asset Coverage Test Breach Notice is outstanding and no Covered Bond Guarantee Activation Event has occurred, Available Principal Receipts will be applied by or on behalf of the Guarantor on each Guarantor Payment Date in making the following payments and provisions (the “Pre-Acceleration Principal Priorities of Payments”) (in each case only if and to the extent that payments or provisions of a higher priority have been made in full):

 

(a)

first, if the Pre-Maturity Test has been breached by the Bank in respect of any Series of Hard Bullet Covered Bonds, towards a credit to the Pre-Maturity Liquidity Ledger in an amount up to but not exceeding the difference between:

 

(i)

the Pre-Maturity Liquidity Required Amount as calculated on the immediately preceding Calculation Date; over

 

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(ii)

any amounts standing to the credit of the Pre-Maturity Liquidity Ledger on the immediately preceding Calculation Date;

 

(b)

second, to pay amounts in respect of principal outstanding on the Demand Loan pursuant to the terms of the Intercompany Loan Agreement;

 

(c)

third, to acquire Loans and their Related Security offered to the Guarantor, if necessary or prudent to ensure that, taking into account the other resources available to the Guarantor, the Asset Coverage Test is met and thereafter to acquire (in the discretion of the Guarantor or the Cash Manager on its behalf) Substitution Assets up to the prescribed limit in the CMHC Guide;

 

(d)

fourth, to deposit the remaining Principal Receipts in the GDA Account (with a corresponding credit to the Principal Ledger) in an amount sufficient to ensure that, taking into account the other resources available to the Guarantor, the Asset Coverage Test is met;

 

(e)

fifth, in or towards repayment on the Guarantor Payment Date (or to provide for repayment on such date in the future of such proportion of the relevant payment falling due in the future as the Cash Manager may reasonably determine) of amounts (in respect of principal) due or to become due and payable to the Bank in respect of the Guarantee Loan pursuant to the terms of the Intercompany Loan;

 

(f)

sixth, in or towards a credit to the GDA Account (with a corresponding credit to the Reserve Ledger) of an amount up to but not exceeding the amount by which the Reserve Fund Required Amount (if applicable) exceeds the existing balance on the Reserve Ledger as calculated on the immediately preceding Calculation Date; and

 

(g)

seventh, subject to complying with the Asset Coverage Test, to make Capital Distributions in accordance with the terms of the Guarantor Agreement.

Allocation and distribution of Available Revenue Receipts and Available Principal Receipts when an Asset Coverage Test Breach Notice is outstanding but no Covered Bond Guarantee Activation Event has occurred

At any time an Asset Coverage Test Breach Notice is outstanding but no Covered Bond Guarantee Activation Event has occurred, all Available Revenue Receipts and Available Principal Receipts will continue to be applied in accordance with the Pre-Acceleration Revenue Priorities of Payments and the Pre-Acceleration Principal Priorities of Payments save that, while any covered bonds remain outstanding, no funds will be applied under paragraphs (b), (c), (j) (to the extent only that such Indemnity Amounts are payable to a Partner), (k) or (l) of the Pre-Acceleration Revenue Priorities of Payments or paragraphs (b), (c), (e) or (g) of the Pre-Acceleration Principal Priorities of Payments, and for greater certainty no Capital Distribution will be made to the Limited Partner and no payments will be made to the Intercompany Loan Provider.

 

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Allocation and distribution of Available Revenue Receipts and Available Principal Receipts following service of a Notice to Pay on the Guarantor

At any time after service of a Notice to Pay on the Guarantor, but prior to service of a Guarantor Acceleration Notice, all Available Revenue Receipts and Available Principal Receipts (other than Third Party Amounts and amounts credited to the Pre-Maturity Liquidity Ledger) will be applied as described below under “—Guarantee Priorities of Payments.”

On each Guarantor Payment Date, but prior to service of a Notice to Pay on the Guarantor, the Guarantor or the Cash Manager on its behalf will transfer Available Revenue Receipts and Available Principal Receipts from the Revenue Ledger, the Reserve Ledger, the Principal Ledger or the Capital Account Ledger, as the case may be, to the Payment Ledger, in an amount equal to the lower of (a) the amount required to make the payments set out in the Guarantee Priorities of Payments and (b) the amount of all Available Revenue Receipts and Available Principal Receipts standing to the credit of such Ledgers.

The Guarantor will create and maintain ledgers for each Series of covered bonds and record amounts allocated to such Series of covered bonds in accordance with paragraph (e) of the Guarantee Priorities of Payments below, and such amounts, once allocated, will only be available to pay amounts due under the Covered Bond Guarantee and amounts due in respect of the relevant Series of covered bonds under the Covered Bond Swap Agreement on the scheduled repayment dates thereof.

Guarantee Priorities of Payments

If a Notice to Pay is served on the Guarantor, the Guarantor will on the relevant Final Maturity Date for any Series of Hard Bullet Covered Bonds, apply all funds standing to the credit of the Pre-Maturity Liquidity Ledger with respect to such Series of Hard Bullet Covered Bonds (and transferred to the Transaction Account on the relevant Guarantor Payment Date) to repay the relevant Series of Hard Bullet Covered Bonds. Subject thereto, on each Guarantor Payment Date after the service of a Notice to Pay on the Guarantor (but prior to service of a Guarantor Acceleration Notice), the Guarantor or the Cash Manager on its behalf will apply Available Revenue Receipts and Available Principal Receipts to make the following payments, provisions or credits in the following order of priority (the “Guarantee Priorities of Payments”) (in each case only if and to the extent that payments or provisions of a higher priority have been made in full):

 

(a)

first, to pay any amounts in respect of principal and interest due to the Bank in respect of the Demand Loan pursuant to the terms of the Intercompany Loan Agreement;

 

(b)

second, in or towards payment of all amounts due and payable or to become due and payable to the Bond Trustee with respect to the performance of its obligations as Bond Trustee in the immediately succeeding Guarantor Payment Period under the provisions of the Trust Deed and the Security Agreement together with interest and applicable GST (or other similar taxes) thereon as provided therein;

 

(c)

third, in or towards satisfaction pro rata and pari passu according to the respective amounts thereof of:

 

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(i)

any remuneration then due and payable to the Agents under the provisions of the Agency Agreement together with applicable GST (or other similar taxes) thereon as provided therein, other than any Indemnity Amounts payable to the Agents in excess of $150,000; and

 

(ii)

any amounts then due and payable by the Guarantor to third parties, including the Corporate Services Provider, and incurred without breach by the Guarantor of the Transaction Documents to which it is a party (and for which payment has not been provided for elsewhere) and to provide for any such amounts expected to become due and payable by the Guarantor in the immediately succeeding Guarantor Payment Period and to pay or discharge any liability of the Guarantor for taxes;

 

(d)

fourth, in or towards satisfaction pro rata and pari passu according to the respective amounts thereof of:

 

(i)

any remuneration then due and payable to the Servicer and any costs, charges, liabilities and expenses then due or to become due and payable to the Servicer in the immediately succeeding Guarantor Payment Period under the provisions of the Servicing Agreement together with applicable GST (or other similar taxes) thereon to the extent provided therein, other than any Indemnity Amounts payable to the Servicer in excess of $150,000;

 

(ii)

any remuneration then due and payable to the Cash Manager and any costs, charges, liabilities and expenses then due or to become due and payable to the Cash Manager in the immediately succeeding Guarantor Payment Period under the provisions of the Cash Management Agreement, together with applicable GST (or other similar taxes) thereon to the extent provided therein, other than any Indemnity Amounts payable to the Cash Manager in excess of $150,000, provided that if the Cash Manager is the Bank or a member of the BMO Group, it will not receive any fees;

 

(iii)

amounts (if any) due and payable to the Account Bank (or, as applicable, the Standby Account Bank) (including costs) pursuant to the terms of the Bank Account Agreement (or, as applicable, the Standby Bank Account Agreement), together with applicable GST (or other similar taxes) thereon to the extent provided therein, other than any Indemnity Amounts payable to the Account Bank (or, as applicable, the Standby Account Bank) in excess of $150,000;

 

(iv)

amounts due and payable to the Cover Pool Monitor pursuant to the terms of the Cover Pool Monitor Agreement, together with applicable GST (or other similar taxes) thereon as provided therein, other than any Indemnity Amounts payable to the Cover Pool Monitor in excess of $150,000; and

 

(v)

amounts due and payable to the Custodian pursuant to the terms of the Mortgage Sale Agreement, together with applicable GST (or other similar taxes) thereon as provided therein, other than any Indemnity Amounts payable to the Custodian in excess of $150,000;

 

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(e)

fifth, to pay pro rata and pari passu according to the respective amounts thereof:

 

(i)

the amounts due and payable to the Interest Rate Swap Provider pro rata and pari passu according to the respective amounts thereof (including any termination payment due and payable by the Guarantor under the Interest Rate Swap Agreement but excluding any Excluded Swap Termination Amount) in accordance with the terms of the Interest Rate Swap Agreement;

 

(ii)

the amounts due and payable to the Covered Bond Swap Provider (other than in respect of principal) pro rata and pari passu in respect of each relevant Series of covered bonds (including any termination payment (other than in respect of principal) due and payable by the Guarantor to the Covered Bond Swap Provider but excluding any Excluded Swap Termination Amount) in accordance with the terms of the Covered Bond Swap Agreement; and

 

(iii)

to the Bond Trustee or (if so directed by the Bond Trustee) the Principal Paying Agent on behalf of the holders of the covered bonds pro rata and pari passu Scheduled Interest that is Due for Payment (or will become Due for Payment in the immediately succeeding Guarantor Payment Period) under the Covered Bond Guarantee in respect of each Series of covered bonds,

provided that if the amount available for distribution under this paragraph (e) (excluding any amounts received from the Covered Bond Swap Provider) would be insufficient to pay the Canadian Dollar Equivalent of the Scheduled Interest that is Due for Payment in respect of each Series of covered bonds under (e)(iii) above, the shortfall will be divided amongst all such Series of covered bonds on a pro rata basis and the amount payable by the Guarantor in respect of each relevant Series of covered bonds to the Covered Bond Swap Provider under (e)(ii) above will be reduced by the amount of the shortfall applicable to the covered bonds in respect of which such payment is to be made;

 

(f)

sixth, to pay or provide for pro rata and pari passu according to the respective amounts thereof, of:

 

(i)

the amounts (in respect of principal) due and payable pro rata and pari passu in respect of each relevant Series of covered bonds (including any termination payment (relating solely to principal) due and payable by the Guarantor under the Covered Bond Swap Agreement but excluding any Excluded Swap Termination Amount) to the Covered Bond Swap Provider in accordance with the terms of the relevant Covered Bond Swap Agreement; and

 

(ii)

to the Bond Trustee or (if so directed by the Bond Trustee) the Principal Paying Agent on behalf of the holders of the covered bonds pro rata, and pari passu Scheduled Principal that is Due for Payment (or will become

 

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Due for Payment in the immediately succeeding Guarantor Payment Period) under the Covered Bond Guarantee in respect of each Series of covered bonds, provided that if the amount available for distribution under this paragraph (f) (excluding any amounts received from the Covered Bond Swap Provider) in respect of the amounts referred to in (f)(i) above would be insufficient to pay the Canadian Dollar Equivalent of the Scheduled Principal that is Due for Payment in respect of the relevant Series of covered bonds under this (f)(ii), the shortfall will be divided amongst all such Series of covered bonds on a pro rata basis and the amount payable by the Guarantor in respect of each relevant Series of covered bonds under (f)(i) to the Covered Bond Swap Provider above will be reduced by the amount of the shortfall applicable to the covered bonds in respect of which such payment is to be made;

 

(g)

seventh, to deposit the remaining funds into the GDA Account for application on the next following Guarantor Payment Date in accordance with the Priorities of Payments described in paragraphs (a) to (f) (inclusive) above, until the covered bonds have been fully repaid or provided for (such that the Required Redemption Amount has been accumulated in respect of each outstanding Series of covered bonds);

 

(h)

eighth, in or towards satisfaction pro rata and pari passu according to the respective amounts thereof of any Excluded Swap Termination Amount due and payable by the Guarantor to the relevant Swap Provider under the relevant Swap Agreement;

 

(i)

ninth, to pay or provide for pro rata and pari passu according to the respective amounts thereof, any Indemnity Amounts payable to the Agents, the Servicer, the Cash Manager, the Account Bank (or the Standby Account Bank, as applicable), the Cover Pool Monitor and the Custodian, to the extent not paid pursuant to paragraph (c) or (d) above;

 

(j)

tenth, any remaining funds will be applied in and towards repayment in full of amounts outstanding under the Intercompany Loan Agreement;

 

(k)

eleventh, in or towards satisfaction pro rata and pari passu according to the respective amounts thereof of any indemnity amount due to the Partners pursuant to the Guarantor Agreement; and

 

(l)

twelfth, thereafter any remaining funds will be applied in accordance with the Guarantor Agreement

Any amounts received by the Guarantor under the Interest Rate Swap Agreement after the Guarantor Payment Date but prior to the next following Guarantor Payment Date will be applied, together with any provision for such payment made on any preceding Guarantor Payment Date, to make payments (other than in respect of principal) due and payable pro rata and pari passu in respect of the Covered Bond Swap Agreement or, as the case may be, in respect of interest due under the Covered Bond Guarantee pro rata and pari passu in respect of each relevant Series of covered bonds.

 

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Any amounts received by the Guarantor under the Covered Bond Swap Agreement (whether or not in respect of principal) after the Guarantor Payment Date but prior to the next following Guarantor Payment Date will be applied, together with any provision for such payment made on any preceding Guarantor Payment Date, to make payments of interest or principal, as the case may be, in respect of the Covered Bond Guarantee pro rata and pari passu in respect of each relevant Series of covered bonds.

Any amounts received under the Interest Rate Swap Agreement or any Covered Bond Swap Agreement on the Guarantor Payment Date or any date prior to the next succeeding Guarantor Payment Date which are not put towards a payment or provision in accordance with paragraphs (e) or (f) above or the two preceding paragraphs will be credited to the Revenue Ledger or the Principal Ledger on the GDA Account (as appropriate) and applied as Available Revenue Receipts or Available Principal Receipts, as the case may be, on the next succeeding Guarantor Payment Date.

If the Guarantor requires any available funds to be exchanged into a currency other than Canadian Dollars, and such exchange would not be subject to or covered by the terms of the Covered Bond Swap Agreement, then the Guarantor (or the Cash Manager on its behalf) will perform all necessary currency conversions at the then prevailing spot rate of exchange.

If any Swap Collateral Available Amounts are received by the Guarantor on a Guarantor Payment Date, such amounts will be applied by the Guarantor (or by the Cash Manager on its behalf) on that Guarantor Payment Date in the same manner as it would have applied the receipts which such Swap Collateral Available Amounts replace.

Termination payments received in respect of the Swap Agreements, premiums received in respect of replacement Swap Agreements

If the Guarantor receives any termination payment from a Swap Provider in respect of a Swap Agreement, such termination payment will first be used, to the extent necessary (prior to the occurrence of a Guarantor Event of Default and service of a Guarantor Acceleration Notice) to pay a replacement Swap Provider to enter into a replacement Swap Agreement with the Guarantor, unless a replacement Swap Agreement has already been entered into on behalf of the Guarantor. If the Guarantor receives any premium from a replacement Swap Provider in respect of a replacement Swap Agreement, such premium will first be used to make any termination payment due and payable by the Guarantor with respect to the previous Swap Agreement, unless such termination payment has already been made on behalf of the Guarantor.

Any amounts received by the Guarantor which are not applied to pay a replacement Swap Provider to enter into a replacement Swap Agreement will be credited to the Revenue Ledger and applied as Available Revenue Receipts on the next succeeding Guarantor Payment Date.

Application of funds received by the Bond Trustee following service of a Guarantor Acceleration Notice and enforcement of the Security

Following a Guarantor Event of Default, service of a Guarantor Acceleration Notice and enforcement of the Security granted under the terms of the Security Agreement, all funds received or recovered by the Bond Trustee (or a receiver appointed on its behalf) (excluding all amounts due or to become due in respect of any tax credits, Swap Collateral Excluded Amounts or Third Party Amounts) will be applied in the following order of priority (the “Post-

 

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Enforcement Priorities of Payments”) (in each case only if and to the extent that payments or provisions of a higher priority have been made in full):

 

(a)

first, in or towards satisfaction of pro rata and pari passu according to the respective amounts thereof of:

 

(i)

all amounts due and payable or to become due and payable to the Bond Trustee under the provisions of the Trust Deed and the Security Agreement with respect to the performance of its obligations thereunder together with interest and applicable GST (or other similar taxes) thereon as provided therein; and

 

(ii)

all amounts due and payable or to become due and payable to the Bond Trustee or any Receiver under the provisions of the Security Agreement together with interest and applicable GST (or other similar taxes) thereon as provided therein;

 

(b)

second, in or towards (on a pro rata and pari passu basis) in satisfaction of any remuneration then due and payable to the Agents under or pursuant to the Agency Agreement together with applicable GST (or other similar taxes) thereon to the extent provided therein;

 

(c)

third, in or towards satisfaction pro rata and pari passu according to the respective amounts thereof, of:

 

(i)

any remuneration then due and payable to the Servicer and any costs, charges, liabilities and expenses then due or to become due and payable to the Servicer under the provisions of the Servicing Agreement, together with applicable GST (or other similar taxes) thereon to the extent provided therein, other than any Indemnity Amounts payable to the Servicer in excess of $150,000;

 

(ii)

any remuneration then due and payable to the Cash Manager and any costs, charges, liabilities and expenses then due or to become due and payable to the Cash Manager under the provisions of the Cash Management Agreement, together with applicable GST (or other similar taxes) thereon to the extent provided therein, other than any Indemnity Amounts payable to the Cash Manager in excess of $150,000, provided that if the Cash Manager is the Bank or a member of the BMO Group, it will not receive any fees;

 

(iii)

amounts due to the Account Bank or, as applicable, the Standby Account Bank (including costs) pursuant to the terms of the Bank Account Agreement or, as applicable, the Standby Bank Account Agreement, together with applicable GST (or other similar taxes) thereon to the extent provided, other than any Indemnity Amounts payable to the Account Bank, or, as applicable, the Standby Account Bank, in excess of $150,000; and

 

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(iv)

amounts due to the Custodian pursuant to the terms of the Mortgage Sale Agreement, together with applicable GST (or other similar taxes) thereon to the extent provided therein, other than any Indemnity Amounts payable to the Custodian in excess of $150,000;

 

(d)

fourth, to pay pro rata and pari passu according to the respective amounts thereof, of:

 

(i)

any amounts due and payable to the Interest Rate Swap Provider pro rata and pari passu according to the respective amounts thereof (including any termination payment (but excluding any Excluded Swap Termination Amounts)) pursuant to the terms of the Interest Rate Swap Agreement;

 

(ii)

the amounts due and payable to the Covered Bond Swap Provider pro rata and pari passu in respect of each relevant Series of covered bonds to the Covered Bond Swap Agreement (including any termination payment due and payable by the Guarantor under the Covered Bond Swap Agreement (but excluding any Excluded Swap Termination Amount)) in accordance with the terms of the Covered Bond Swap Agreement; and

 

(iii)

the amounts due and payable under the Covered Bond Guarantee, to the Bond Trustee on behalf of the holders of the covered bonds pro rata and pari passu in respect of interest and principal due and payable on each Series of covered bonds,

provided that if the amount available for distribution under this paragraph (d) (excluding any amounts received from the Covered Bond Swap Provider in respect of amounts referred to in (d)(ii) above) would be insufficient to pay the Canadian Dollar Equivalent of the amounts due and payable under the Covered Bond Guarantee in respect of each Series of covered bonds under (d)(iii) above, the shortfall will be divided amongst all such Series of covered bonds on a pro rata basis and the amount payable by the Guarantor in respect of each relevant Series of covered bonds under (d)(ii) above to the Covered Bond Swap Provider will be reduced by the amount of the shortfall applicable to the covered bonds in respect of which such payment is to be made;

 

(e)

fifth, in or towards satisfaction pro rata and pari passu according to the respective amounts thereof, of any Excluded Swap Termination Amounts due and payable by the Guarantor to the relevant Swap Provider under the relevant Swap Agreement;

 

(f)

sixth, to pay or provide for pro rata and pari passu according to the respective amounts thereof, any Indemnity Amounts payable to the Servicer, the Cash Manager, the Account Bank and the Custodian, to the extent not paid pursuant to paragraph (c) above;

 

(g)

seventh, in or towards repayment in full of all amounts outstanding under the Intercompany Loan Agreement;

 

(h)

eighth, towards payment of any indemnity amount due to the Partners pursuant to the Guarantor Agreement;

 

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(i)

ninth, in or towards payment of the fee due to the Corporate Services Provider; and

 

(j)

tenth, thereafter any remaining funds will be applied in or towards payment to the Partners pursuant to the Guarantor Agreement.

If the Guarantor receives any tax credits in respect of a Swap Agreement following the occurrence of a Guarantor Event of Default and service of a Guarantor Acceleration Notice, such tax credits will be used to reimburse the relevant Swap Provider for any gross-up in respect of any withholding or deduction made under the relevant Swap Agreement. Following the occurrence of a Guarantor Event of Default and service of a Guarantor Acceleration Notice, any Swap Collateral Excluded Amounts in respect of a Swap Agreement will be returned to the relevant Swap Provider subject to the terms of the relevant Swap Agreement, and any Third Party Amounts will be returned to the Seller, with the Seller paying such Third Party Amounts to the relevant third party.

Any Third Party Amounts received by the Bond Trustee or any Receiver after service of a Guarantor Acceleration Notice will be held by it on trust for the Seller until they have been returned to the Seller.

Summary of Fees and Expenses

Prior to the occurrence of a Covered Bond Guarantee Activation Event, the following fees and expenses will be paid from the Available Revenue Receipts.

 

Fee Description		Payable To		Purpose		Amount (% or $ per annum)		Current Provider
Agent Fees		US Paying Agent Principal Paying Agent Exchange Agent Calculation Agent		Making payments on bonds issued through DTC		Up to $10,000		Bank of Montreal
				For bond issued outside the US, the issuing and paying agent				Bank of Montreal
Bond Trustee Fee		Bond Trustee		Trustee for bond holders		Up to $22,000*		Computershare Trust Company of Canada
Servicing Fee and Expenses of Servicer		Replacement Servicer		Servicing the mortgage loans		Up to 0.20% (expected fee for replacement servicer)		Bank of Montreal
Cash Manager Fee and expenses of Cash Manager		Replacement Cash Manager		Hold cash		Up to $10,000		Bank of Montreal
Account Bank Fee		Replacement Account Bank				None		Bank of Montreal
Cover Pool Monitor Fee		Cover Pool Monitor		Check accuracy of records and confirm mathematical accuracy of tests and calculations		Up to $75,000		KPMG LLP

 

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GDA Provider Fee		Standby GDA Provider				None		Standby GDA Provider: Royal Bank of Canada
Custodial Fee		Custodian				Up to $10,000		Computershare Trust Company of Canada
Corporate Service Fees, Asset Trustee Fees, and Liquidation General Partner Fees		Corporate Service Provider, Covered Bond – Asset Trustee, Liquidation General Partner				Up to approximately $120,000**		Computershare Trust Company of Canada
CMHC registration fees		CMHC		Ongoing fees to maintain registration with CMHC		Up to $750,000		CMHC

 

*	Expenses may be in excess of this amount depending on the amount of the annual fees

**	Expenses may be in excess of this amount in an Issuer Event of Default

 

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PORTFOLIO

The Portfolio consists of cash, Loans and their Related Security, and in some cases Substitution Assets up to certain prescribed limits. The Loans sold to the Guarantor were randomly selected from the Bank’s uninsured residential mortgage portfolio after applying the Eligibility Criteria. For details on the Eligibility Criteria and representations and warranties provided with respect to the Loans in the Portfolio, see “Summary of the Principal Documents—Mortgage Sale Agreement—Eligibility Criteria and Summary of the Principal Documents—Mortgage Sale Agreement—Loan Representations and Warranties.” The Asset Coverage Test and the Amortization Test performed by the Cash Manager are intended to determine whether the assets and cashflows of the Guarantor, including the Loans and their Related Security in the Portfolio and cashflows in respect thereof, will be adequate to enable the Guarantor to meet its obligations under the Covered Bond Guarantee following the occurrence of a Covered Bond Guarantee Activation Event and the Valuation Calculation performed by the Cash Manager is intended to monitor exposure to volatility in interest rate and currency exchange rates.

Because the Portfolio is not a static pool of assets, statistical data for the Portfolio will be provided in the applicable prospectus supplement that will be distributed to investors with respect to an offering of a specific Series of covered bonds. In addition, the Cash Manager will prepare and provide Investor Reports to the Bank, the Guarantor, the Bond Trustee, and the Rating Agencies that will set out certain information in relation to the Portfolio, the calculation of the Asset Coverage Test, the Valuation Calculation, if applicable the Amortization Test, statistical information about the Loans in the Portfolio, performance information about the Loans, information on proceeds received on assets in the Portfolio and the application of such proceeds and other information prescribed by the requirements of the CMHC Guide. The Investor Reports will be available to covered bondholders at the Bank’s website at www.bmo.com/home/about/banking/investor-relations/financial-information/covered-bonds and through the CMHC’s covered bond registry at www.cmhc-schl.gc.ca/coveredbonds and filed with the SEC on its EDGAR system under cover of Form 10-D on the 20th day of each month (or if such day is not a Business Day, the first following Business Day).

Characteristics of the Loans

Mortgage loans originated by the Seller are secured by a first mortgage on the residential property to which they relate and are full recourse against the borrower (subject to exceptions in Alberta and Saskatchewan, as described below) and if guaranteed to the guarantor and against the property securing the mortgage loan.

Interest is calculated using either a fixed or variable rate. Fixed rate mortgage loans provide for interest based on a fixed annual rate agreed to at the time the mortgage loan is advanced with interest calculated semi-annually, not in advance. Variable rate mortgage loans provide for interest based on the Bank’s annual rate of interest announced from time to time as a reference rate then in effect for determining interest rates on Canadian Dollar commercial loans in Canada (the “Bank’s Prime Rate”) plus or minus a set percentage, calculated on the outstanding balance when each regular payment is due. In the case of variable rate mortgage loans, the interest rate varies automatically with changes in the Bank’s Prime Rate. If the Bank’s Prime Rate changes between scheduled payment dates, the revised rate becomes effective from the date of such change and is reflected on the next payment date. The total regular monthly payment amount due will not change (only the split between interest and principal is adjusted) unless that amount is insufficient to cover the interest amount due on the mortgage. In some circumstances the interest rate on a variable rate mortgage loan may be capped at a maximum rate.

 

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Mortgage loans can either be open or closed to pre-payment and can be for terms up to 18 years (with a typical term of five years) with amortization periods that do not exceed 40 years. They provide for regular payments (e.g. weekly, bi-weekly or monthly) and early and/or increased payment options subject to pre-payment charges in certain circumstances. In the case of variable rate mortgage loans, in the event that the borrower’s regular payment is insufficient to pay all interest when due, the mortgage loan terms and conditions allow the Bank to increase the regular payment amount payable by the borrower to cover interest costs. Interest which is not paid when due is subject to interest.

Where a mortgage loan is in default all amounts owing due under the mortgage loan will become due and payable and the Bank is allowed to require immediate payment of all amounts due. In Alberta and Saskatchewan the law restricts a lender’s recourse against a borrower where the proceeds from enforcement of the mortgage by way of a foreclosure action are insufficient to repay the amounts owing on a mortgage loan. Accordingly, if the proceeds from a foreclosure action are insufficient to repay the amounts due on a mortgage loan, the lender will suffer a loss.

 

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LOAN ORIGINATION AND LENDING CRITERIA

The description of the Bank’s Lending Criteria and procedures that follows describes the Bank’s Lending Criteria and procedures for the origination of mortgage loans as of the date of this prospectus. There is no requirement for the Bank to maintain the Lending Criteria or procedures described below and the Bank reserves the right to change its Lending Criteria and procedures at any time.

All of the Bank’s residential mortgages are originated by employees of the Bank. The Bank does not directly originate mortgage loans from external broker channels at this time. The Bank may purchase residential mortgage loans from third parties; however, such loans are not expected to form part of the Portfolio. All mortgages funded through third party arrangements are subject to the same credit standards as if they were originated through a Bank-owned channel.

Mortgage Origination and Renewal

The Bank primarily uses two proprietary channels for the origination of residential mortgages: Mortgage specialists (a mobile sales force of Bank employees) and the Bank’s branch network employees, including its private banking locations. The Bank uses real estate secured lending decision models to adjudicate conventional residential mortgages. These models are updated from time to time.

Mortgage Specialists

Mortgage specialists primarily focus on obtaining home financing business from new customers and do not participate in mortgage renewals. Mortgage specialists have credit training, but they do not have the authority to approve loans. All mortgage applications from this channel are independently adjudicated by the Bank’s Credit Department. Completion of mortgage specialist applications consists of a two stage process where the mortgage specialist receives and reviews the required documentation and then submits it to a dedicated team of support officers for an independent review enabling any corrective action prior to funding. A separate support team conducts regular quality reviews on transactions completed by the support officers to ensure adherence to the Bank’s policies and standards. Additionally, transactions completed in this channel also are subject to the Bank’s loan review process described below.

Branch Network

The branch channel, which also includes private banking locations, internet and telephone applications, focuses on the refinancing needs of existing clients as well as new clients. All lenders in the branch channel typically have extensive credit training. Transaction authority for branch originated mortgage applications is limited to systematic credit decisions generated through the Bank’s Automated Lending Decision (“ALD”) process. Some Private Banking lenders and Customer Contact Centre lenders may have credit decision authority based on extensive credit training and skill evaluation. All remaining mortgage applications are independently adjudicated by the Bank’s Credit Department. Completion of branch channel applications is undertaken in a similar two stage process where the branch lender receives and reviews the required documentation and then submits it to a designated in branch

 

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“funder” for an independent review enabling any corrective action prior to funding. Additionally, transactions completed in this channel are also subject to the Bank’s loan review process described below. The Bank is currently in the process of centralizing execution process activities in this channel to align this process with the execution process described in “—Mortgage Specialist” above.

Mortgage Renewals

All mortgages which are not in arrears are automatically available for renewal. Customers are typically contacted to choose their preferred term. A customer may be contacted by their branch or through a centralized call center team. Customers renewing their mortgage may change their payment structure (including amount and frequency of payments) however, remaining amortization cannot be extended past original commitment.

Valuations, Appraisals and Credit Strategy

Mortgage Valuations and Appraisals

The Bank Act (Canada) requires that all residential mortgage loans that have a LTV greater than 80% at origination be default insured by a mortgage default insurer. These loans are referred to in this prospectus as “insured mortgage loans” or “insured Loans.” Mortgage loans that have an LTV less than or equal to 80% at origination are referred to as “conventional mortgages.”

LTV is calculated on the outstanding balance or authorized amount and the most recent property valuation or purchase price (whichever is lower), which generally will be at the time of origination of the mortgage loan.

For all residential mortgage loans that have a LTV ratio of 80 percent or less, the Bank’s mortgage policy requires a property value assessment. The type of property value assessment applied will depend on a combination of factors, including property location, value, mortgage amount, borrower risk and LTV.

 

•

Drive-by appraisals—a Bank approved appraiser’s opinion of the property based on an exterior inspection of the property

 

•

Full appraisal—a Bank approved appraiser’s opinion of the property based on an exterior and interior inspection of the property

 

•

Low ratio risk assessment—a third party model for property risk assessment may be used in limited circumstances (maximum financed amount of $500,000, owner occupied, conventional mortgages within certain LTV ranges)

 

•

Waiving a property value risk assessment is available in limited circumstances based on internal guidelines and subject to a maximum 65% LTV for a purchase and 60% for refinancing. In these circumstances, the property value risk assessment is obtained through a multiple listing service for a purchase or a tax assessment for a refinancing.

The Bank uses three independent mortgage appraisal companies to ensure that appraisals are completed independent of the mortgage application.

 

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When the third party risk assessment model is used and the property does not pass the Bank’s established risk tolerance, a full appraisal is required.

Use of the Third Party Risk Assessment Model

In order for a mortgage to be eligible to be risk-assessed using a third party risk assessment model, the mortgage must meet the following criteria as established by the Bank: (i) the LTV range for a purchase is between 65% and less than or equal to 80% and the LTV range is between 60% and less than or equal to 80% for a refinance, (ii) the zoning regulations applicable to the property are residential, (iii) the mortgage is not a home equity line of credit, (iv) the property is not a new construction and (v) the mortgage is a single advance.

The third party risk assessment model looks at the specific characteristics of the property in question and uses different information sources, including:

 

•

the physical characteristics of the property (such as square footage, lot size, age, style of the home, etc.)

 

•

the municipal property tax assessment

 

•

historical and current sales activity within the local housing market, and

 

•

prior sales activity of the property being assessed, when available.

Mortgage Application

All mortgage applications undergo a due diligence process by qualified personnel related to the borrower’s background, credit history (using updated credit reports from either Equifax Information Services LLC or TransUnion LLC) and capacity to service the debt obligation. This credit risk analysis will help inform the underwriting decision as to the borrower’s ability and propensity to repay a mortgage loan as agreed. Excluding specialized programs such as loans for “new Canadians,” full disclosure of all requisite financial information (including assets, liabilities, recurring payment obligations, level of income) are obtained and validated.

The Bank’s underwriting policies and procedures require each prospective borrower to submit a mortgage loan application that discloses the applicant’s credit history, assets, liabilities, income and employment history, and includes consent to the Bank obtaining a credit report in respect of such applicant.

All mortgage refinance applications require a new credit application and risk assessment, including full adjudication and appraisal.

 

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Credit Adjudication

The Bank’s consumer credit decision is based on the 5C’s of credit at the time of application, which includes: (i) Character (the overall description of an individual’s personal history), (ii) Capacity (the customer’s ability to pay based on its circumstances), (iii) Credit (the customer’s repayment history with creditors generally), (iv) Capital (the availability of assets) and (v) Collateral (available security). In addition, a credit bureau report is used to support the credit decision.

Based on the data provided in the prospective borrower’s application and certain verifications, if required, and per the measures described above, the Bank determines whether the applicant’s monthly income will be sufficient to enable such applicant to meet the obligations under the proposed mortgage loan and to pay other expenses relating to the mortgaged property, including taxes and other fixed obligations.

All consumer loan applications are entered into the Bank’s loan processing system (“CCAPS”) which is an automated credit application system. The CCAPS system provides an automated method of capturing, investigating and executing various tasks associated with all mortgage applications, including: capturing the applicant’s personal information (residence, assets, liabilities, employment and income), obtaining a credit bureau report, calculating transaction values such as Total Debt Service Ratio and Gross Debt Service Ratio. CCAPS contains an access and security system allowing management to manage the activities of credit personnel. This facility consists of multiple levels designed to ensure credit limits are properly utilized by lending qualified staff.

CCAPS also has ALD component. ALD is model-driven and produces system generated decisions based on the information entered. Once a decision is returned the lender takes appropriate action. Any decision that is not a system generated approval requires adjudication by the Bank’s Credit Department in order for the loan to be approved. In addition, all mortgage specialist loans are adjudicated by the Bank’s Credit department. Any request that is an exception to the Bank’s policies and procedures and is credit related must be authorized by the Bank’s Credit Department.

Suspicious or potentially fraudulent activity is monitored throughout the process. Fraud detection systems are designed to look for inconsistencies in applications and suspicious facts. Suspicious applications are referred to the Bank’s Fraud Investigation group for investigation.

Loan Review Process

The Bank has an independent loan review process. This process includes the review of supporting documentation used to assess the quality of the credit and is completed monthly based on a random selection of applications. Additionally, a loan review procedure is conducted by the Canadian Consumer Credit department within the Bank’s Risk Management Unit. This loan review process requires the loan review manager to re-adjudicate the loan to ensure that the credit quality of the loan fits within the Bank’s risk appetite and was booked in accordance with policy. The loan review process also assesses the quality of the overall rationale used to support the final decision which includes an analysis of any risk mitigation that enabled the loan to fall within acceptable risk parameters set forth by the Bank. A loan review officer will review approximately two loans per credit officer per week. Weekly and monthly performance reports are submitted to lending managers and are designed to assist in determining when corrective action is required.

 

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THE SERVICER

General

The Bank is the servicer (the “Servicer”) of the Loans and Related Security pursuant to a servicing agreement (the “Servicing Agreement”) dated September 30, 2013 between the Bank, in its capacity as the Servicer and Seller, the Guarantor, as owner of the Loans and Related Security, and Computershare Trust Company of Canada, as the Bond Trustee. The Servicer will not be liable in respect of any loss, liability, claim, expense or damage suffered or incurred by the Guarantor and/or any other person as a result of the proper performance by the Servicer of its servicing obligations under the Servicing Agreement unless such loss, liability, claim, expense or damage is suffered or incurred as a result of any gross negligence, dishonesty, bad faith, fraud or willful misconduct of the Servicer or as a result of a breach by the Servicer of the terms and provisions of the Servicing Agreement or the other Transaction Documents in relation to such functions.

Servicing Activities

The Servicer began originating and servicing residential mortgage loans in 1954. The Servicer services its own portfolio of mortgage loans and generally retains the servicing rights with respect to any mortgage loans it sells or securitizes. As at August 31, 2013, the Servicer acted as primary servicer and owned the corresponding servicing rights on approximately 373,000 residential mortgage loans having an aggregate unpaid balance of approximately $72.1 billion.

The following table sets forth the dollar amount of mortgage loans serviced by the Servicer for the periods indicated, and the number of such loans for the same period.

 

				Year Ended October 31,
				2012				2011				2010				2009
Conventional mortgages		No. of Loans (thousands)			113				96				100				105
		Dollar Amount of Loans (Cdn$ millions)			23,878				18,045				18,074				17,494
		Percentage Change from Prior Year			32.32	%			-0.16	%			3.32	%			29.41	%
Insured mortgages		No. of Loans (thousands)			245				253				262				269
		Dollar Amount of Loans (Cdn$ millions)			42,438				42,312				41,744				41,069
		Percentage Change from Prior Year			0.30	%			1.36	%			1.65	%			-8.15	%
Total mortgage loans serviced		No. of Loans (thousands)			358				349				362				374
		Dollar Amount of Loans (Cdn$ millions)			66,316				60,357				59,819				58,563
		Percentage Change from Prior Year			9.87	%			0.90	%			2.14	%			0.57	%

Servicing Procedures with respect to Loans and Related Security

Following the sale of a mortgage loan to the Guarantor, the Servicer keeps and maintains records in relation to the Loans and Related Security sold to the Guarantor on a loan by loan basis, for the purposes of identifying amounts paid by each borrower, any amount due from a borrower and the principal balance (and, if different, the total balance) from time to time outstanding on a borrower’s account and such other records as would be customarily kept by a reasonable and prudent mortgage lender. The Servicer also identifies the Loans and Related Security as belonging to the Guarantor and maintains a computer record of the location and

 

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identification of the Loans and Related Security by reference to an account number and pool identifier so as to be able to distinguish them from other mortgage loans and security serviced by the Servicer for retrieval purposes. In the event the ratings of the Servicer by the Rating Agencies falls below certain ratings, the Servicer will use reasonable efforts to ensure that files relating to the Loans and their Related Security are identified as distinct from the conveyancing deeds and documents which make up the title and security of other properties and mortgages which do not form part of the Portfolio.

The Servicer provides customary servicing functions with respect to the Loans and Related Security. The Servicer makes reasonable efforts to collect all payments called for under the loan documents and follows such collection procedures as are customary with respect to such Loans. The Servicer collects and remits mortgage loan payments, responds to borrower inquiries, accounts for principal and interest, holds escrow account information and funds for payment of property taxes, monitors property insurance and in the case of lapses notifies borrowers and obtains lender-placed insurance at the borrower’s expense as necessary, counsels or otherwise works with delinquent borrowers, supervises power of sale, judicial sales or foreclosures, and property dispositions and generally administers the Loans and is required to take all reasonable steps to recover all sums due to the Guarantor in respect of the Loans and Related Security. The Bank will administer the Loans and the Related Security in the same way it administers mortgage loans for its own account. The Servicing Agreement requires that the Loans and the Related Security are to be serviced as if the Loans had not been sold to the Guarantor but remained with the Bank.

The Servicer may act as collection agent for the Guarantor under a scheme for either the manual or automated debiting of bank accounts (the “Direct Debiting System”) provided such Direct Debiting System is operated in accordance with policies and procedures which would be acceptable to a reasonable and prudent mortgage lender. Borrowers provide authorization for regular payments (made monthly or on a greater frequency) to be deducted automatically from bank accounts on the date each schedule payment is due.

The Servicer has the power to exercise the rights, powers and discretions and to perform the duties of the Guarantor in relation to the Loans and their Related Security and to do anything which it reasonably considers necessary or convenient or incidental to the administration of the Loans and their Related Security. This includes the authority to accept applications for product switches or advances in respect of the Loans in its sole discretion. The Bank, as seller of the Loans and Related Security to the Guarantor is required to provide the funding for any product switches or advances approved by the Servicer. The Servicer is not restricted from, in its discretion, (i) waiving any assumption fee, late payment or other charge in connection with a Loan; or (ii) waiving, varying or modifying any term of any Loan or consenting to the postponement of strict compliance with any such term or in any other matter grant indulgence with respect to any borrower.

With respect to collections, the Servicer may institute proceedings and enforce any relevant Loan which is in default in accordance with the Bank’s enforcement procedures and the usual procedures undertaken by a reasonable and prudent institutional mortgage lender.

The Servicer’s collections policy is designed to identify payment problems sufficiently early to permit the Servicer to address such delinquency problems and, when necessary, to act to preserve the lender’s equity in the property. A Loan is considered delinquent if a scheduled payment remains unpaid for 30 days or more after the due date. If timely payment is not received,

 

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the Servicer’s automated loan servicing system automatically places the Loan in the assigned collection queue. The account remains in the queue unless and until a payment is received, at which point the Servicer’s automated loan servicing system automatically removes the Loan from that collection queue.

When a Loan appears in a collection queue, various collection techniques are employed to remind the borrower that a payment is due. Such techniques include subsequent automated attempts to contact the borrower as well as automated letters, with the borrower ultimately telephoned by a collector. Follow-up telephone contacts with the borrower are attempted until the account is current or other payment arrangements have been made. When contact is made with a delinquent borrower, collectors present the borrower with alternative payment methods, in order to expedite payments. Standard form letters are utilized when attempts to reach the borrower by telephone fail and/or in some circumstances, to supplement the phone contacts. Collectors have computer access to telephone numbers, payment histories, loan information, and all past collection notes. The Servicer supplements the collectors’ efforts with advanced technology such as predictive dialers and software used to determine the optimal times to call a particular customer. Additionally, collectors may attempt to mitigate losses through the use of behavioral or other models that are designed to assist in identifying workout options in the early stages of delinquency. For those Loans in which collection efforts have been exhausted without success, the Servicer determines whether mortgage enforcement proceedings are appropriate. The course of action elected with respect to a delinquent Loan generally will be guided by a number of factors, including the related borrower’s payment history, ability and willingness to pay, the condition and occupancy of the Related Security, the amount of borrower equity in the Related Security, and whether there are any tax arrears, condominium or strata arrears, or construction liens.

Prior to a foreclosure or sale by power of sale, once the Servicer is in possession of the Related Security, it obtains an appraisal from a Bank approved appraiser. The Servicer then hires a real-estate agent to sell the property. The real-estate agent performs a current market analysis which includes: (i) a current valuation of the Related Security; (ii) an evaluation of the amount owed, if any, for real estate taxes; and (iii) estimated carrying costs, brokers’ fees, repair costs, and other related costs associated with real estate owned properties. The Servicer bases the sale price at the foreclosure process or power of sale on this analysis and its own appraisal.

The foreclosure process and power of sale process vary by jurisdiction across Canada and there are two different ways that the Servicer can acquire the right to sell the Related Security. If the Servicer acquires title to a property at a foreclosure process or a Certificate of Power of Sale at a power of sale process, it obtains an estimate of the sale price of the property and then hires one or more real estate agents to begin marketing the property. If the Related Security is not vacant when acquired, the lawyers that have been hired to facilitate the mortgage enforcement commence eviction proceedings and/or negotiations are held with occupants in an attempt to get them to vacate without incurring the additional time and cost of eviction. Repairs are performed if it is determined that they will increase the net liquidation proceeds, taking into consideration the cost of repairs, the carrying costs during the repair period and the marketability of the property both before and after the repairs.

Any loss, if any, on a Loan is determined based on the aggregate amount due on the Loan less the aggregate proceeds of sale of the mortgaged property minus related expenses.

 

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The Servicer’s collections procedures are updated regularly and continue to evolve on a regular basis to improve its efficiency and effectiveness.

Servicing and Other Compensation and Payment of Expenses

Each Loan acquired by the Guarantor is a serviced interest. The Guarantor does not have any obligation or liability to the Servicer on account of costs, expenses, disbursements, charges, or fees of the Servicer, the sole responsibility in that connection being that of the Servicer.

Payments on Loans; Deposits to Custodial Accounts

Any collections received by the Servicer in respect of Loans and Related Security to which the Guarantor is entitled are required to be held by the Servicer in trust for the Guarantor and to be kept distinguishable from all other funds held by the Servicer and following a downgrade in ratings by the Rating Agencies below certain thresholds, to be deposited directly into the GDA Account. All other sums received by the Servicer in respect of the Loans and their Related Security will be held by the Servicer for itself.

Replacement of Servicer

The Guarantor and the Bond Trustee may terminate the Servicing Agreement in the circumstances described under “Summary of the Principal Documents—Servicing Agreement.”

 

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DESCRIPTION OF THE CANADIAN REGISTERED COVERED BOND PROGRAMS REGIME

The CMHC Guide elaborates on the role and powers of CMHC as administrator of the Legislative Framework and sets out the conditions and restrictions applicable to registered issuers and registered covered bond programs.

Eligible Issuers

The Legislative Framework provides that in order to apply for registration as a registered issuer, a proposed issuer of covered bonds must be a “federal financial institution”, as defined in section 2 of the Bank Act (Canada), or, following the order of the Governor in Council, a cooperative credit society that is incorporated and regulated by or under an act of the legislature of a province of Canada.

Eligible Covered Bond Collateral and Coverage Tests

Assets held by a guarantor as collateral for covered bonds issued under a registered program may not include mortgages or other secured residential loans that (i) are insured by the CMHC or other Prohibited Insurers, or (ii) have a loan-to-value ratio that exceeds 80%. A guarantor may hold substitution assets consisting of Government of Canada securities and repos of such securities, provided that the value of such substitution assets may not exceed 10% of the total value of the assets of the guarantor held as covered bond collateral. The Legislative Framework, as further described in the CMHC Guide, further restricts assets comprising covered bond collateral by limiting cash held by the guarantor at any time to the amount necessary to meet the guarantor’s payment obligations for the next six months, subject to certain exceptions.

While the CMHC Guide does not impose a specified minimum or maximum level of overcollateralization, registered issuers must establish a minimum and maximum level of overcollateralization and disclose such levels in the registered issuer’s offering documents and in the Registry. The methodology to be employed for the asset coverage and amortization tests is specified in the CMHC Guide. Commencing July 1, 2014, in performing such tests registered issuers will be required to adjust the market values of the residential properties securing the mortgages or other residential loans comprising covered bond collateral to account for subsequent price adjustments.

The CMHC Guide also requires that the Guarantor engage in certain risk-monitoring and risk-mitigation practices, including (i) measurement of the present value of the assets comprising covered bond collateral as compared to the outstanding covered bonds (the “Valuation Calculation”), and (ii) hedging of its interest rate and currency exchange risks.

Bankruptcy and Insolvency

The Legislative Framework contains provisions that will limit the application of the laws of Canada and the provinces and territories relating to bankruptcy, insolvency and fraudulent conveyance to the assignments of loans and other assets to be held by a guarantor as covered bond collateral under a registered covered bond program. Such provisions will not be applicable to any covered bonds that are issued under a registered program at a time that the registered issuer has been suspended by CMHC in accordance with the powers afforded to it under the Legislative Framework and the CMHC Guide.

 

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Qualifications of Counterparties

The CMHC Guide prescribes certain qualifications for each of the counterparties to a registered covered bond program, including that such counterparty (i) possess the necessary experience, qualifications and facilities to perform its obligations under the program, (ii) meet or exceed any minimum standards prescribed by an applicable rating agency, (iii) if regulated, be in regulatory good standing, (iv) be in material compliance with any internal policies and procedures relevant to its role as a counterparty, and (v) be in material compliance with all laws, regulations and rules applicable to that aspect of its business relevant to its role as a counterparty (collectively, the “Counterparty Qualifications”). In connection with the Program, the counterparties are the Swap Providers, the Servicer, the Cash Manager, the Cover Pool Monitor, the Custodian, the Bond Trustee, the Account Bank and the Standby Account Bank (collectively, the “Counterparties”). Each of the Counterparties has represented and warranted in the Transaction Documents that it meets the Counterparty Qualifications.

Cover Pool Monitor

The role of the cover pool monitor, as well as the specified procedures to be carried out by the cover pool monitor, are also detailed in the CMHC Guide. The cover pool monitor’s responsibilities include confirmation of the arithmetical accuracy of the tests required by the CMHC Guide to be carried out under the registered covered bond program and the preparation and delivery of an annual report detailing the results of the specified procedures undertaken in respect of the covered bond collateral and the program. In addition to the Counterparty Qualifications, the cover pool monitor must be either (i) a firm engaged in the practice of accounting that is qualified to be an auditor of the registered issuer under the Bank Act (Canada) and Canadian auditing standards, or (ii) otherwise approved by CMHC (the “Cover Pool Monitor Qualifications”). The Cover Pool Monitor has represented and warranted in the Transaction Documents that it meets the Cover Pool Monitor Qualifications.

Custodian

The CMHC Guide requires that a registered issuer appoint a custodian for each of its registered covered bond programs. The custodian’s responsibilities include holding on behalf of the Guarantor applicable powers of attorney granted by the Bank to the Guarantor and details of the Portfolio assets and Substitution Assets. In addition to the Counterparty Qualifications, the custodian must satisfy certain other qualifications, including that it (i) be a federally or provincially chartered institution authorized to act in a fiduciary capacity with respect to valuable documents, or a chartered bank as described in Schedule I to the Bank Act (Canada), (ii) be equipped with secure, fireproof storage facilities, with adequate controls on access to assure the safety, confidentiality and security of the documents in accordance with customary standards for such facilities, (iii) use employees who are knowledgeable in the handling of mortgage and security documents and in the duties of a mortgage and security custodian, (iv) have computer systems that can accept electronic versions of asset details and be able to transmit that data as required by the CMHC Guide, and (v) be at arm’s length from (and otherwise independent and not an affiliate of) the registered issuer (collectively, the “Custodian Qualifications”). The Custodian has represented and warranted in the Transaction Documents that it meets the Custodian Qualifications.

 

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Bond Trustee

A registered issuer is required to appoint a bond trustee to represent the views and interests, and to enforce the rights, of the covered bondholders. In addition to the Counterparty Qualifications, a bond trustee must be at arm’s length from (and otherwise independent and not an affiliate of) the registered issuer (the “Bond Trustee Qualifications”). The Bond Trustee has represented and warranted in the Transaction Documents that it meets the Bond Trustee Qualifications.

Ratings

If there are covered bonds outstanding under a registered covered bond program, at least two rating agencies must at all times have current ratings assigned to at least one series or tranche of covered bonds outstanding, provided that such ratings need not be for the same series or tranche.

Disclosure and Reporting

The CMHC Guide sets out a number of disclosure and reporting obligations for registered issuers. Underlying these obligations is the principle that investors should have access to all material information with respect to the registered issuer and the relevant Series of covered bonds in order to make an informed investment decision with respect to buying, selling or holding such covered bonds. Registered issuers will be required to maintain a website where investors can access, among other things, material transaction documents, monthly reports on the covered bond collateral and static covered bond collateral portfolio data that users may download and analyze. The provisions of the CMHC Guide permit registered issuers to restrict access to such website (for example, through the use of a password) in order to comply with securities laws or otherwise. The Bank’s website will be specified in the applicable prospectus supplement.

Status of the Bank and the Program

On                     , the Bank was accepted as a registered issuer under Part I.1 of the NHA and the CMHC Guide in accordance with their terms and on                     , the Program was registered as a registered program under Part I.1 of the NHA and the CMHC Guide.

 

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PLAN OF DISTRIBUTION (AND CONFLICTS OF INTEREST)

We may sell any Series of covered bonds to be issued pursuant to this prospectus at any time after effectiveness of the Registration Statement of which this prospectus forms a part in one or more of the following ways from time to time:

 

•

through underwriters or Dealers;

 

•

through agents; or

 

•

directly to one or more purchasers.

The offered covered bonds may be distributed periodically in one or more transactions at:

 

•

a fixed price or prices, which may be changed;

 

•

market prices prevailing at the time of sale;

 

•

prices related to the prevailing market prices; or

 

•

negotiated prices.

The applicable prospectus supplements will include:

 

•

the initial public offering price;

 

•

the names of any underwriters, dealers or agents;

 

•

the purchase price of the covered bonds;

 

•

our proceeds from the sale of the covered bonds;

 

•

any underwriting discounts or commissions or agency fees and other underwriters’ or agents’ compensation;

 

•

any discounts or concessions allowed or reallowed or paid to dealers;

 

•

the place and time of delivery of the covered bonds; and

 

•

any securities exchange on which the covered bonds may be listed.

If underwriters are used in the sale of covered bonds issued pursuant to this prospectus, they will buy the covered bonds for their own account. The underwriters may then resell the covered bonds in one or more transactions, at any time or times at a fixed public offering price or at varying prices. The underwriters may change from time to time any fixed public offering price and any discounts or commissions allowed or re-allowed or paid to dealers. If dealers are utilized in the sale of covered bonds issued pursuant to this prospectus, we will sell the covered bonds to the dealers as principals. The dealers may then resell the covered bonds to the public at varying prices to be determined by such dealers.

 

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In connection with the offering of covered bonds pursuant to this prospectus, we may grant to the underwriters an option to purchase additional covered bonds to cover over-allotments, if any, at the initial public offering price (with an additional underwriting commission), as may be set forth in the applicable supplements for such covered bonds. If we grant any over-allotment option, the terms of the option will be set forth in the applicable supplements for the covered bonds.

This prospectus may be delivered by underwriters and dealers in connection with short sales undertaken to hedge exposures under commitments to acquire our covered bonds to be issued on a delayed or contingent basis.

Underwriters, dealers and agents that participate in the distribution of the covered bonds issued pursuant to this prospectus may be underwriters as defined in the Securities Act. Any discounts or commissions that we pay them and any profit they receive when they resell the covered bonds may be treated as underwriting discounts and commissions under the Securities Act. We may have agreements with underwriters, dealers and agents to indemnify them against certain civil liabilities, including liabilities under the Securities Act, to contribute with respect to payments which they may be required to make in respect of such liabilities and to reimburse them for certain expenses.

Underwriters, dealers and agents, and their affiliates or associates, may engage in transactions with us or perform services for us in the ordinary course of business and receive compensation from us.

Each Series of offered covered bonds issued pursuant to this prospectus will be a new issue of covered bonds and will have no established trading market. Covered bonds may or may not be listed on a national or foreign securities exchange or automated quotation system. Any underwriters or agents to whom covered bonds are sold for public offering or sale may make, but are not required to make, a market in the covered bonds, and the underwriters or agents may discontinue making a market in the covered bonds at any time without notice. No assurance can be given as to the liquidity or the existence of trading markets for any covered bonds.

Any underwriters utilized with the issuance of the covered bonds pursuant to this prospectus may engage in stabilizing transactions and syndicate covering transactions in accordance with Rule 104 of Regulation M under the Exchange Act. Stabilizing transactions permit bids to purchase the offered covered bonds or any underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of covered bonds in the open market after the distribution has been completed in order to cover syndicate short positions. Such stabilizing transactions and syndicate covering transactions may cause the price of the offered covered bonds to be higher than would be the case in the absence of such transactions.

Selling Restrictions Outside the United States

Except as described in an applicable prospectus supplement, the Bank has taken no action that would permit a public offering of the covered bonds or possession or distribution of this prospectus or any other offering material in any jurisdiction outside the United States where action for that purpose is required. Accordingly, each underwriter will be required to represent, warrant and agree, that it will comply with all applicable laws and regulations in force in any jurisdiction in which it purchases, offers or sells covered bonds or possesses or distributes this

 

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prospectus or any other offering material and will obtain any consent, approval or permission required by it for the purchase, offer or sale by it of covered bonds under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes such purchases, offers or sales and the Bank will have no responsibility in relation to this.

With regard to each covered bond, the relevant purchaser will be required to comply with those restrictions that the Bank and the relevant purchaser will agree and as will be set out in an applicable supplement.

Conflicts of Interest

Our affiliate, BMO Capital Markets Corp. may participate in the distribution of the covered bonds as an underwriter, dealer or agent. Any offering of covered bonds in which BMO Capital Markets Corp. participates will be conducted in compliance with the applicable requirements of FINRA Rule 5121, a rule of the Financial Industry Regulatory Authority, Inc. (“FINRA”). BMO Capital Markets Corp. will not participate in the distribution of an offering of covered bonds that do not have a bona fide public market within the meaning of Rule 5121 or are not investment grade rated within the meaning of Rule 5121 or covered bonds issued pursuant to this prospectus in the same Series that have equal rights and obligations as investment grade rated covered bonds unless either (1) each member firm responsible for managing the public offering does not have a conflict of interest within the meaning of Rule 5121, is not an affiliate of any member that does have a conflict of interest, and meets the requirements of Rule 5121 with respect to disciplinary history or (2) a qualified independent underwriter has participated in the preparation of the prospectus supplement or other offering document for the offering of covered bonds and has exercised the usual standards of due diligence with respect thereto. Neither BMO Capital Markets Corp. nor any other FINRA member participating in an offering of these covered bonds issued pursuant to this prospectus that has a conflict of interest will confirm initial sales to any discretionary accounts over which it has authority without the prior specific written approval of the customer.

In compliance with the guidelines of FINRA, the maximum commission or discount to be received by the participating FINRA members may not exceed 8% of the aggregate principal amount of covered bonds offered pursuant to this prospectus. We anticipate, however, that the maximum commission or discount to be received in any particular offering of covered bonds issued pursuant to this prospectus will be significantly less than this amount.

Market-Making Resale by Affiliates

This prospectus may be used by BMO Capital Markets Corp. or one more of our affiliates in connection with offers and sales of the covered bonds in market-making transactions. In a market-making transaction, BMO Capital Markets Corp. or one of our affiliates may resell a security it acquires from other holders, after the original offering and sale of security. Resales of this kind may occur in the open market or may be privately negotiated, at prevailing market prices at the time of resale or at related or negotiated prices. In these transactions, BMO Capital Markets Corp. or one of our affiliates may act as principal or agent, including as agent for the counterparty in a transaction in which BMO Capital Markets Corp. or one our affiliates, as applicable, acts as principal, or as agent for both counterparties in a transaction in which BMO Capital Markets Corp. or such affiliate, as applicable, does not act as principal. BMO Capital Markets Corp. or one of our affiliates may receive compensation in the form of discounts and commissions, including from both counterparties in some cases.

 

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The covered bonds to be sold in market-making transactions include covered bonds to be issued after the date of this prospectus, as well as covered bonds previously issued. We do not expect to receive any proceeds from market-making transactions. We do not expect that BMO Capital Markets Corp. or any other affiliate that engages in these transactions will pay any proceeds from its market-making resales to us.

Information about the trade and settlements dates, as well as the purchase price, for a market-making transaction will be provided to the purchaser in a separate confirmation of sale.

Unless we or an agent informs you in your confirmation of sale that your security is being purchased in its original offering and sale, you may assume that you are purchasing your security in a market-making transaction.

 

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TAXATION

U.S. FEDERAL INCOME TAXATION

The following describes the material U.S. federal income tax consequences that may be relevant with respect to the purchase, ownership and disposition of the covered bonds by an initial holder of a covered bond. It is the opinion of Allen & Overy LLP, counsel to the Bank. This summary addresses only the U.S. federal income tax considerations of holders that acquire the covered bonds at their original issuance and that will hold the covered bonds as capital assets.

This summary does not purport to address all U.S. federal income tax matters that may be relevant to a particular holder of covered bonds. This summary does not address tax considerations applicable to U.S. Holders (as defined below) that may be subject to special tax rules including, without limitation, the following: (i) financial institutions; (ii) insurance companies; (iii) dealers or traders in stocks, securities, currencies or notional principal contracts; (iv) regulated investment companies; (v) tax-exempt entities; (vi) persons that will hold the covered bonds as part of a “hedging” or “conversion” transaction or as a position in a “straddle” or as a part of a “synthetic security” or other integrated transaction for U.S. federal income tax purposes; (vii) persons that have a “functional currency” other than the U.S. Dollar; (viii) real estate investment trusts; (ix) persons that own (or are deemed to own) ten percent or more of the voting shares (or interests treated as equity) of the Bank; (x) partnerships, pass-through entities, or persons that hold covered bonds through pass-through entities; and (xi) U.S. expatriates and former long-term residents of the United States. Further, this summary does not address alternative minimum tax consequences, the Medicare tax on net investment income or the indirect effects on the holders of equity interests in a U.S. Holder. This summary also does not address the U.S. federal estate and gift tax consequences to holders of covered bonds.

This summary is based on the Code, U.S. Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date of this Prospectus. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below.

For the purposes of this summary, a “U.S. Holder” is a beneficial owner of a covered bond that is, for U.S. federal income tax purposes: (i) a citizen or individual resident of the United States; (ii) a corporation or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any state thereof (including the District of Columbia); (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (iv) a trust if (x) a court within the U.S. is able to exercise primary supervision over its administration and (y) one or more U.S. persons have the authority to control all of the substantial decisions of such trust. A “Non-U.S. Holder” is a beneficial owner of covered bonds that is not a U.S. Holder. If a partnership holds covered bonds, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership. Partners of partnerships holding covered bonds should consult their tax advisor.

 

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Taxation of U.S. Holders

This discussion deals only with covered bonds that are treated as debt instruments not subject to the contingent payment debt instrument rules for U.S. federal income tax purposes. The United States federal income tax consequences of owning covered bonds whose terms are not described in this prospectus will be discussed in an applicable supplement.

Payments of Interest

Interest paid on a covered bond, other than interest on a “Discount Bond” that is not “qualified stated interest” (each as defined below under “—Original Issue Discount—General”), will be taxable to a U.S. Holder as ordinary interest income at the time it is received or accrued, depending on the U.S. Holder’s regular method of accounting for U.S. federal income tax purposes.

A U.S. Holder utilizing the cash method of accounting for U.S. federal income tax purposes that receives an interest payment denominated in a currency other than U.S. Dollars (a “foreign currency”) will be required to include in income the U.S. Dollar value of that interest payment, based on the exchange rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. Dollars.

If interest on a covered bond is payable in a foreign currency, an accrual basis U.S. Holder is required to include in income the U.S. Dollar value of the amount of interest income accrued on a covered bond during the accrual period. An accrual basis U.S. Holder may determine the amount of the interest income to be recognized in accordance with either of two methods. Under the first accrual method, the amount of income accrued will be based on the average spot exchange rate in effect during the interest accrual period or, with respect to an accrual period that spans two taxable years, the part of the period within the taxable year. Under the second accrual method, the U.S. Holder may elect to determine the amount of income accrued on the basis of the exchange rate in effect on the last day of the accrual period or, in the case of an accrual period that spans two taxable years, the exchange rate in effect on the last day of the part of the period within the taxable year. If the last day of the accrual period is within five business days of the date the interest payment is actually received, an electing accrual basis U.S. Holder may instead translate that interest expense at the exchange rate in effect on the day of actual receipt. Any election to use the second accrual method will apply to all debt instruments held by the U.S. Holder at the beginning of the first taxable year to which the election applies or thereafter acquired by the U.S. Holder and will be irrevocable without the consent of the U.S. Internal Revenue Service (the “IRS”).

A U.S. Holder utilizing either of the foregoing two accrual methods will recognize ordinary income or loss with respect to accrued interest income on the date of receipt of the interest payment (including a payment attributable to accrued but unpaid interest upon the sale or retirement of a covered bond). The amount of ordinary income or loss will equal the difference between the U.S. Dollar value of the interest payment received (determined on the date the payment is received or on the date the covered bond is disposed of) in respect of the accrual period and the U.S. Dollar value of interest income that has accrued during that accrual period (as determined under the accrual method utilized by the U.S. Holder).

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a U.S. Holder on a sale or other disposition of that foreign currency will be ordinary income or loss and will generally be income from sources within the United States. for U.S. foreign tax credit limitation purposes.

Interest on the covered bonds received by a U.S. Holder will be treated as foreign source income for the purposes of calculating that holder’s U.S. foreign tax credit limitation. The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to specific classes of income. The rules relating to foreign tax credits and timing thereof are complex. U.S. Holders should consult their own tax advisors regarding the availability of a foreign tax credit in their particular situation.

Original Issue Discount

General. A covered bond, other than a covered bond with a term of one year or less (a “Short-Term Bond”), will be treated as issued at an original issue discount (“OID,” and a covered bond issued with OID, a “Discount Bond”) for U.S. federal income tax purposes if the excess of the sum of all payments provided under the covered bond, other than “qualified stated interest” payments (as defined below), over the “Issue Price” of the covered bond is more than a “de minimis amount” (as defined below). “Qualified stated interest” is generally interest paid on a covered bond that is unconditionally payable at least annually at a single fixed rate. The “Issue Price” of the covered bonds under the applicable prospectus supplement will be the first price at which a substantial amount of such covered bonds are sold to persons other than bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents, or wholesalers. Special rules for “Variable Rate Bonds” are described below under “—Original Issue Discount—Variable Rate Bonds.”

In general, if the excess of the sum of all payments provided under the covered bond other than qualified stated interest payments (the covered bond’s “stated redemption price at maturity”) over its Issue Price is less than one quarter of one percent of the covered bond’s stated redemption price at maturity multiplied by the number of complete years to its maturity (the “de minimis amount”), then such excess, if any, constitutes “de minimis OID” and the covered bond is not a Discount Bond. Unless the election described below under “—Original Issue Discount—Election to Treat All Interest as OID” is made, a U.S. Holder of a covered bond with de minimis OID must include such de minimis OID in income as stated principal payments on the covered bond are made. The includable amount with respect to each such payment will equal the product of the total amount of the covered bond’s de minimis OID and a fraction, the numerator of which is the amount of the principal payment made and the denominator of which is the stated principal amount of the covered bond.

A U.S. Holder will be required to include OID on a Discount Bond in income for U.S. federal income tax purposes as it accrues calculated on a constant yield method (described below) before the actual receipt of cash attributable to that income, regardless of the U.S. Holder’s regular method of accounting for U.S. federal income tax purposes. Under this method, U.S. Holders generally will be required to include in income increasingly greater amounts of OID over the life of Discount Bonds.

The amount of OID includable in income by a U.S. Holder of a Discount Bond is the sum of the daily portions of OID with respect to the covered bond for each day during the taxable year or portion of the taxable year on which the U.S. Holder holds that covered bond (“accrued OID”). The daily portion is determined by allocating to each day in any “accrual period” a pro

 

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rata portion of the OID allocable to that accrual period. Accrual periods with respect to a covered bond may be of any length selected by the U.S. Holder and may vary in length over the term of the covered bond as long as (i) no accrual period is longer than one year and (ii) each scheduled payment of interest or principal on the covered bond occurs on either the final or first day of an accrual period.

The amount of OID allocable to an accrual period equals the excess of (a) the product of the covered bond’s “adjusted issue price” at the beginning of the accrual period and the covered bond’s yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) over (b) the sum of the payments of qualified stated interest on the covered bond allocable to the accrual period. The “adjusted issue price” of a covered bond at the beginning of any accrual period is the Issue Price of the covered bond increased by (x) the amount of accrued OID for each prior accrual period and decreased by (y) the amount of any payments previously made on the covered bond that were not qualified stated interest payments.

For the purposes of determining the amount of OID allocable to an accrual period, if an interval between payments of qualified stated interest on the covered bond contains more than one accrual period, the amount of qualified stated interest payable at the end of the interval (including any qualified stated interest that is payable on the first day of the accrual period immediately following the interval) is allocated pro rata on the basis of relative lengths to each accrual period in the interval, and the adjusted issue price at the beginning of each accrual period in the interval must be increased by the amount of any qualified stated interest that has accrued prior to the first day of the accrual period but that is not payable until the end of the interval.

The amount of OID allocable to an initial short accrual period may be computed using any reasonable method if all other accrual periods other than a final short accrual period are of equal length. The amount of OID allocable to the final accrual period is the difference between (x) the amount payable at the maturity of the covered bond (other than any payment of qualified stated interest) and (y) the covered bond’s adjusted issue price as of the beginning of the final accrual period.

OID for any accrual period on a covered bond that is denominated in, or determined by reference to, a foreign currency will be determined in that foreign currency and then translated into U.S. Dollars in the same manner as interest payments accrued by an accrual basis U.S. Holder, as described under Payments of Interest above. Upon receipt of an amount attributable to OID in these circumstances, a U.S. Holder may recognize ordinary income or loss.

OID on a Discount Bond will be treated as foreign source income for the purposes of calculating a U.S. Holder’s foreign tax credit limitation. The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to specific classes of income. The rules relating to foreign tax credits and timing thereof are complex. U.S. Holders should consult their own tax advisors regarding the availability of a foreign tax credit in their particular situation.

Acquisition Premium. A U.S. Holder that purchases a covered bond for an amount less than or equal to the sum of all amounts payable on the covered bond after the purchase date other than payments of qualified stated interest but in excess of its adjusted issue price (as determined above under “—Original Issue Discount—General) (any such excess being “acquisition premium”) and that does not make the election described below under “—Original Issue

 

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Discount—Election to Treat All Interest as OID” will reduce the daily portions of OID by a fraction, the numerator of which is the excess of the U.S. Holder’s adjusted basis in the covered bond immediately after its purchase over the adjusted issue price of the covered bond, and the denominator of which is the excess of the sum of all amounts payable on the covered bond after the purchase date, other than payments of qualified stated interest, over the covered bond’s adjusted issue price.

Market Discount. A covered bond, other than a Short-Term Bond, will be treated as purchased at a market discount (a “Market Discount Bond”) if the covered bond’s stated redemption price at maturity or, in the case of a Discount Bond, the covered bond’s “revised issue price”, exceeds the amount for which the U.S. Holder purchased the covered bond by at least one quarter of one percent of such covered bond’s stated redemption price at maturity or revised issue price, respectively, multiplied by the number of complete years to the covered bond’s maturity. If such excess is not sufficient to cause the covered bond to be a Market Discount Bond, then such excess constitutes “de minimis market discount” and such covered bond is not subject to the rules discussed in the following paragraphs. For these purposes, the “revised issue price” of a covered bond generally equals its Issue Price, increased by the amount of any OID that has accrued on the covered bond.

Any gain recognized on the maturity or disposition of a Market Discount Bond will be treated as ordinary income to the extent that such gain does not exceed the accrued market discount on such covered bond. Alternatively, a U.S. Holder of a Market Discount Bond may elect to include market discount in income currently over the life of the covered bond. Such an election will apply to all debt instruments with market discount acquired by the electing U.S. Holder on or after the first day of the first taxable year to which the election applies. This election may not be revoked without the consent of the IRS.

Market discount on a Market Discount Bond will accrue on a straight-line basis unless the U.S. Holder elects to accrue such market discount on a constant yield method. Such an election will apply only to the covered bond with respect to which it is made and may not be revoked. A U.S. Holder of a Market Discount Bond that does not elect to include market discount in income currently generally will be required to defer deductions for interest on borrowings allocable to such covered bond in an amount not exceeding the accrued market discount on such covered bond until the maturity or disposition of such covered bond.

Election to Treat All Interest as OID. A U.S. Holder may elect to include in gross income all interest that accrues on a covered bond using the constant yield method described above under the heading “—Original Issue Discount—General,” with the modifications described below. For the purposes of this election, interest includes stated interest, OID, de minimis OID, market discount, de minimis market discount and unstated interest, as adjusted by any amortizable bond premium or acquisition premium.

In applying the constant yield method to a covered bond with respect to which this election has been made, the issue price of the covered bond will equal its cost to the electing U.S. Holder, the issue date of the covered bond will be the date of its acquisition by the electing U.S. Holder, and no payments on the covered bond will be treated as payments of qualified stated interest. This election will generally apply only to the covered bond with respect to which it is made and may not be revoked without the consent of the IRS. If this election is made with respect to a covered bond with “amortizable bond premium” (as defined below under “Covered Bonds Purchased at a Premium”), then the electing U.S. Holder will be deemed to have elected to apply

 

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amortizable bond premium against interest with respect to all debt instruments with amortizable bond premium (other than debt instruments the interest on which is excludible from gross income) held by the electing U.S. Holder as of the beginning of the taxable year in which the covered bond with respect to which the election is made is acquired or thereafter acquired. The deemed election with respect to amortizable bond premium may not be revoked without the consent of the IRS.

If the election to apply the constant yield method to all interest on a covered bond is made with respect to a Market Discount Bond, the electing U.S. Holder will be treated as having made the election discussed above under “—Original Issue Discount—Market Discount” to include market discount in income currently over the life of all debt instruments held or thereafter acquired by such U.S. Holder.

Variable Rate Bonds. A “Variable Rate Bond” is a covered bond that:

 

(a)

has an Issue Price that does not exceed the total noncontingent principal payments by more than the lesser of (i) the product of (x) the total noncontingent principal payments, (y) the number of complete years to maturity from the issue date and (z) 0.015, or (ii) 15 percent of the total noncontingent principal payments; and

 

(b)

does not provide for stated interest other than stated interest compounded or paid at least annually at (i) one or more “qualified floating rates,” (ii) a single fixed rate and one or more qualified floating rates, (iii) a single “objective rate” or (iv) a single fixed rate and a single objective rate that is a “qualified inverse floating rate.”

A qualified floating rate or objective rate in effect at any time during the term of the instrument must be set at a “current value” of that rate. A “current value” of a rate is the value of the rate on any day that is no earlier than three months prior to the first day on which that value is in effect and no later than one year following that first day.

A variable rate is a “qualified floating rate” if (i) variations in the value of the rate can reasonably be expected to measure contemporaneous variations in the cost of newly borrowed funds in the currency in which the covered bond is denominated or (ii) it is equal to the product of such a rate and either (a) a fixed multiple that is greater than 0.65 but not more than 1.35, or (b) a fixed multiple greater than 0.65 but not more than 1.35, increased or decreased by a fixed rate. If a covered bond provides for two or more qualified floating rates that (i) are within 0.25 percentage points of each other on the issue date or (ii) can reasonably be expected to have approximately the same values throughout the term of the covered bond, the qualified floating rates together constitute a single qualified floating rate. A rate is not a qualified floating rate, however, if the rate is subject to certain restrictions (including caps, floors, governors, or other similar restrictions) unless such restrictions are fixed throughout the term of the covered bond or are not reasonably expected to significantly affect the yield on the covered bond.

An “objective rate” is a rate, other than a qualified floating rate, that is determined using a single fixed formula and that is based on objective financial or economic information that is not within the control of or unique to the circumstances of the Bank or a related party (such as dividends, profits or the value of the Bank’s stock). A variable rate is not an objective rate, however, if it is reasonably expected that the average value of the rate during the first half of the covered bond’s term will be either significantly less than or significantly greater than the average

 

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value of the rate during the final half of the covered bond’s term. An objective rate is a “qualified inverse floating rate” if (i) the rate is equal to a fixed rate minus a qualified floating rate, and (ii) the variations in the rate can reasonably be expected to inversely reflect contemporaneous variations in the qualified floating rate.

If interest on a covered bond is stated at a fixed rate for an initial period of one year or less followed by either a qualified floating rate or an objective rate for a subsequent period and (i) the fixed rate and the qualified floating rate or objective rate have values on the issue date of the covered bond that do not differ by more than 0.25 percentage points or (ii) the value of the qualified floating rate or objective rate is intended to approximate the fixed rate, the fixed rate and the qualified floating rate or the objective rate constitute a single qualified floating rate or objective rate.

In general, if a Variable Rate Bond provides for stated interest at a single qualified floating rate or objective rate, all stated interest on the covered bond is qualified stated interest and the amount of OID, if any, is determined under the rules applicable to fixed rate debt instruments by using, in the case of a qualified floating rate or qualified inverse floating rate, the value as of the issue date of the qualified floating rate or qualified inverse floating rate, or, in the case of any other objective rate, a fixed rate that reflects the yield reasonably expected for the covered bond.

If a Variable Rate Bond does not provide for stated interest at a single qualified floating rate or a single objective rate and also does not provide for interest payable at a fixed rate (other than at a single fixed rate for an initial period), the amount of interest and OID accruals on the covered bond are generally determined by (i) determining a fixed rate substitute for each variable rate provided under the Variable Rate Bond (generally, the value of each variable rate as of the issue date or, in the case of an objective rate that is not a qualified inverse floating rate, a rate that reflects the reasonably expected yield on the covered bond), (ii) constructing the equivalent fixed rate debt instrument (using the fixed rate substitutes described above), (iii) determining the amount of qualified stated interest and OID with respect to the equivalent fixed rate debt instrument, and (iv) making the appropriate adjustments for actual variable rates during the applicable accrual period.

If a Variable Rate Bond provides for stated interest either at one or more qualified floating rates or at a qualified inverse floating rate, and in addition provides for stated interest at a single fixed rate (other than at a single fixed rate for an initial period), the amount of interest and OID accruals are determined as in the immediately preceding paragraph with the modification that the Variable Rate Bond is treated, for the purposes of the first three steps of the determination, as if it provided for a qualified floating rate (or a qualified inverse floating rate, as the case may be) rather than the fixed rate. The qualified floating rate (or qualified inverse floating rate) replacing the fixed rate must be such that the fair market value of the Variable Rate Bond as of the issue date would be approximately the same as the fair market value of an otherwise identical debt instrument that provides for the qualified floating rate (or qualified inverse floating rate) rather than the fixed rate.

 

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Prospective purchasers should consult their own tax advisors regarding the applicability and consequences of the variable rate debt instrument rules to any of the covered bonds issued under the Program.

Covered bonds Subject to Redemption. If the covered bonds are redeemable at the option of the Bank prior to their maturity or are repayable at the option of the U.S. Holder prior to their stated maturity, such covered bonds may be subject to rules that are different from the general rules discussed above. Investors intending to purchase covered bonds with such features should consult their own tax advisors, since the OID consequences will depend, in part, on the particular terms and features of the purchased covered bonds.

Short-Term Bonds. Short-Term Bonds will be treated as having been issued with OID. In general, an individual or other cash method U.S. Holder is not required to accrue such OID unless the U.S. Holder elects to do so. If such an election is not made, any gain recognized by the U.S. Holder on the sale, exchange or maturity of the Short-Term Bond will be ordinary income to the extent of the OID accrued on a straight-line basis, or upon election under the constant yield method (based on daily compounding), through the date of sale or maturity, and a portion of the deductions otherwise allowable to the U.S. Holder for interest on borrowings allocable to the Short-Term Bond will be deferred until a corresponding amount of income is realized. U.S. Holders who report income for U.S. federal income tax purposes under the accrual method, and certain other holders including banks and dealers in securities, are required to accrue OID on a Short-Term Bond on a straight-line basis unless an election is made to accrue the original issue discount under a constant yield method (based on daily compounding).

Covered Bonds Purchased at a Premium

A U.S. Holder that purchases a covered bond for an amount in excess of its principal amount may elect to treat such excess as “amortizable bond premium.” If such election is made, the amount required to be included in the U.S. Holder’s income each year with respect to interest on the covered bond will be reduced by the amount of amortizable bond premium allocable (based on the covered bond’s yield to maturity) to such year. In the case of a covered bond that is denominated in, or determined by reference to, a foreign currency, amortizable bond premium will be computed in units of foreign currency, and amortizable bond premium will reduce interest income in units of foreign currency. At the time amortizable bond premium offsets interest income, a U.S. Holder realizes exchange gain or loss (taxable as ordinary income or loss) equal to the difference between exchange rates at that time and at the time of the acquisition of the covered bonds. Any election to amortize bond premium will apply to all bonds (other than bonds the interest in which is excludible from gross income) held by the U.S. Holder at the beginning of the first taxable year to which the election applies or thereafter acquired by the U.S. Holder and is irrevocable without the consent of the IRS.

Sale, Exchange or Retirement of the Covered Bonds

A U.S. Holder’s tax basis in a covered bond will generally equal its “U.S. Dollar cost,” increased by the amount of any OID or market discount included in the U.S. Holder’s income with respect to the covered bond and the amount, if any, of income attributable to de minimis OID and de minimis market discount included in the U.S. Holder’s income with respect to the covered bond (each as determined above), and reduced by the amount of any payments with respect to the covered bond that are not qualified stated interest payments and the amount of any amortizable bond premium applied to reduce interest on the covered bond. The “U.S. Dollar

 

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cost” of a covered bond purchased with a foreign currency will generally be the U.S. Dollar value of the purchase price on the date of purchase or, in the case of covered bonds traded on an established securities market (as defined in the applicable U.S. Treasury Regulations) that are purchased by a cash basis U.S. Holder (or an accrual basis U.S. Holder that so elects), on the settlement date for the purchase.

A U.S. Holder will generally recognize gain or loss on the sale, exchange or retirement of a covered bond equal to the difference between the amount realized on the sale, exchange or retirement and the tax basis of the covered bond. The amount realized on the sale, exchange or retirement of a covered bond for an amount in foreign currency will be the U.S. Dollar value of that amount on (1) the date the payment is received in the case of a cash basis U.S. Holder, (2) the date of disposition in the case of an accrual basis U.S. Holder, or (3) in the case of covered bonds traded on an established securities market (as defined in the applicable U.S. Treasury Regulations), that are sold by a cash basis U.S. Holder (or an accrual basis U.S. Holder that so elects), on the settlement date for the sale.

Gain or loss recognized by a U.S. Holder on the sale, exchange or retirement of a covered bond that is attributable to changes in currency exchange rates will be ordinary income or loss and will consist of OID exchange gain or loss and principal exchange gain or loss. OID exchange gain or loss will equal the difference between the U.S. Dollar value of the amount received on the sale, exchange or retirement of a covered bond that is attributable to accrued but unpaid OID as determined by using the exchange rate on the date of the sale, exchange or retirement and the U.S. Dollar value of accrued but unpaid OID as determined by the U.S. Holder under the rules described above under “—Original Issue Discount—General.” Principal exchange gain or loss will equal the difference between the U.S. Dollar value of the U.S. Holder’s purchase price of the covered bond in foreign currency determined on the date of the sale, exchange or retirement, and the U.S. Dollar value of the U.S. Holder’s purchase price of the covered bond in foreign currency determined on the date the U.S. Holder acquired the covered bond. The foregoing foreign currency gain or loss will be recognized only to the extent of the total gain or loss realized by the U.S. Holder on the sale, exchange or retirement of the covered bond, and will generally be treated as from sources within the U.S. for U.S. foreign tax credit limitation purposes.

Any gain or loss recognized by a U.S. Holder in excess of foreign currency gain recognized on the sale, exchange or retirement of a covered bond (except for a Short-Term Bond, as discussed above) would generally be U.S. source capital gain or loss (except to the extent such amounts are attributable to market discount, accrued but unpaid interest, or subject to the general rules governing contingent payment obligations).

Prospective investors should consult their own tax advisors with respect to the treatment of capital gains (which may be taxed at lower rates than ordinary income for taxpayers who are individuals, trusts or estates that held the covered bonds for more than one year) and capital losses (the deductibility of which is subject to limitations).

A U.S. Holder will have a tax basis in any foreign currency received on the sale, exchange or retirement of a covered bond equal to the U.S. Dollar value of the foreign currency at the time of the sale, exchange or retirement. Gain or loss, if any, realized by a U.S. Holder on a sale or other disposition of that foreign currency will be ordinary income or loss and will generally be income from sources within the U.S. for foreign tax credit limitation purposes.

 

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Taxation of Non-U.S. Holders

A Non-U.S. Holder generally should not be subject to U.S. federal income or withholding tax on any payments on the covered bonds and gain from the sale, redemption or other disposition of the covered bonds unless: (i) that payment and/or gain is effectively connected with the conduct by that Non-U.S. Holder of a trade or business in the U.S.; (ii) in the case of any gain realized on the sale or exchange of a covered bond by an individual Non-U.S. Holder, that holder is present in the U.S. for 183 days or more in the taxable year of the sale, exchange or retirement and certain other conditions are met; or (iii) the Non-U.S. Holder is subject to tax pursuant to provisions of the Code applicable to certain expatriates.

Non U.S. Holders should consult their own tax advisors regarding the U.S. federal income and other tax consequences of owning covered bonds.

Backup Withholding and Information Reporting

Under current U.S. federal income tax law, backup withholding tax and information reporting requirements apply in the case of certain non-corporate U.S. beneficial owners of a covered bond to certain payments of principal of, and interest on, an obligation, and of proceeds of the sale of an obligation before maturity. The Bank, its agent, a broker, or any paying agent, as the case may be, may be required to withhold tax from any payment that is subject to backup withholding if the U.S. Holder fails to furnish the U.S. Holder’s taxpayer identification number (usually on IRS Form W-9), to certify that such U.S. Holder is not subject to backup withholding, or to otherwise comply with the applicable requirements of the backup withholding rules. Certain U.S. Holders (including, among others, corporations) are not subject to the backup withholding and information reporting requirements.

Non-U.S. Holders may be required to comply with applicable certification procedures to establish that they are not U.S. Holders in order to avoid the application of such information reporting requirements and backup withholding. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a U.S. Holder generally may be claimed as a credit against such U.S. Holder’s U.S. federal income tax liability provided that the required information is furnished to the IRS.

U.S. Holders should consult their own tax advisors as to their qualification for exemption from backup withholding and the procedure for obtaining an exemption.

Certain U.S. Holders may be required to report to the IRS certain information with respect to their beneficial ownership of the covered bonds. Investors who fail to report required information could be subject to substantial penalties.

IRS Disclosure Reporting Requirements

Certain U.S. Treasury Regulations relating to Section 6011 of the Internal Revenue Code (the “Disclosure Regulations”) meant to require the reporting of certain tax shelter transactions (“Reportable Transactions”) could be interpreted to cover transactions generally not regarded as tax shelters. Under the Disclosure Regulations it may be possible that certain transactions with respect to the covered bonds may be characterized as Reportable Transactions requiring a covered bondholder who is required to disclose such transaction, such as a sale, exchange, retirement or other taxable disposition of a covered bond that results in a loss that exceeds certain thresholds

 

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and other specified conditions are met. Prospective investors in the covered bonds should consult with their own tax advisors to determine the tax return obligations, if any, with respect to an investment in the covered bonds, including any requirement to file IRS Form 8886 (Reportable Transaction Disclosure Statement).

The above summary does not describe other tax consequences which will arise from purchasing, holding and disposing of covered bonds because the precise terms of covered bonds will vary from issue to issue. Persons who are unsure of their tax position are advised to consult their professional advisors.

Foreign Account Tax Compliance Act

Sections 1471 through 1474 of the U.S. Internal Revenue Code of 1986, as amended, (“FATCA”) impose a new reporting regime and potentially a 30% withholding tax with respect to certain payments to any non-U.S. financial institution (a “foreign financial institution,” or “FFI” (as defined in the Code)) that does not become a “Participating FFI” by entering into an agreement with the IRS to provide the IRS with certain information in respect of its account holders and investors or is not otherwise exempt from or in deemed compliance with FATCA. The Bank is classified as an FFI.

The new withholding regime will be phased in beginning July 1, 2014 for payments from sources within the United States and will apply to “foreign passthru payments” (a term not yet defined) no earlier than January 1, 2017. This withholding would potentially apply to payments in respect of any covered bonds that are issued on or after the “grandfathering date”, which is the later of (a) July 1, 2014 and (b) the date that is six months after the date on which final U.S. Treasury regulations defining the term foreign passthru payment are filed with the Federal Register, or which are materially modified on or after the grandfathering date. If covered bonds are issued before the grandfathering date, and additional covered bonds of the same Series are issued on or after that date, the additional covered bonds may not be treated as grandfathered, which may have negative consequences for the existing covered bonds, including a negative impact on market price.

The United States and a number of other jurisdictions have announced their intention to negotiate intergovernmental agreements to facilitate the implementation of FATCA (each, an “IGA”). Pursuant to FATCA and the “Model 1” and “Model 2” IGAs released by the United States, an FFI in an IGA signatory country could be treated as a “Reporting FI” not subject to withholding under FATCA on any payments it receives. Further, an FFI in a Model 1 IGA jurisdiction would not be required to withhold under FATCA or an IGA (or any law implementing an IGA) (any such withholding being: “FATCA Withholding”) from payments it makes (unless it has agreed to do so under the U.S. “qualified intermediary”, “withholding foreign partnership”, or “withholding foreign trust” regimes). The Model 2 IGA leaves open the possibility that a Reporting FI might in the future be required to withhold as a Participating FFI on foreign passthru payments. Under each Model IGA, a Reporting FI would still be required to report certain information in respect of its account holders and investors to its home government or to the IRS. The United States and Canada have announced an intention to enter into an agreement (a “US-Canada IGA”).

 

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If the Bank becomes a Participating FFI, the Bank and financial institutions through which payments on the covered bonds are made may be required to withhold FATCA Withholding if any FFI through or to which payment on such covered bonds is made is not a Participating FFI, a Reporting FI, or otherwise exempt from or in deemed compliance with FATCA.

Whilst the covered bonds are in global form and held within the clearing systems, it is expected that FATCA will not affect the amount of any payments made under, or in respect of, the covered bonds by the Bank, the Guarantor or any paying agent, given that each of the entities in the payment chain between the Bank and the participants in the clearing systems is a major financial institution whose business is dependent on compliance with FATCA and that any alternative approach introduced under an IGA will be unlikely to affect the covered bonds. The documentation expressly contemplates the possibility that the covered bonds may go into definitive form and therefore that they may take out of the clearing systems. If this were to happen, then a non-FATCA compliant holder could be subject to FATCA withholding. However, definitive covered bonds will only be printed in remote circumstances.

If an amount in respect of FATCA withholding were to be deducted or withheld from interest, principal or other payments made in respect of the covered bonds, neither the Bank nor any paying agent nor any other person would, pursuant to the conditions of the covered bonds, be required to pay additional amounts as a result of the deduction or withholding. As a result, investors may receive less interest or principal than expected.

FATCA is particularly complex and its application is uncertain at this time. The above description is based in part on regulations, official guidance and model IGAs, all of which are subject to change or may be implemented in a materially different form. Prospective investors should consult their tax advisers on how these rules may apply to the Bank and to payments they may receive in connection with the covered bonds.

CANADIAN TAXATION

This section describes the material Canadian federal income tax considerations applicable to a Non-Resident Holder (as defined below). It is the opinion of Osler Hoskin & Harcourt LLP, counsel to the Bank. A “Non Resident Holder” is a holder of covered bonds (1) who acquires covered bonds, including entitlement to all payments thereunder, as a beneficial owner pursuant to this prospectus, (2) who, at all relevant times, for the purposes of the ITA, deals at arm’s length with the Bank and the Guarantor, (3) who, at all relevant times, for purposes of the application of the ITA, is not, and is not deemed to be, resident in Canada, (4) who deals at arm’s length with the Bank, the Guarantor and any transferee resident (or deemed to be resident) in Canada to whom the Holder disposes of the covered bonds, (5) who is not a “specified shareholder” (as defined in the ITA) of the Bank or a person that does not deal at arm’s length with a specified shareholder of the Bank for purposes of the thin capitalization rules contained in subsection 18(4) of the ITA, and (6) who does not use or hold the covered bonds in a business carried on (or deemed to be carried on) in Canada.

This discussion assumes that no amount paid or payable as, on account or in lieu of payment of, or in satisfaction of, interest will be in respect of a debt or other obligation to pay an amount to a person who does not deal at arm’s length with the Bank or the Guarantor, as the case may be, for the purposes of the ITA.

This discussion is based upon the provisions of the ITA and the regulations thereunder (the “Regulations”) in force on the date hereof and counsel’s understanding of the current administrative and assessing practices and policies of the Canada Revenue Agency published in writing by it prior to the date hereof. This summary takes into account all specific proposals to amend the ITA and Regulations publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (the “Proposed Amendments”) and assumes that all Proposed Amendments will be enacted in the form proposed. However, no assurances can be given that the Proposed Amendments will be enacted as proposed, or at all. This summary does not otherwise take into account or anticipate any changes in law or administrative policy or assessing practice, whether by legislative, regulatory, administrative or judicial action, nor does it take into account provincial, territorial or foreign income tax legislation.

Canadian federal income tax considerations applicable to covered bonds may be described more particularly when such covered bonds are offered (and then only to the extent material) in the prospectus supplement related thereto if they are not addressed by the comments following and, in that event, the following will be superseded thereby to the extent indicated in such prospectus supplements.

This discussion is not, and is not intended to be, legal or tax advice to any particular holder. Accordingly, prospective purchasers of covered bonds should consult their own tax advisors with respect to their particular circumstances.

 

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Payments by the Bank in Respect of the covered bonds

Interest paid or credited or deemed to be paid or credited by the Bank on a covered bond (including amounts on account of or in lieu of, or in satisfaction of, interest) to a Non-Resident Holder will not be subject to Canadian non-resident withholding tax, unless all or any portion of such interest (other than on a “prescribed obligation” described below) is contingent or dependent on the use of or production from property in Canada or is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholders of any class or Series of shares of the capital stock of a corporation. A “prescribed obligation” is a debt obligation the terms or conditions of which provide for an adjustment to an amount payable in respect of the obligation for a period during which the obligation was outstanding which adjustment is determined by reference to a change in the purchasing power of money and no amount payable in respect thereof, other than an amount determined by reference to a change in the purchasing power of money, is contingent or dependent upon any of the criteria described in the preceding sentence. If any interest payable on a covered bond, or any portion of the principal amount of a covered bond in excess of its issue price, is to be calculated by reference to an index or formula, interest on the covered bond together with such portion of principal, may be subject to Canadian non-resident withholding tax. The prospectus supplement in respect of each particular Tranche of covered bonds of a Series will confirm the exemption from (or application of) Canadian non-resident withholding tax based upon the terms of that particular Tranche.

In the event that a covered bond the interest on which is not exempt from Canadian non-resident withholding tax upon its terms is redeemed, cancelled, repurchased or purchased by the Bank or any other person resident or deemed to be resident in Canada from a Non-Resident Holder or is otherwise assigned or transferred by a Non-Resident Holder to a person resident or deemed to be resident in Canada for an amount which exceeds, generally, the issue price thereof, the excess may be deemed to be interest and may, together with any interest that has accrued on the covered bond to that time, be subject to Canadian non-resident withholding tax. Such excess will not be subject to Canadian non-resident withholding tax, however, if the covered bond is considered to be an “excluded obligation” for purposes of the ITA. A covered bond that is not an “indexed debt obligation” (described below), that was issued for an amount not less than 97 percent of the principal amount (as defined in the ITA) of the covered bond, and the yield from

 

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which, expressed in terms of an annual rate (determined in accordance with the ITA) on the amount for which the covered bond was issued does not exceed 4/3 of the interest stipulated to be payable on the covered bond, expressed in terms of an annual rate on the outstanding principal amount from time to time, will be an “excluded obligation” for this purpose. An “indexed debt obligation” is a debt obligation the terms or conditions of which provide for an adjustment to an amount payable in respect of the obligation, for a period during which the obligation was outstanding, that is determined by reference to a change in the purchasing power of money.

If interest is subject to Canadian non-resident withholding tax, the rate is 25%, subject to reduction under the terms of an applicable income tax treaty or convention between Canada and the country of residence of the Non-Resident Holder.

Generally, there are no other taxes on income (including taxable capital gains) payable by a Non-Resident Holder on interest, discount, or premium on a covered bond or on the proceeds received by a Non-Resident Holder on the disposition of a covered bond (including redemption, cancellation, purchase or repurchase).

Payments by the Guarantor under the Covered Bond Guarantee

Payments by the Guarantor under the Covered Bond Guarantee in respect of interest, amounts in lieu of interest on the covered bonds or in respect of the principal amount of the covered bonds will not be subject to Canadian non-resident withholding tax to the same extent such payments, if made by the Bank on the covered bonds, would be free of Canadian non-resident withholding tax, as discussed above.

 

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BENEFIT PLAN INVESTOR CONSIDERATIONS

Unless otherwise provided in any supplement to this prospectus, the covered bonds should be eligible for purchase by employee benefit plans and other plans subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the provisions of Section 4975 of the Code and by governmental, church and non-U.S. plans that are subject to state, local, other federal or non-U.S. law that is substantially similar to ERISA or the Code (“Similar Law”) subject to consideration of the issues described in this Section. ERISA imposes certain requirements on “employee benefit plans” (as defined in Section 3(3) of ERISA) subject to ERISA, including entities such as collective investment funds and separate accounts whose underlying assets include the assets of such plans (collectively, “ERISA Plans”), and on those persons who are fiduciaries with respect to ERISA Plans. Investments by ERISA Plans are subject to ERISA’s general fiduciary requirements, including the requirements of investment prudence and diversification and the requirement that an ERISA Plan’s investments be made in accordance with the documents governing the ERISA Plan. The prudence of a particular investment must be determined by the responsible fiduciary of an ERISA Plan by taking into account the ERISA Plan’s particular circumstances and all of the facts and circumstances of the investment including, but not limited to, the matters discussed under “Risk factors.”

Section 406 of ERISA and Section 4975 of the Code prohibit certain transactions involving the assets of an ERISA Plan (as well as those plans that are not subject to ERISA but which are subject to Section 4975 of the Code, such as individual retirement accounts (together with ERISA Plans, the “Plans”)) and certain persons (referred to as “parties in interest” or “disqualified persons”) having certain relationships to such Plans, unless a statutory or administrative exemption is applicable to the transaction. A party in interest or disqualified person, including a Plan fiduciary, who engages in a prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code.

The Bank, the Guarantor, the Dealers, the Bond Trustee or any other party to the transactions referred to in this prospectus may be parties in interest or disqualified persons with respect to many Plans. Prohibited transactions within the meaning of Section 406 of ERISA or Section 4975 of the Code may arise if any of the covered bonds is acquired or held by a Plan, including but not limited to where the Bank, the Guarantor, the Dealers, the Bond Trustee or any other party to such transactions is a party in interest or a disqualified person. Certain exemptions from the prohibited transaction provisions of Section 406 of ERISA and Section 4975 of the Code may be applicable, however, depending in part on the type of Plan fiduciary making the decision to acquire any covered bonds and the circumstances under which such decision is made. Included among these exemptions are Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code (relating to transactions between a person that is a party in interest (other than a fiduciary or an affiliate that has or exercises discretionary authority or control or renders investment advice with respect to assets involved in the transaction) solely by reason of providing services to the plan, provided that there is adequate consideration for the transaction), Prohibited Transaction Class Exemption (“PTCE”) 91-38 (relating to investments by bank collective investment funds), PTCE 84-14 (relating to transactions effected by a qualified professional asset manager), PTCE 95-60 (relating to transactions involving insurance company general accounts), PTCE 90-1 (relating to investments by insurance company pooled separate accounts) and PTCE 96-23 (relating to transactions determined by in-house asset managers). Prospective investors should consult with their advisors regarding the prohibited transaction rules and these exceptions. There can be no assurance that any of these exemptions or any other exemption will be available with respect to any particular transaction involving any covered bonds.

 

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Governmental plans (as defined in Section 3(32) of ERISA), certain church plans (as defined in Section 3(33) of ERISA) and non-U.S. plans (as described in Section 4(b)(4) of ERISA), while not subject to the fiduciary responsibility provisions of ERISA or the prohibited transaction provisions of Section 406 of ERISA and Section 4975 of the Code, may nevertheless be subject to substantially Similar Law. Fiduciaries of any such plans should consult with their counsel before purchasing the covered bonds to determine the need for, if necessary, and the availability of, any exemptive relief under any Similar Law.

Accordingly, except as otherwise provided in any supplement to this prospectus, each purchaser and subsequent transferee of any covered bonds will be deemed by such purchase or acquisition of any such covered bonds to have represented and warranted, on each day from the date on which the purchaser or transferee acquires such covered bonds (or any interest therein) through and including the date on which the purchaser or transferee disposes of such covered bonds (or any interest therein), either that (a) it is not a Plan or any entity whose underlying assets include, or are deemed for purposes of ERISA or the Code to include, the assets of any Plan or a governmental, church or non-U.S. plan which is subject to any substantially Similar Law or (b) its acquisition, holding and disposition of such covered bonds (or any interest therein) will not constitute or result in a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code (or, in the case of a governmental, church or non-U.S. plan subject to Similar Law, a violation of any substantially Similar Law) for which an exemption is not available.

In addition, any purchaser, that is a Plan or that is acquiring the covered bonds on behalf of a Plan, including any fiduciary purchasing on behalf of a Plan, will be deemed to have represented, in its corporate and its fiduciary capacity, by its purchase and holding of the covered bonds that (a) none of the Bank, the Guarantor, the Dealers, the Bond Trustee, or any of their respective affiliates (the “Affiliated Parties”) is a “fiduciary” (under Section 3(21) of ERISA, or under any final or proposed regulations thereunder, or with respect to a governmental, church, or non-U.S. plan under any Similar Laws) with respect to the acquisition, holding or disposition of the covered bonds, or as a result of any exercise by us or our affiliates of any rights in connection with the covered bonds, (b) no advice provided by any of the Affiliated Parties has formed a primary basis for any investment decision by or on behalf of such purchaser in connection with the covered bonds and the transactions contemplated with respect to the covered bonds, and (c) such purchaser recognizes and agrees that any communication from any of the Affiliated Parties to the purchaser with respect to the covered bonds is not intended by the Affiliated Parties to be impartial investment advice and is rendered in its capacity as a seller of such covered bonds and not a fiduciary to such purchaser.

Each Plan fiduciary who is responsible for making the investment decisions whether to purchase or commit to purchase and to hold any of the covered bonds should determine whether, under the documents and instruments governing the Plan, an investment in such covered bonds is appropriate for the Plan, taking into account the overall investment policy of the Plan and the composition of the Plan’s investment portfolio. Any Plan proposing to invest in such covered bonds (including any governmental, church or non-U.S. plan) should consult with its counsel to confirm that such investment will not constitute or result in a non-exempt prohibited transaction and will satisfy the other requirements of ERISA and the Code (or, in the case of a governmental, church or non-U.S. plan, any substantially Similar Law).

 

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The sale of any covered bonds to a Plan is in no respect a representation by the Bank, the Guarantor, the Dealers, the Bond Trustee or any other party to the transactions that such an investment meets all relevant legal requirements with respect to investments by Plans generally or any particular Plan, or that such an investment is appropriate for Plans generally or any particular Plan.

Any further ERISA considerations with respect to covered bonds may be found in the relevant supplement to this prospectus.

 

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OWNERSHIP AND BOOK-ENTRY

The covered bonds will be issued in registered form as global covered bonds through DTC. In this section, we describe special considerations that will apply to the covered bonds issued in global i.e., book-entry, form. First we describe the difference between registered ownership and indirect ownership of the covered bonds. Then we describe special provisions that apply to global covered bonds.

Who is the Registered Owner of a Covered Bond?

The covered bonds will be represented by one or more global covered bonds. We refer to those who have covered bonds registered in their own names, on the books that we or the trustee maintain for this purpose, as the “registered holders” of those securities. Subject to limited exceptions, we and the trustee are entitled to treat the registered holder of a covered bond as the person exclusively entitled to vote, to receive notices, to receive any interest or other payment in respect of the covered bond, and to exercise all the rights and power as an owner of the covered bond. We refer to those who own beneficial interests in covered bonds that are not registered in their own names as indirect owners of those covered bonds. As we discuss below, indirect owners are not registered holders, and investors in covered bonds issued in book-entry form or in street name will be indirect owners.

Book-Entry Owners. Unless otherwise noted in your prospectus supplement, we will issue each covered bond issued pursuant to this prospectus in book-entry form only. This means covered bonds issued pursuant to this prospectus will be represented by one or more global covered bonds registered in the name of a financial institution that holds them as depositary on behalf of other financial institutions that participate in the depositary’s book-entry system. These participating institutions, in turn, hold beneficial interests in such covered bonds on behalf of themselves or their customers.

Under the Trust Deed, subject to limited exceptions, only the person in whose name a covered bond is registered is recognized as the holder of that covered bond. Consequently, for global covered bonds, we will recognize only the applicable depositary as the holder of the covered bonds and we will make all payments on the covered bonds, including deliveries of any property other than cash, to the applicable depositary. The applicable depositary passes along the payments it receives to its participants, which in turn pass the payments along to their customers who are the beneficial owners. The applicable depositary and its participants do so under agreements they have made with one another or with their customers; they are not obligated to do so under the terms of the covered bonds.

As a result, investors will not own the covered bonds directly. Instead, they will own beneficial interests in a global covered bond, through a bank, broker, or other financial institution that participates in the depositary’s book-entry system or holds an interest through a participant. As long as the covered bonds are issued in global form, investors will be indirect owners, and not registered holders, of the covered bonds.

Registered Holders. Subject to limited exceptions, our obligations, as well as the obligations of the Bond Trustee and the obligations, if any, of any other third parties employed by us, run only to the registered holders of the covered bonds. We do not have obligations to investors who hold beneficial interests in global covered bonds by any indirect means. This will

 

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be the case whether an investor chooses to be an indirect owner of a covered bond or has no choice because we are issuing the covered bonds issued pursuant to this prospectus only in global form.

For example, once we make a payment or give a notice to the registered holder, we have no further responsibility for that payment or notice even if that holder is required, under agreements with depositary participants or customers or by law, to pass it along to the indirect owners but does not do so. Similarly, if we want to obtain the approval of the holders for any purpose—for example, to amend the Trust Deed for a Series of covered bonds or to relieve us of the consequences of a default or of our obligation to comply with a particular provision of the Trust Deed—we would seek the approval only from the registered holders, and not the indirect owners, of the relevant covered bonds. Whether and how the registered holders contact the indirect owners is up to the registered holders.

When we refer to “you” in this prospectus, we mean all purchasers of the covered bonds being issued pursuant to this prospectus, whether they are the registered holders or only indirect owners of those covered bonds.

Special Considerations for Indirect Owners. If you hold covered bonds through a bank, broker or other financial institution in book-entry form, you should check with your own institution to find out:

 

•

how it handles payments and notices;

 

•

whether it imposes fees or charges;

 

•

how it would handle a request for the holders’ consent, if ever required;

 

•

how it would exercise rights under the covered bonds if there were a default or other

 

•

event triggering the need for holders to act to protect their interests; and

 

•

how the depositary’s rules and procedures will affect these matters.

What is a Global Covered Bond?

Unless otherwise noted in the applicable prospectus supplement, we will issue each covered bond issued pursuant to this prospectus in book-entry form only. Each covered bond issued in book-entry form will be represented by a global covered bond that we deposit with and register in the name of one or more financial institutions or clearing systems, or their nominees, which we select. A financial institution or clearing system that we select for any covered bond for this purpose is called the “depositary” for that covered bond. Each Series of covered bonds issued pursuant to this prospectus will have one or more of the following as the depositaries: DTC and/or any other clearing system or financial institution named in the prospectus supplement.

The depositary or depositaries for your covered bonds will be named in your prospectus supplement; if none is named, the depositary will be DTC. Covered bonds may have different depositaries or be held directly.

 

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A global covered bond may represent one or any other number of individual covered bonds. All covered bonds represented by the same global covered bond will have the same terms.

A global covered bond may not be transferred to or registered in the name of anyone other than the depositary or its nominee. As a result of these arrangements, the depositary, or its nominee, will be the sole registered owner and holder of all covered bonds represented by a global covered bond, and investors will be permitted to own only indirect interests in a covered bond represented by a global covered bond. Indirect interests must be held by means of an account with a broker, bank or other financial institution that in turn has an account with the depositary or with another institution that does. Thus, an investor whose covered bonds are represented by a global covered bond will not be a holder of the covered bonds, but only an indirect owner of an interest in the global covered bond.

If the prospectus supplement for a particular Series of covered bonds indicates that the covered bonds will be issued in global form only, then the covered bonds will be represented by a global covered bond at all times.

Special considerations for global covered bonds.

As an indirect owner, an investor’s rights relating to a global covered bond will be governed by the account rules of the depositary and those of the investor’s bank, broker, financial institution or other intermediary through which it holds its interest, as well as general laws relating to securities transfers. We do not recognize this type of investor or any intermediary as a holder of covered bonds and instead deal only with the depositary that holds the global covered bond.

For covered bonds issued only in the form of a global covered bond, an investor should be aware of the following:

 

•

except in limited circumstances, an investor cannot cause the covered bonds to be registered in his or her own name, and cannot obtain non-global certificates for his or her interest in the covered bond;

 

•

an investor will be an indirect holder and must look to his or her own bank, broker, or other financial institution for payments on the covered bonds and protection of his or her legal rights relating to the covered bonds, as we describe above under “—Who Is the Registered Owner of a Covered Bond?”;

 

•

an investor may not be able to sell interests in the covered bonds to some insurance companies and other institutions that are required by law to own their securities in non-book-entry form;

 

•

an investor may not be able to pledge his or her interest in a global covered bond in circumstances in which certificates representing the covered bonds must be delivered to the lender or other beneficiary of the pledge in order for the pledge to be effective;

 

•

the depositary’s policies will govern payments, deliveries, transfers, exchanges, notices and other matters relating to an investor’s interest in a global covered bond, and those policies may change from time to time. We and the Bond Trustee

 

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will have no responsibility for any aspect of the depositary’s policies, actions or records of ownership interests in a global covered bond. We and the Bond Trustee also do not supervise the depositary in any way;

 

•

the depositary may require that those who purchase and sell interests in a global covered bond within its book-entry system use immediately available funds and your bank, broker or other financial institution may require you to do so as well; and

 

•

financial institutions that participate in the depositary’s book-entry system and through which an investor holds its interest in the global covered bonds, directly or indirectly, may also have their own policies affecting payments, deliveries, transfers, exchanges, notices and other matters relating to the securities, and those policies may change from time to time. There may be more than one financial intermediary in the chain of ownership for an investor. We do not monitor and are not responsible for the policies or actions or records of ownership interests of any of those intermediaries.

Considerations Relating to DTC

DTC has advised us as follows:

 

•

DTC is:

 

(1)

a limited purpose trust company organized under the laws of the State of New York;

 

(2)

a “banking organization” within the meaning of New York Banking Law;

 

(3)

a member of the Federal Reserve System;

 

(4)

a “clearing corporation” within the meaning of the New York Uniform Commercial Code; and

 

(5)

a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act.

 

•

DTC was created to hold securities for its participants and to facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes to accounts of its participants. This eliminates the need for physical movement of securities.

 

•

Participants in DTC include securities brokers and dealers, banks, trust companies and clearing corporations and may include certain other organizations. DTC is partially owned by some of these participants or their representatives.

 

•

Indirect access to the DTC system is also available to banks, brokers, and dealers and trust companies that have custodial relationships with participants.

 

•

The rules applicable to DTC and DTC participants are on file with the SEC.

 

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EXPERTS

The consolidated financial statements incorporated by reference in this prospectus from the Bank’s 2012 Annual Report, and the effectiveness of the Bank’s internal control over financial reporting have been audited by KPMG LLP, Independent Registered Public Accounting Firm, as stated in their reports, which are incorporated herein by reference. Such financial statements have been so incorporated in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.

 

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LEGAL MATTERS

The legality of the covered bonds will be passed upon by Osler, Hoskin & Harcourt LLP, Toronto, Ontario, as to matters of Ontario law and applicable matters of Canadian federal law. Allen & Overy LLP, New York, New York, is advising the Bank as to certain legal matters in connection with the offering. Certain legal matters will be passed upon by Morrison & Foerster LLP, New York, New York, for the Dealers. McCarthy Tetrault LLP, Toronto, Ontario is advising the Dealers as to certain matters of Ontario law and applicable Canadian federal law in connection with the offering.

 

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OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The estimated expenses in connection with this offering, other than underwriting discounts and commissions, are as follows (in U.S. Dollars):

 

Registration Statement filing fee		$	1,364,000
Trustees’ fees and expenses		$	100,000
Legal fees and expenses		$	850,000
Accounting fees and expenses		$	300,000
Printing costs		$	30,000
Miscellaneous (including CMHC fees)		$	750,000
Total			3,394,000

 

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GLOSSARY

 

“30/360”		The meaning given in the applicable prospectus supplement
“Actual/360”		The meaning given in the applicable prospectus supplement
“Adjusted Required Redemption Amount”		The Canadian Dollar Equivalent of the Required Redemption Amount, plus or minus the Canadian Dollar Equivalent of any swap termination amounts payable under the Covered Bond Swap Agreement to or by the Guarantor in respect of the relevant Series of covered bonds less (where applicable) amounts held by the Cash Manager for and on behalf of the Guarantor and amounts standing to the credit of the Guarantor Accounts and the Canadian Dollar Equivalent of the principal balance of any Substitution Assets (excluding all amounts to be applied on the next following Guarantor Payment Date to repay higher ranking amounts in the Guarantee Priorities of Payments and those amounts that are required to repay any Series of covered bonds which mature prior to or on the same date as the relevant Series of covered bonds) plus or minus any swap termination amounts payable to or by the Guarantor under the Interest Rate Swap Agreement in respect of the relevant Series of covered bonds, determined on a pro rata basis amongst all Series of covered bonds according to the respective Principal Amount Outstanding thereof, minus amounts standing to the credit of the Pre-Maturity Liquidity Ledger that are not otherwise required to provide liquidity for any Series of Hard Bullet Covered Bonds which mature within 12 months of the date of such calculation
“Arrangers”		Barclays Capital Inc. and BMO Capital Markets
“Asset Coverage Test Breach Notice”		The notice required to be served in accordance with the Guarantor Agreement if the Asset Coverage Test has not been met on two consecutive Calculation Dates
“Available Principal Receipts”		As of a relevant Calculation Date, an amount equal to the aggregate of (without double counting):
		(1)    the amount of Principal Receipts received during the immediately preceding Calculation Period and credited to the Principal Ledger (but, for the avoidance of doubt, excluding any Principal Receipts received in the Calculation Period commencing on (but excluding) the relevant Calculation Date);

 

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		(2)    any other amount standing to the credit of the Principal Ledger including (i) the proceeds of any advances under the Intercompany Loan Agreement (where such proceeds have not been applied to acquire additional Loans and their Related Security, refinance an advance under the Intercompany Loan, invest in Substitution Assets or make a Capital Distribution), (ii) any Cash Capital Contributions and (iii) the proceeds from any sale of Loans and their Related Security or Substitution Assets pursuant to the terms of the Guarantor Agreement or the Mortgage Sale Agreement but excluding any amounts received under the Covered Bond Swap Agreement in respect of principal (but, for the avoidance of doubt, excluding any such other amounts received in the Calculation Period commencing on (but excluding) the relevant Calculation Date);
		(3)    following repayment of any Hard Bullet Covered Bonds by the Bank and the Guarantor on the Final Maturity Date thereof, any amounts standing to the credit of the Pre-Maturity Liquidity Ledger in respect of such Series of Hard Bullet Covered Bonds (except where the Guarantor has elected to or is required to retain such amounts on the Pre-Maturity Liquidity Ledger)
“Available Revenue Receipts”		(1)    As of a relevant Calculation Date, an amount equal to the aggregate of:
		(a)    the amount of Revenue Receipts received during the immediately preceding Calculation Period and credited to the Revenue Ledger;   (b)    other net income of the Guarantor including all amounts of interest received on the Guarantor Accounts and the Substitution Assets in the immediately preceding Calculation Period, but excluding amounts received by the Guarantor under the Interest Rate Swap Agreement and in respect of interest received by the Guarantor under the Covered Bond Swap Agreement;   (c)    prior to the Service of a Notice of Pay on the Guarantor, amounts standing to the credit of the Reserve Fund in excess of the Reserve Fund Required Amount;   (d)    the amount of any termination payment or premium received from a Swap Provider which is not applied to pay a replacement Swap Provider;   (e)    any other Revenue Receipts not referred to in paragraphs (a) to (d) (inclusive) above received during the immediately preceding Calculation Period and standing to the Credit of the Revenue Ledger; and   (f)     following the service of a Notice to Pay on the Guarantor, amounts standing to the credit of the Reserve Fund;

 

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		(2)    Less Third Party Amounts, which will be paid on receipt in cleared funds to the Seller
“Bank Account Agreement”		The bank account agreement entered into on the Program Date between the Guarantor, the Account Bank, the GDA Provider, the Cash Manager and the Bond Trustee (as amended and/or supplemented and/or restated from time to time)
“BMO Group”		The Bank and its subsidiaries collectively
“borrower”		In relation to a Loan, each individual specified as such in the relevant Mortgage Conditions together with each person (if any) from time to time assuming an obligation to repay such Loan or any part of it
“Calculation Amount”		In relation to any Series of covered bonds, the meaning given in the applicable prospectus supplement
“Calculation Period”		The period from (and including) the first day of a calendar month to (and including) the last day of that calendar month, except that the first Calculation Period will commence on (and include) the first Issue Date under the Program and end on (and include) the last day of the next following calendar month
“Canadian Business Day”		A day (other than a Saturday or Sunday) on which commercial banks are open for general business (including dealings in foreign exchange and foreign currency deposits) in Toronto
“Canadian Dollar Equivalent”		In respect of any amount in a currency other than Canadian Dollars, the amount of Canadian Dollars that could be purchased with such amount at the then prevailing spot rate of exchange
“Capital Account Ledger”		The ledger maintained by the Managing GP (or the Cash Manager on its behalf) in respect of each Partner to record the balance of each Partner’s Capital Contributions from time to time
“Capital Contribution”		In relation to each Partner, the aggregate of the capital contributed by or agreed to be contributed by that Partner to the Guarantor from time to time by way of Cash Capital Contributions and Capital Contributions in Kind as determined on each Calculation Date in accordance with the formula set out in the Guarantor Agreement

 

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“Capital Contribution in Kind”		A contribution by a Partner to the Guarantor other than a Cash Capital Contribution, including contributions of Substitution Assets (up to the prescribed limit), and/or Loans and their Related Security on a fully-serviced basis to the Guarantor (which will constitute a Capital Contribution equal to (a) the aggregate of the Fair Market Value of those Loans as at the relevant Purchase Date, minus (b) any cash payment paid by the Guarantor for such Loans and their Related Security on that Purchase Date)
“Capital Distribution”		Any return on a Partner’s Capital Contribution in accordance with the terms of the Guarantor Agreement
“Capitalized Arrears”		In relation to a Loan on any date (the “determination date”), the amount (if any) at such date of any arrears of interest in respect of which, on or prior to the determination date, each of the following conditions has been satisfied:
		(1)    the Seller (or the Servicer on the Seller’s behalf) acting as a reasonable and prudent institutional mortgage lender in the Seller’s market has, by arrangement with the relevant borrower, agreed to capitalize such arrears of interest; and   (2)    such arrears of interest have been capitalized and added, in the relevant accounts of the Seller (or, if the determination date occurs after the First Purchase Date, the Guarantor), to the principal amount outstanding in respect of such Loan
“Capitalized Expenses”		In relation to a Loan, the amount of any expense, charge, fee, premium or payment (excluding, however, any arrears of interest) capitalized and added to the principal amount outstanding of that Loan in accordance with the relevant Mortgage Conditions
“Cash Management Agreement”		The cash management agreement entered into on the Program Date between the Guarantor, the Seller, the Servicer, the Cash Manager, the GDA Provider and the Bond Trustee (as amended and/or supplemented and/or restated from time to time)
“Cash Management Deposit Ratings”		The threshold ratings of (i) P-1 (in respect of Moody’s), (ii) F1 or A (in respect of Fitch) and (iii) AA (low) or R-1 (middle) (in respect of DBRS), as applicable, of the unsecured, unsubordinated and unguaranteed debt obligations (or, in the case of Fitch, the issuer default rating) of the Cash Manager by the Rating Agencies
“Cash Manager”		BMO, in its capacity as cash manager or any successor cash manager appointed from time to time
“Cash Manager Required Ratings”		The threshold ratings of (i) P-1 (in respect of Moody’s), (ii) BBB+ and F2 (in respect of Fitch), and (iii) BBB (low) (in respect of DBRS), as applicable, of the unsecured, unsubordinated and unguaranteed debt obligations (or in the case of Fitch, the issuer default rating) of the Cash Manager by the Rating Agencies

 

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“Cash Manager Termination Event”		If any of the following events occur:
		(a)    the Cash Manager defaults in the payment on the due date of any payment due and payable by it under the Cash Management Agreement or in the performance of its obligations thereunder and such default continues unremedied for a period of five Canadian Business Days after the earlier of the Cash Manager becoming aware of such default and receipt by the Cash Manager of written notice from the Bond Trustee requiring the same to be remedied; or
		(b)    the Cash Manager defaults in the performance or observance of any of its other covenants and obligations under the Cash Management Agreement, which in the reasonable opinion of the Bond Trustee is materially prejudicial to the interests of the Secured Creditors and such default continues unremedied for a period of thirty (30) days after the earlier of the Cash Manager becoming aware of such default and receipt by the Cash Manager of written notice from the Bond Trustee requiring the same to be remedied; or
		(c)    an Insolvency Event occurs in respect of the Cash Manager; or
		(d)    the Ratings of the Cash Manager fall below the Cash Manager Required Ratings
“Corporate Services Provider”		Computershare Trust Company of Canada, in its capacity as Corporate Services Provider under the Corporate Services Agreement together with any successor or additional Corporate Services Provider appointed from time to time thereunder
“Cover Pool Monitor”		KPMG LLP, in its capacity as Cover Pool Monitor under the Cover Pool Monitor Agreement together with any successor or additional Cover Pool Monitor appointed from time to time thereunder
“Cover Pool Monitor Agreement”		The cover pool monitor agreement entered into on the Program Date between the Cover Pool Monitor, the Guarantor, the Cash Manager, and the Bond Trustee (as amended and/or supplemented and/or restated from time to time)

 

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“Covered Bond Swap Effective Date”		The earliest to occur of (i) an Issuer Event of Default, (ii) a Guarantor Event of Default, and (iii) the date on which one or more Rating Agencies downgrades or withdraws the long-term, unsecured, unsubordinated and unguaranteed debt obligations (or, in the case of Fitch, the long-term issuer default rating) of the Covered Bond Swap Provider, or any credit support provider from time to time in respect of the Covered Bond Swap Provider, below BBB (high) (in respect of DBRS), BBB+ (in respect of Fitch) and Baa1 (in respect of Moody’s)
“Covered Bond Swap Provider”		The Bank and, from time to time, any additional provider(s) of a swap under the Covered Bond Swap Agreement, together with any successor covered bond swap provider(s)
“Credit and Collection Policy”		The Seller’s customary credit and collection policies and practices relating to the granting of credit on the security of Loans and the collection and enforcement of Loans, as in effect on the Program Date, as modified in compliance with the Mortgage Sale Agreement from time to time
“Custodian”		Computershare Trust Company of Canada, in its capacity as Custodian under the Mortgage Sale Agreement.
“Customer Files”		With respect to any Loan, (a) the original fully executed copy of the document evidencing the Loan and the Mortgage, (b) the duplicate registered Mortgage evidencing and securing such Loan bearing a certificate of registration from the applicable land registry office, land titles office or similar place of public record in which the related Mortgage is registered together with the promissory note, if any, evidencing such Loan fully executed by the borrower, (c) fully executed copies of the other loan and/or security agreements, if any, securing the Mortgage, fully executed by the borrower, (d) a record or facsimile of the original credit application fully executed by the borrower and all other credit information obtained by the Seller or the relevant Originator in connection with the Loan and the related borrower, I the solicitor’s or notary’s report of title or title insurance policy obtained by the Seller or the relevant Originator in connection with the initial advance of the Loan together with the survey or certificate of location relied upon by the solicitor or notary or title insurance company in issuing his or its report or title insurance policy, (f) the most recent valuation report of the related mortgaged property obtained by the Seller or the relevant Originator in accordance with the Credit and Collection Policy, (g) the insurance policy or certificate of insurance evidencing the borrower’s insurance against fire and other standard risks showing the Seller or the relevant Originator as first mortgagee and loss payee and containing a standard mortgage endorsement, and (h) any and all other documents that the Servicer or the Seller or the relevant Originator will keep on file relating to such Loan.

 

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“Dealer”		Each dealer appointed from time to time in accordance with the Program Agreement, which appointment may be for a specific issue or on an ongoing basis. References in this prospectus to the relevant Dealer(s) will, in the case of an issue of covered bonds being (or intended to be) subscribed for or purchased by more than one Dealer, be to all Dealers agreeing to subscribe for or purchase such covered bonds
“Determination Date”		The meaning given in the applicable prospectus supplement
“Due for Payment”		The requirement by the Guarantor to pay any Guaranteed Amount:
		(1)    following service of a Notice to Pay but prior to service of a Guarantor Acceleration Notice:
		(a)    (except where paragraph (b) below applies) on the date on which the Scheduled Payment Date in respect of such Guaranteed Amount is reached, or, if the applicable prospectus supplement specified that an Extended Due for Payment Date is applicable to the relevant Series of covered bonds, on the Interest Payment Date that would have applied if the Final Maturity Date of such Series of covered bonds had been the Extended Due for Payment Date or such other Interest Payment Date(s) specified in the applicable prospectus supplement (the “Original Due for Payment Date”); and
		(b)    in relation to any Guaranteed Amount in respect of the Final Redemption Amount payable on the Final Maturity Date of a Series of covered bonds for which an Extended Due for Payment Date is specified in the applicable prospectus supplement, on the Extended Due for Payment Date, but only to the extent that the Guarantor, having received the Notice to Pay no later than the date falling one Business Day prior to the Extension Determination Date, does not pay Guaranteed Amounts corresponding to the full amount of the Final Redemption Amount in respect of such Series of covered bonds by the Extension Determination Date, because the Guarantor has insufficient funds available under the Guarantee Priorities of Payments to pay such Guaranteed Amounts in full on the earlier of (1) the date which falls two Business Days after service of the Notice to Pay on the Guarantor or, if later, the Final Maturity Date (in each case after the expiry of the grace period set out in Condition 9.2(b) (Guarantor Events of Default) of the Terms and Conditions of the Covered Bonds) and (2) the Extension Determination Date.

 

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		For the avoidance of doubt, Due for Payment does not refer to any earlier date upon which payment of any Guaranteed Amounts may become due under the guaranteed obligations, by reason of prepayment, acceleration of maturity, mandatory or optional redemption or otherwise; or
		(2)    following service of a Guarantor Acceleration Notice, on the date on which the Guarantor Acceleration Notice is served on the Bank and the Guarantor
“Earliest Maturing Covered Bonds”		At any time, the Series of the covered bonds (other than any Series which is fully collateralized by amounts standing to the credit of the GDA Account) that has or have the earliest Final Maturity Date as specified in the applicable prospectus supplement (ignoring any acceleration of amounts due under the covered bonds prior to service of a Guarantor Acceleration Notice)
“Excluded Swap Termination Amount”		In relation to a Swap Agreement, an amount equal to the amount of any termination payment due and payable under that Swap Agreement (a) to the relevant Swap Provider as a result of a Swap Provider Default with respect to such Swap Provider or (b) to the relevant Swap Provider following a Swap Provider Downgrade Event with respect to such Swap Provider
“Extended Due for Payment Date”		In relation to any Series of covered bonds, the date, if any, specified as such in the applicable prospectus supplement to which the payment of all or (as applicable) part of the Final Redemption Amount payable on the Final Maturity Date will be deferred in the event that the Final Redemption Amount is not paid in full by the Extension Determination Date
“Extension Determination Date”		In relation to any Series of covered bonds, the date falling two Business Days after the expiry of seven days from (and including) the Final Maturity Date of such Series of covered bonds
“Extraordinary Resolution”		A resolution of the covered bondholders passed as such under the terms of the Trust Deed
“Fair Market Value”		In respect of a Loan and its Related Security, the fair market value at the relevant time, being the price expressed in terms of money or funds’ worth, a willing, prudent and informed buyer would pay in an open and unrestricted market to a willing, prudent and informed seller, each acting at arms’ length, where neither party is under any compulsion to enter into the transaction, as part of the acquisition of all of the Loans and their Related Security being purchased or sold at the relevant time

 

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“Final Maturity Date”		The Interest Payment Date on which a Series of covered bonds will be redeemed at the Final Redemption Amount in accordance with the Terms and Conditions
“Final Redemption Amount”		In respect of a Series of covered bonds, the amount as specified in the applicable prospectus supplement
“First Purchase Date”		The date on which the Initial Portfolio was assigned to the Guarantor pursuant to the terms of the Mortgage Sale Agreement, being                     , 2013
“Fixed Coupon Amount”		The meaning given in the applicable prospectus supplement
“Fixed Rate”		The rate of interest paid under the Fixed Rate Covered Bonds
“Fixed Rate Covered Bonds”		Covered bonds that pay a fixed rate of interest on such date or dates as may be agreed between the Bank and the relevant Dealer(s) and on redemption calculated on the 30/360 day count basis or as may be agreed between the Bank and the relevant Dealer(s)
“Fixed Rate Loan”		A Loan the interest rate on which is fixed at a specified rate at the time of its origination, and the initial term of which was up to ten years
“Floating Rate”		The rate of interest paid under the Floating Rate Covered Bonds
“Floating Rate Covered Bonds”		Covered bonds which bear interest at a rate determined:
		(a)    on the same basis as the floating rate under a notional interest rate swap transaction; or
		(b)    on the basis of a reference rate appearing on the agreed screen page of a commercial quotation service; or
		(c)    on such other basis as may be agreed between the Bank and the relevant Dealer(s),
		as set out in the applicable prospectus supplement
“GDA Account”		The account in the name of the Guarantor held with BMO and maintained subject to the terms of the Guaranteed Deposit Account Contract, the Bank Account Agreement and the Security Agreement or such additional or replacement account as may for the time being be in place with the prior consent of the Security Trustee and designated as such

 

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“GDA Provider”		BMO, in its capacity as GDA provider or any successor GDA provider appointed from time to time
“GDA Rate”		The variable rate of interest accruing on the balance standing to the credit of the GDA Account being a variable rate at a minimum of 0.10 per cent below the average of the rates per annum for Canadian Dollar bankers’ acceptances having a term of 30 days that appears on the Reuters screen as of 10:00 a.m. (Toronto time) on the date of determination, as reported by the GDA Provider (and if such screen is not available, any successor or similar service as may be selected by the GDA Provider) (calculated on the basis of the actual number of days elapsed and a 365 day year) or such greater amount as the Guarantor (or the Cash Manager on its behalf) and the GDA Provider may agree from time to time
“Guaranteed Amounts”		Prior to service of a Guarantor Acceleration Notice, with respect to any Original Due for Payment Date or, if applicable, any Extended Due for Payment Date, the sum of Scheduled Interest and Scheduled Principal, in each case, payable on that Original Due for Payment Date or, if applicable, any Extended Due for Payment Date, or after service of a Guarantor Acceleration Notice, an amount equal to the relevant Early Redemption Amount as specified in the Terms and Conditions plus all accrued and unpaid interest and all other amounts due and payable in respect of the covered bonds (other than additional amounts payable under Condition 7 (Taxation) of the Terms and Conditions of the Covered Bonds), including all Excluded Scheduled Interest Amounts, all Excluded Scheduled Principal Amounts (whenever the same arose) and all amounts payable by the Guarantor under the Trust Deed
“Guarantor Acceleration Notice”		A notice in writing given by the Bond Trustee to the Bank and the Guarantor, that each covered bond of each Series is, and each covered bond of each Series will, as against the Bank (if not already due and repayable against it following an Issuer Acceleration Notice) and as against the Guarantor, thereupon immediately become, due and repayable at its Early Redemption Amount together with accrued interest and all amounts payable by the Guarantor under the Covered Bond Guarantee will thereupon immediately become due and payable at the Guaranteed Amount corresponding to the Early Redemption Amount for each covered bond of each Series together with accrued interest in each case as provided in and in accordance with the Trust Deed and thereafter the Security will become enforceable, if any of the Guarantor Events of Default will occur and be continuing
“Guarantor Accounts”		The GDA Account and the Transaction Account and any additional or replacement accounts opened in the name of the Guarantor from time to time with the prior consent of the Bond Trustee, including the Standby GDA Account and the Standby Transaction Account

 

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“Guarantor Agreement”		The limited partnership agreement in respect of the Guarantor entered into on the Program Date by and among the Managing GP, the Liquidation GP, the Bond Trustee and the Bank as Limited Partner and any other parties who accede thereto in accordance with its terms
“Guarantor Payment Date”		The 12th Canadian Business Day of each month following a Calculation Date
“Guarantor Payment Period”		The period from (and including) a Guarantor Payment Date to (but excluding) the next following Guarantor Payment Date
“Hard Bullet Covered Bond”		Any covered bond issued by the Bank in respect of which the principal is due to be redeemed in full in one amount on the Final Maturity Date of that covered bond and which is identified as such in the applicable prospectus supplement
“Indemnity Amounts”		In respect of any person that is a party to a Transaction Document, any amounts payable to such person pursuant to the indemnification provisions of such Transaction Document.
“Independently Controlled and Governed”		In respect of the Guarantor, at the time of determination, it is demonstrated that, whether by attestation of an executive officer of the Bank or otherwise, each of the following is correct:
		(a)     the managing general partner of the Guarantor is not (and cannot be) an affiliate of the Bank and less than ten percent of its voting securities are (or can be) owned, directly or indirectly, by the Bank or any of its affiliates,
		(b)     if an administrative agent or other analogous entity has been engaged by the managing general partner of the Guarantor to fulfill its responsibility or role to carry on, oversee, manage or otherwise administer the business, activities and assets of the Guarantor, the agent or entity is not (and cannot be) an affiliate of the Bank and less than ten percent of its voting securities are (or can be) owned, directly or indirectly, by the Bank or any of its affiliates,
		(c)     all members (but one) of the board of directors or other governing body of the managing general partner of the Guarantor and each such administrative agent or other entity are not (and cannot be) directors, officers, employees or other representatives of the Bank or any of its affiliates, do not (and cannot) hold greater than ten percent of the voting or equity securities of the Bank or any of its affiliates and are (and must be) otherwise free from any material relationship with the Bank or any of its affiliates (hereinafter referred to as “Independent Members”), and

 

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		(d)     the board of directors or other governing body of the managing general partner of the Guarantor and each such administrative agent or other entity is (and must be) composed of at least three members, and the non-Independent Member is not (and will not be) entitled to vote on any resolution or question to be determined or resolved by the board (or other governing body) and will attend meetings of the board (or other governing body) at the discretion of the remaining members thereof, provided that such board of directors or other governing body may be composed of only two Independent Members with “observer status” granted to one director, officer, employee or other representative of the Bank or any of its affiliates
“Indexation Methodology”		The indexation methodology of the Bank used to account for subsequent price developments in the valuation of a Loan, which indexation methodology will be consistent with all regulatory requirements to which the Bank is subject (or supervisory guidelines provided to the Bank) in relation to the valuation of residential properties or the indexation of such values, together with any additional requirements as may be established by CMHC in relation thereto and set forth in the CMHC Guide
“Initial Portfolio”		The portfolio of Loans and their Related Security sold by the Seller to the Guarantor on the First Purchase Date pursuant to the Mortgage Sale Agreement
“Insolvency Event”		In respect of the Seller, the Servicer or the Cash Manager or any other person, and impending or actual insolvency of such person, as evidenced by, but not limited to:
		(a)     the commencement of a dissolution proceeding or a case in bankruptcy involving the relevant entity (and where such proceeding is the result of an involuntary filing, such proceeding is not dismissed within 60 days after the date of such filing); or
		(b)     the appointment of a trustee or other similar court officer over, or the taking of control or possession by such officer, of the business of the relevant entity, in whole or in part, before the commencement of a dissolution proceeding or a case in bankruptcy; or
		(c)     the relevant entity makes a general assignment for the benefit of any of its creditors; or

 

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		(d)     the general failure of, or the inability of, or the written admission of the inability of, the relevant entity to pay its debts as they become due
“Intercompany Loan Agreement”		The intercompany loan agreement entered into on the Program Date between the Bank, the Guarantor, the Cash Manager and the Bond Trustee documenting the Intercompany Loan (as amended and/or supplemented and/or restated from time to time)
“Interest Basis”		The meaning given in the applicable prospectus supplement
“Interest Commencement Date”		In the case of interest bearing covered bonds, the date specified in the applicable prospectus supplement from (and including) which the relevant covered bonds will accrue interest
“Interest Payment Date”		In respect of Fixed Rate Covered Bonds and Floating Rate Covered Bonds, the meaning given in the applicable prospectus supplement
“Interest Rate Swap Agreement”		The agreement between the Guarantor, the Interest Rate Swap Provider and the Bond Trustee dated the Program Date governing the Interest Rate Swap in the form of an ISDA Master Agreement, including a schedule, one or more confirmations and a credit support annex (each as may be amended and/or supplemented and/or restated from time to time)
“Interest Rate Swap Provider”		BMO in its capacity as interest rate swap provider under the Interest Rate Swap Agreement together with any successor interest rate swap provider
“Investor Report”		The monthly report made available to the covered bondholders, the Bond Trustee and the Rating Agencies detailing, inter alia, compliance with the Asset Coverage Test
“ISDA Master Agreement”		The 1992 ISDA Master Agreement (Multicurrency—Cross Border), as published by the International Swaps and Derivatives Association, Inc. (“ISDA”)
“Issue Date”		Each date on which the Bank issues a Tranche of covered bonds under the Program, as specified in the applicable prospectus supplement
“Issue Price”		The price, generally expressed as a percentage of the nominal amount of the covered bonds, at which a Series or Tranche of covered bonds will be issued
“Latest Valuation”		In relation to any Property, the value given to that Property by the most recent Valuation Report addressed to the Seller or, if the LTV ratio of such Loan was less than 60%, the purchase price of that Property or current property tax assessment, as applicable

 

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“Ledger”		Each of the Revenue Ledger, the Principal Ledger, the Reserve Ledger, the Pre-Maturity Liquidity Ledger and the Payment Ledger
“Lending Criteria”		The lending criteria of the Seller, or, as applicable, the Originator, from time to time, or such other criteria as would be acceptable to reasonable and prudent institutional mortgage lenders in the Seller’s market
“Limited Partner”		The Bank, in its capacity as a limited partner of the Guarantor, individually and together with such other persons who may from time to time, become limited partner(s) of the Guarantor pursuant to the terms of the Guarantor Agreement
“Liquidation GP”		8429065 Canada Inc., in its capacity as liquation general partner of the Guarantor together with any of its successors and any successor liquidation general partner appointed pursuant to the terms of the Guarantor Agreement
“Loan”		Each mortgage loan referenced by its mortgage loan identifier number and comprising the aggregate of all principal sums, interest, costs, charges, expenses and other funds due or owing with respect to that mortgage loan or home equity line of credit under the relevant Mortgage Conditions by a borrower on the security of a Mortgage from time to time outstanding or, as the context may require, the borrower’s obligations in respect of the same
“Loan Representations and Warranties”		The representations and warranties relating to the Loans set out in the Mortgage Sale Agreement
“Loan Repurchase Notice”		A notice in substantially the form set out in the Mortgage Sale Agreement served by the Guarantor on the Seller in relation to the repurchase of Loans in the Portfolio by the Seller in accordance with the terms of the Mortgage Sale Agreement
“LTV ratio” or “LTV” or “Loan-To-Value ratio”		The ratio of the outstanding balance of a Loan to the value of the Property securing that Loan
“Managing GP”		BMO Covered Bond GP Inc., in its capacity as managing general partner of the Guarantor, any successor managing general partner of the Guarantor appointed in accordance with the terms of the Guarantor Agreement, including without limitation the Liquidation GP if and while appointed as Managing GP in accordance with Article 11 of the Guarantor Agreement (Removal and Resignation of the Managing General Partner and the Liquidation General Partner), and any successor or assign of any of them as the context requires

 

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“Market Value”		With respect to a Property and any date of determination, (a) if such date of determination is prior to July 31, 2014, the Original Market Value of such Property, or (b) if such date of determination is on or after July 31, 2014, the Original Market Value of such Property as adjusted in accordance with the Indexation Methodology
“Master Definitions and Construction Agreement”		The master definitions and construction agreement made between the parties to the Transaction Documents on or about the Program Date (as the same may be amended and/or supplemented and/or restated from time to time)
“Maximum Rate of Interest”		In respect of Floating Rate covered bonds or Variable Interest covered bonds, the percentage rate per annum (if any) specified in the applicable prospectus supplement
“Maximum Redemption Amount”		The amount specified as such in the applicable prospectus supplement
“Minimum Rate of Interest”		In respect of Floating Rate Covered Bonds, the percentage rate per annum (if any) specified in the applicable prospectus supplement
“Minimum Redemption Amount”		The amount specified as such in the applicable prospectus supplement
“Monthly Payment”		The amount which the relevant Mortgage Conditions require a borrower to pay on each Monthly Payment Day in respect of that borrower’s Loan
“Monthly Payment Day”		The date on which interest (and principal in relation to a repayment mortgage) is due to be paid by a borrower on a Loan or, if any such day is not a Canadian Business Day, the next following Canadian Business Day
“Mortgage”		The legal charge, mortgage, hypothec, standard security or charge securing a Loan
“Mortgage Account”		The mortgage account into which all Loans secured on the same Property will be incorporated
“Mortgage Sale Agreement”		The mortgage sale agreement entered into on the Program Date between the Seller, the Guarantor, the Custodian and the Bond Trustee (as amended and/or supplemented and/or restated from time to time) and, where the context so requires, including any New Mortgage Sale Agreement entered into from time to time between any New Seller, the Guarantor and the Bond Trustee
“Mortgage Conditions”		All the terms and conditions applicable to a Loan

 

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“New Loan Type”		A new type of mortgage loan originated by the Seller or a New Seller, which the Seller or the New Seller intends to sell to the Guarantor, the terms and conditions of which are materially different (in the opinion of the Seller or the New Seller, acting reasonably) from any of the Loans in the Portfolio. For the avoidance of doubt, a mortgage loan will not constitute a New Loan Type if it differs from any of the Loans in the Portfolio solely due to it having different interest rates and/or interest periods and/or time periods for which it is subject to a fixed rate, capped rate or any other interest rate or the benefit of any discounts, cash-backs and/or rate guarantees. A home equity line of credit, commercial mortgage or a Loan originated by an Originator that is not the Seller will be a New Loan Type
“New Mortgage Sale Agreement”		Any new mortgage sale agreement entered into between any New Seller, the Guarantor and the Bond Trustee (as amended and/or supplemented and/or restated from time to time), which will be substantially in the same form and contain substantially the same provisions (provided that the Bond Trustee may agree variations to the representations and warranties in relation to the relevant Loan and their Related Security) as the Mortgage Sale Agreement (as amended and/or supplemented and/or restated from time to time)
“New Seller”		Any member of the BMO Group (other than BMO and any general partner of the Guarantor) that becomes a limited partner of the Guarantor and accedes to the relevant Transaction Documents in accordance with the terms thereof and sells Loan and their Related Security to the Guarantor in the future pursuant to a New Mortgage Sale Agreement
“Non-Performing Loan”		Any Loan that is 90 days or more in arrears
“Optional Redemption Amount”		The meaning (if any) given in the applicable prospectus supplement
“Optional Redemption Date”		The meaning (if any) given in the applicable prospectus supplement
“Original Due for Payment Date”		The meaning given in paragraph (1)(a) of the definition of Due for Payment
“Original Market Value”		In respect of a Property, its value as most recently determined or assessed in accordance with the underwriting policies of the Seller or, if not capable of determination in accordance therewith, on the basis of the most recent sale price of the Property
“Originator”		A person that is a member of the BMO Group and has originated Loans included in the Portfolio

 

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“OSFI”		Office of the Superintendent of Financial Institutions
“Outstanding Principal Balance”		In relation to any Loan at any date (the “determination date”), the aggregate at such date (but avoiding double counting) of:   (a)    the original principal amount advanced by the Seller including any retention(s) advanced to the relevant borrower after completion of the Mortgage;   (b)    Capitalized Expenses; and   (c)    Capitalized Arrears,   in each case relating to such Loan less any prepayment, repayment or payment of any of the foregoing made on or prior to the determination date
“Paying Agent Required Ratings”		The threshold ratings of (i) P-1 with respect to the short-term unsecured, unsubordinated and unguaranteed debt obligations of the Paying Agent by Moody’s, (ii) F1 with respect to the short-term issuer default rating of the Paying Agent by Fitch, and (iii) A with respect to long-term issuer default rating of the Paying Agent by Fitch
“Payment Ledger”		The ledger on the GDA Account of such name maintained by the Cash Manager pursuant to the Cash Management Agreement to record the credits and debits of Available Revenue Receipts and Available Principal Receipts for application in accordance with the relevant Priorities of Payment
“Pre-Maturity Liquidity Ledger”		The ledger on the GDA Account established to record the credits and debits of funds available to repay any Series of Hard Bullet Covered Bonds on the Final Maturity Date thereof if the Pre-Maturity Test has been breached
“Pre-Maturity Liquidity Required Amount”		Nil, unless the Pre-Maturity Test has been breached in respect of one or more Series of Hard Bullet Covered Bonds, and then an amount equal to the aggregate for each affected Series (without double counting) of (i) the Required Redemption Amount for such affected Series, (ii) the Required Redemption Amount for all other Series of Hard Bullet Covered Bonds which will mature within 12 months of the date of the calculation, and (iii) the amount required to satisfy paragraphs (a) through (f) of the Guarantee Priorities of Payments on the Final Maturity of the affected Series of Hard Bullet Covered Bonds and on the Final Maturity Date of all other Series of Hard Bullet Covered Bonds which will mature within 12 months of the date of the calculation

 

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“Pre-Maturity Required Ratings”		With respect to the Bank’s unsecured, unsubordinated and unguaranteed debt obligations (or in the case of Fitch, the issuer default rating) of the Bank by the Rating Agencies on any Canadian Business Day, a rating of (a) in the case of Fitch, F1+, (b) in the case of Moody’s, P-1, and (c) in the case of DBRS, (i) if such Canadian Business Day falls within six months of the Final Maturity Date of any Series of Hard Bullet Covered Bonds, A(high), or (ii) otherwise, A (low)
“Pre-Maturity Test”		If one or more Rating Agencies downgrades the Bank’s unsecured, unsubordinated and unguaranteed debt obligations or issuer default rating, as applicable, below the Pre-Maturity Required Ratings and a Hard Bullet Covered Bond is due for repayment within a specified period of time thereafter
“Present Value”		For any Loan the value of the outstanding loan balance of such Loan, calculated by discounting the expected future cash flow (on a loan level basis) using current market interest rates for mortgage loans with credit risks similar to those of the Loan (using the same discounting methodology as that used as part of the fair value disclosure in the Bank’s audited financial statements), or using publicly posted mortgage rates
“Principal Amount Outstanding”		In respect of a covered bond on any day, the principal amount of that covered bond on the relevant Issue Date thereof less principal amounts received by the relevant covered bondholder in respect thereof on or prior to that day
“Principal Ledger”		The ledger on the GDA Account of such name maintained by the Cash Manager pursuant to the Cash Management Agreement (or, if applicable, the ledger of such name maintained by the Standby Account Bank pursuant to the Standby Bank Account Agreement) to record the credits and debits of Principal Receipts in accordance with the terms of the Guarantor Agreement
“Principal Receipts”		Any payment received in respect of principal in respect of any Loan (including payments pursuant to any insurance policies taken out in respect of a Loan), whether as all or part of a Monthly Payment in respect of such Loan, on redemption (including partial redemption) of such Loan, on enforcement of such Loan (including the proceeds of sale of the relevant Property) or on the disposal of such Loan or otherwise (without double counting but including principal received or treated as received after completion of the enforcement procedures)
“Priorities of Payments”		The orders of priority for the allocation and distribution of amounts standing to the credit of the Guarantor in different circumstances being the Pre-Acceleration Revenue Priorities of Payments, the Pre-Acceleration Principal Priorities of Payments and the Guarantee Priorities of Payments and the Post-Enforcement Priorities of Payments

 

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“Product Switch”		In respect of a Loan, a variation in the financial terms and conditions applicable to the relevant borrower’s Loan other than: (a) any variation agreed with a borrower to control or manage arrears on the Loan; (b) any variation imposed by statute; or (c) any change in the repayment method of the Loan
“Program Agreement”		The Underwriting Agreement, and such other agreement or agreements, as the case may be, to the extent then in force, under which the covered bonds may from time to time be agreed to be sold by the Bank to, and purchased by, the Dealers
“Program Date”		[                            ], 2013
“Prohibited Insurer”		CMHC, Canada Guaranty Mortgage Insurance Company, the Genworth Financial Mortgage Insurance Company of Canada, the PMI Mortgage Insurance Company Canada, any other private mortgage insurer recognized by CMHC for purposes of the Legislative Framework or otherwise identified in the Protection of Residential Mortgage or Hypothecary Insurance Act (Canada), or any successor to any of them
“Property”		Freehold or leasehold residential property (or owned residential immovable property situated in the Province of Québec) located in Canada which is subject to a Mortgage
“Purchase Date”		Each of the First Purchase Date and each other date on which Loans and their Related Security are assigned to the Guarantor in accordance with the terms of the Mortgage Sale Agreement
“Purchaser”		Any third party or the Seller to whom the Guarantor offers to sell Selected Loans
“Rate of Interest”		In respect of a Series of interest bearing covered bonds, the rate of interest payable from time to time in respect of such covered bonds determined in accordance with the Terms and Conditions and the applicable prospectus supplement
“Rating Agencies”		Fitch, Moody’s, and DBRS, and any other internationally recognized rating agency that may rate the covered bonds from time to time
“Rating Agency Condition”		With respect to any event or matter, (i) in the case of each Rating Agency other than Fitch, confirmation in writing by the Rating Agencies that the then current ratings of the covered bonds will not be downgraded or withdrawn as a result of the relevant event or matter, and (ii) in the case of Fitch, at least 5 Canadian Business Days’ prior written notice of such event or matter will have been provided to Fitch

 

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“Ratings”		With respect to any entity, (a) the long-term or short-term rating given by Moody’s to such entity’s, unsecured, unguaranteed and unsubordinated debt, (b) the long-term or short-term issuer default rating given to such entity by Fitch and (c) the long-term or short-term rating given by DBRS to such entity’s, unsecured, unguaranteed and unsubordinated debt
“Ratings Trigger”		The Account Bank Required Ratings, the Cash Management Deposit Ratings, the Cash Manager Required Ratings, the Paying Agent Required Ratings, the Pre-Maturity Required Ratings, the Reserve Fund Required Amount Ratings, the Servicer Replacement Ratings, the Servicer Deposit Threshold Ratings, the Standby Account Bank Required Ratings and the Swap Agreement Ratings
“Receiver”		Any person or persons appointed (and any additional person or persons appointed or substituted) as an administrative receiver, receiver, manager, or receiver and manager of the Portfolio by the Bond Trustee pursuant to the Security Agreement
“Records”		With respect to each Loan, all documents and information (other than the Customer File) including, without limitation, computer

 

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		programs, tapes, discs, punch cards, data processing software and related property and rights, maintained by the Seller or the Servicer with respect to such Loan, the Related Security and the related borrower
“Reference Rate”		In respect of Floating Rate Covered Bonds to which Screen Rate Determination applies, the meaning given in the applicable prospectus supplement
“Related Retained Loans”		In relation to any Eligible Loan, all Retained Loans that are secured by, or advanced upon the security of, the same mortgage or hypothecary instrument securing such Eligible Loan
“Related Security”		With respect to any Loan:
		(1)     all of the Seller’s right, title and interest in the related Customer File including the Mortgage and the security interest granted to the Seller (or, as applicable, the relevant Originator) by the related borrower in the related mortgaged property as security for or pursuant to such Loan and all proceeds thereof or realized thereunder;
		(2)     all other security interests or liens and property subject thereto from time to time purporting to secure payment of such Loan, whether pursuant to the Related Security or otherwise, together with all personal property financing statements and similar instruments or other filings relating thereto and all proceeds thereof or realized thereunder;
		(3)     all guaranties, indemnities, insurance (other than blanket insurance coverage maintained by the Seller) and other agreements (including the Mortgage) or arrangements of whatever character from time to time supporting or securing payment of such Loan which are or should be included in the Customer Files whether pursuant to the Related Security or otherwise and all the proceeds of the foregoing; and
		(4)     all Records related to such Loan.

 

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“Repurchase Amount”		With respect to a Loan at any time, the sum of the Outstanding Principal Balance of such Loan and all Arrears of Interest and accrued interest thereon
“Reserve Fund”		The reserve fund that the Guarantor will be required to establish in the GDA Account which may be credited with part of an advance from the proceeds of an intercompany loan (in the Guarantor’s discretion) and from Available Revenue Receipts and Available Principal Receipts up to an amount equal to the Reserve Fund Required Amount
“Reserve Fund Required Amount”		Nil, unless one or more Rating Agencies downgrades the unsecured, unsubordinated and unguaranteed debt obligations or issuer default rating of the Bank below the Reserve Fund Required Amount Ratings and then an amount equal to the Canadian Dollar

 

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		Equivalent of one month’s interest due on each Series of covered bonds together with an amount equal to one-twelfth of the anticipated aggregate annual amount payable in respect of the items specified in paragraphs (a) to (c) and, if applicable, (d) of the Pre-Acceleration Revenue Priorities of Payments
“Reserve Fund Required Amount Ratings”		The threshold ratings of (i) P-1 (in respect of Moody’s), (ii) R-1 (middle) and A (low) (in respect of DBRS; for greater certainty, the ratings from DBRS are only required to be at or above one of such ratings), and (iii) F1 or A (in respect of Fitch; provided that both such ratings from Fitch are required), as applicable, of the unsecured, unsubordinated and unguaranteed debt obligations (or in the case of Fitch, the issuer default rating) of the Bank by the Rating Agencies
“Reserve Ledger”		The ledger on the GDA Account of such name maintained by the Cash Manager pursuant to the Cash Management Agreement (or, if applicable, the ledger of such name maintained by the Standby Account Bank pursuant to the Standby Bank Account Agreement), to record the crediting of Available Revenue Receipts and Available Principal Receipts to the Reserve Fund and the debiting of such Reserve Fund in accordance with the terms of the Guarantor Agreement
“Retained Loans”		A loan, indebtedness or liability that is secured by or advanced upon the security of, a mortgage or hypothecary instrument securing an Eligible Loan(s) transferred or contributed to the Guarantor which is not also being transferred or contributed to the Guarantor
“Revenue Ledger”		The ledger on the GDA Account of such name maintained by the Cash Manager pursuant to the Cash Management Agreement (or, if applicable, the ledger of such name maintained by the Standby Account Bank pursuant to the Standby Bank Account Agreement), to record credits and debits of Revenue Receipts in accordance with the terms of the Guarantor Agreement
“Revenue Receipts”		Any payment received in respect of any Loan, including payments pursuant to any insurance policies taken out in respect of a Loan (otherwise than in respect of a Loan that has been repurchased by the Seller), whether as all or part of a Monthly Payment in respect of such Loan, on redemption (including partial redemption) of such Loan, on enforcement of such Loan (including the proceeds of sale of the relevant Property) or on the disposal of such Loan or otherwise, which in any such case is not a Principal Receipt in respect of such Loan
“Scheduled Interest”		In relation to a Series of covered bonds, an amount equal to the amount in respect of interest which is or would have been due and payable under such covered bonds on each Interest Payment Date as specified in Condition 4 (Interest) of the Terms and Conditions of the Covered Bonds (but excluding any additional amounts relating to premiums, default interest or interest upon

 

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		interest (“Excluded Scheduled Interest Amounts”) payable by the Bank following service of an Issuer Acceleration Notice, but including such amounts (whenever the same arose) following service of a Guarantor Acceleration Notice), as if such covered bonds had not become due and repayable prior to their Final Maturity Date and (if the applicable prospectus supplement specified that an Extended Due for Payment Date is applicable to the relevant covered bonds) as if the maturity date of the covered bonds had been the Extended Due for Payment Date (but taking into account any principal repaid in respect of such covered bonds or any Guaranteed Amounts paid in respect of such principal prior to the Extended Due for Payment Date) or, where applicable, after the Final Maturity Date, such other amount of interest as may be specified in the applicable prospectus supplement less any additional amounts the Bank would be obliged to pay as a result of any gross-up in respect of any withholding or deduction made under the circumstances set out in Condition 7 (Taxation) of the Terms and Conditions of the Covered Bonds
“Scheduled Payment Date”		In relation to payments under the Covered Bond Guarantee in respect of a Series of covered bonds, each Interest Payment Date or the Final Maturity Date as if such covered bonds had not become due and repayable prior to their Final Maturity Date
“Scheduled Principal”		In relation to a Series of covered bonds, an amount equal to the amount in respect of principal which is or would have been due and repayable under such covered bonds on each Interest Payment Date or the Final Maturity Date (as the case may be) as specified in the Terms and Conditions of the Covered Bonds, Condition 6.1 (Final redemption) and Condition 6.7 (Early Redemption Amounts) (but excluding any additional amounts relating to prepayments, early redemption, broken funding indemnities, penalties, premiums or default interest (“Excluded Scheduled Principal Amounts”) payable by the Bank following service of an Issuer Acceleration Notice, but including such amounts (whenever the same arose) following service of a Guarantor Acceleration Notice), as if such covered bonds had not become due and repayable prior to their Final Maturity Date and (if the prospectus supplement specified that an Extended Due for Payment Date is applicable to such relevant covered bonds) as if the maturity date of such covered bonds had been the Extended Due for Payment Date
“Screen Rate Determination”		If specified as applicable in the applicable prospectus supplement, the manner in which the Rate of Interest on Floating Rate Covered Bonds as determined in accordance with the applicable prospectus supplement
“Secured Creditors”		The Bond Trustee (in its own capacity and on behalf of the other Secured Creditors), the covered bondholders, the Bank, the Seller, the Servicer, the Account Bank, the GDA Provider, the Standby Account Bank, the Standby GDA Provider, the Cash Manager, the

 

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		Swap Providers, the Agents and any other person which becomes a Secured Creditor pursuant to the Security Agreement except, pursuant to the terms of the Guarantor Agreement, to the extent and for so long as such person is a Limited Partner
“Selected Loan Offer Notice”		A notice from the Guarantor served to the Seller offering to sell Selected Loans to the Seller in accordance with the terms of the Mortgage Sale Agreement and the Guarantor Agreement
“Selected Loans”		Loans and their Related Security to be sold by the Guarantor pursuant to the terms of the Guarantor Agreement or the Mortgage Sale Agreement.
“Seller”		BMO in its capacity as Seller under the Mortgage Sale Agreement, and “Sellers” means, together, the Seller and any New Sellers
“Series Reserved Matter”		In relation to covered bonds of a Series:
		(a)     reduction or cancellation of the amount payable or, where applicable, modification of the method of calculating the amount payable or modification of the date of payment or, where applicable, modification of the method of calculating the date of payment in respect of any principal or interest in respect of the covered bonds other than in accordance with the terms thereof;
		(b)     alteration of the currency in which payments under the covered bonds are to be made;
		(c)     alteration of the majority required to pass an Extraordinary Resolution;
		(d)     any amendment to the Covered Bond Guarantee or the Security Agreement (except in a manner determined by the Bond Trustee not to be materially prejudicial to the interests of the covered bondholders of any Series or an amendment which is in the sole opinion of the Bond Trustee of a formal, minor or technical nature or to correct a manifest error or an error which is, in the sole opinion of the Bond Trustee proven or is to comply with mandatory provisions of law);
		(e)     the sanctioning of any such scheme or proposal for the exchange or sale of the covered bonds or the conversion of the covered bonds into, or the cancellation of the covered bonds in consideration of, shares, stock, covered bonds, bonds, debentures, debenture stock and/or other obligations and/or securities of the Bank, or any other company formed or to be formed, or for or into or in

 

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		consideration of cash, or partly for or into or in consideration of such shares, stock, bonds, covered bonds, debentures, debenture stock and/or other obligations and/or securities as aforesaid and partly for or into or in consideration of cash and for the appointment of some person with power on behalf of the covered bondholders to execute an instrument of transfer of the Registered Covered Bonds held by them in favor of the persons with or to whom the covered bonds are to be exchanged or sold respectively; and
		(f)      alteration of the proviso to paragraph 5 or paragraph 6 of Schedule 4 to the Trust Deed
“Servicer Deposit Threshold Ratings”		The threshold ratings of (i) P-1 (in respect of Moody’s), (ii) F1 or A (in respect of Fitch) and (iii) BBB (low) or R-1 (middle) (in respect of DBRS), as applicable, of the unsecured, unsubordinated and unguaranteed debt obligations (or, in the case of Fitch, the issuer default rating) of the Servicer by the Rating Agencies
“Servicer Replacement Ratings”		The threshold ratings of (i) Baa2 (in respect of Moody’s), (ii) F2 (in respect of Fitch), and (iii) either BBB (low) or R-1 (middle) (in respect DBRS) as applicable, of the unsecured, unsubordinated and unguaranteed debt obligations (or, in the case of Fitch, the issuer default rating) of the Servicer by the Rating Agencies
“Specified Denomination”		In respect of a Series of covered bonds, the denomination or denominations of such covered bonds specified in the applicable prospectus supplement
“Standby GDA Rate”		The variable rate of interest accruing on the balance standing to the credit of the Standby GDA Account being a variable rate at a floor of 0.10% below the average of the rates per annum for Canadian Dollar bankers’ acceptances having a term of 30 days that appears on the Reuters Screen as of 10:00 a.m. (Toronto time) on the date of determination, as reported by the Standby GDA Provider (and if such screen is not available, any successor or similar service as may be selected by the Standby GDA Provider) (calculated on the basis of the actual number of days elapsed and a 365 day year) or such greater amount as the Guarantor (or the Cash Manager on its behalf) and the Standby GDA Provider may agree from time to time

 

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“Substitution Assets”		The classes and types of assets from time to time eligible under the Legislative Framework and the CMHC Guide to collateralize covered bonds which include the following: (a) securities issued by the Government of Canada and (b) repos of Government of Canada securities having terms acceptable to CMHC; provided that the total exposure to Substitution Assets described in (a) and (b) above will not exceed 10 percent of the aggregate value of (x) the Loans in the Portfolio; (y) any Substitution Assets; and (z) cash balances held in the GDA Account (subject to the Prescribed Cash Limitation); in each case, provided that:
		(a)     such exposures will have certain minimum long-term and short-term ratings from the Rating Agencies, as specified by such Rating Agencies from time to time;
		(b)     the maximum aggregate total exposures in general to classes of assets with certain ratings by the Rating Agencies will, if specified by the Rating Agencies, be limited to the maximum percentages specified by such Rating Agencies; and
		(c)     in respect of investments of Available Revenue Receipts in such classes and types of assets, the Interest Rate Swap Provider has given its consent to investments in such classes and types of assets
“Swap Agreements”		The Covered Bond Swap Agreements together with the Interest Rate Swap Agreement
“Swap Collateral”		At any time, any asset (including, without limitation, cash and/or securities) which is paid or transferred by a Swap Provider to the Guarantor as collateral in respect of the performance by such Swap Provider of its obligations under the relevant Swap Agreement together with any income or distributions received in respect of such asset and any equivalent of such asset into which such asset is transformed
“Swap Collateral Available Amounts”		At any time, the amount of Swap Collateral which under the terms of the relevant Swap Agreement may be applied at that time in satisfaction of the relevant Swap Provider’s obligations to the Guarantor to the extent that such obligations relate to payments to be made in connection with the Pre-Acceleration Revenue Priorities of Payments, the Pre-Acceleration Principal Priorities of Payments or the Guarantee Priorities of Payments
“Swap Collateral Excluded Amounts”		At any time, the amount of Swap Collateral which under the terms of the relevant Swap Agreement may be applied in satisfaction of the relevant Swap Provider’s obligations to the Guarantor following termination of a Swap to the extent that such obligations

 

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		relate to payments to be made in connection with the Pre-Acceleration Priorities of Payments or the Guarantee Priorities of Payments
“Swap Provider Default”		The occurrence of an Event of Default (as defined in the relevant Swap Agreement) with respect to the relevant Swap Provider, where the relevant Swap Provider is the Defaulting Party (as defined in the relevant Swap Agreement)
“Swap Provider Downgrade Event”		The occurrence of an Additional Termination Event (as defined in the relevant Swap Agreement) following a failure by a Swap Provider to comply with the requirements of the ratings downgrade provisions set out in the relevant Swap Agreement
“Swap Providers”		The Covered Bond Swap Providers and the Interest Rate Swap Provider
“Taxes”		All present and future taxes, levies, imposts, duties (other than stamp duty), fees, deductions, withholdings or charges of any nature whatsoever and wheresoever imposed, including, without limitation, income tax, corporation tax, GST, VAT or other tax in respect of added value and any franchise, transfer, sales, gross receipts, use, business, occupation, excise, personal property, real property or other tax imposed by any national, local or supranational taxing or fiscal authority or agency together with any penalties, fines or interest thereon and “Tax” and “Taxation” will be construed accordingly
“Third Party Amounts”		Each of:
		(a)     payments of insurance premiums, if any, due to an insurer in respect of any arranged policy to the extent not paid or payable by the Seller;
		(b)     amounts under an unpaid direct debit which are repaid by a Seller to the bank making such payment if such bank is unable to recoup that amount itself from its customer’s account; or
		(c)     any amount received from a borrower for the express purpose of payment being made to a third party for the provision of a service (including giving insurance cover) to any of that borrower or the Seller or the Guarantor;
		which amounts will be paid on receipt by the Guarantor to the Seller from funds on deposit in the GDA Account, with such Seller paying such amounts to the relevant third party
“Total Credit Commitment”		The combined aggregate amount available to be drawn by the Guarantor under the terms of the Intercompany Loan Agreement,

 

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		subject to increase and decrease in accordance with the terms of the Intercompany Loan Agreement, which amount is initially the Canadian Dollar Equivalent of US$12 billion.
“Tranche”		An issue of covered bonds which are identical in all respects (including as to listing and admission to trading)
“Transaction Account”		The account in the name of the Guarantor held with the Account Bank and maintained subject to the terms of a bank account agreement and the Security Agreement or such additional or replacement account as may for the time being be in place with the prior consent of the Bond Trustee and designated as such
“Transaction Documents”		The Mortgage Sale Agreement; the Servicing Agreement; the Cover Pool Monitor Agreement; the Intercompany Loan Agreement; the Guarantor Agreement; the Program Agreement, the Cash Management Agreement; the Interest Rate Swap Agreement; each Covered Bond Swap Agreement; the Guaranteed Deposit Account Contract; the Standby Guaranteed Deposit Account Contract; the Bank Account Agreement; the Standby Bank Account Agreement; the Security Agreement (and each document entered into pursuant to the Security Agreement); the Trust Deed; the Agency Agreement; each of the prospectus supplements (as applicable in the case of each issue of listed covered bonds subscribed for pursuant to a subscription agreement); each Subscription Agreement (as applicable in the case of each issue of listed covered bonds subscribed for pursuant to a subscription agreement); the Master Definitions and Construction Agreement; and any security sharing agreement entered into by the Guarantor
“Valuation Report”		The appraisal of the Property for mortgage purposes, obtained by the relevant borrower, the Seller or, as applicable, any Originator, in respect of each Property in accordance with the Credit and Collection Policy or appraisal in respect of a valuation of a Property made using a methodology which would be acceptable to a reasonable and prudent institutional mortgage lenders in the Seller’s market and which has been approved by the relevant officers of the Seller or, as applicable, any Originator

 

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Filed Pursuant to Rule 424(b)(5)
Registration Statement No. 333-189814

FORM OF PRELIMINARY PROSPECTUS SUPPLEMENT

The information in this preliminary prospectus supplement is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus supplement is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion, Dated [—], 2013

Preliminary Prospectus Supplement to the Prospectus dated [—], 2013

 

Bank of Montreal

 

 

U.S.$[—] [—]% Covered Bonds Due [—], 20[—]

unconditionally and irrevocably guaranteed as to payments by

BMO Covered Bond Guarantor Limited Partnership

 

 

We will pay interest on the [—]% covered bonds due [—], 20[—] semi-annually on [—] and [—] each year. We will make the first interest payment on the covered bonds on [—]. The covered bonds will mature on [—]. The covered bonds will constitute deposits for purposes of the Bank Act (Canada) and will constitute legal, valid and binding direct, unconditional, unsubordinated and unsecured obligations of Bank of Montreal (the “Bank”) and will rank pari passu with all deposit liabilities of the Bank without any preference among themselves and (save for any applicable statutory provisions) at least equally with all other present and future unsecured and unsubordinated obligations of the Bank, present and future, except as prescribed by law and in certain limited circumstances described in Conditions 9.1 (Issuer Events of Default) and 14 (Meetings of Covered Bondholders, Modification, Waiver and Substitution). The covered bonds are unconditionally and irrevocably guaranteed as to payments by BMO Covered Bond Guarantor Limited Partnership as described in the prospectus. We will issue each covered bond in minimum denominations of U.S.$[—] and integral multiples of U.S.$[—].

Other than as set forth under “Terms and Conditions of the Covered Bonds—Redemption for taxation reasons” and “Terms and Conditions of the Covered Bonds—Redemption due to illegality or invalidity” in the prospectus, we may not redeem the covered bonds prior to their maturity. There is no sinking fund for the covered bonds.

Investing in the covered bonds involves a number of risks. See “Risk Factors” beginning on page [20] of the accompanying prospectus dated [—], 2013.

 

		Per Covered Bond		Total
Public offering price(1)
Underwriting commissions
Proceeds, before expenses, to Bank of Montreal

 

(1)	The price to the public also will include interest accrued on the covered bonds after [—], 2013 if any.

We will deliver the covered bonds in book-entry form through the facilities of The Depository Trust Company (including through its indirect participants CDS Clearing and Depository Services, Inc., Euroclear and Clearstream, Luxembourg) on or about [—], 2013 against payment in immediately available funds.

This preliminary prospectus supplement may be used by certain of our affiliates in connection with offers and sales of the covered bonds in market-making transactions.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined that this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.

The covered bonds described herein will not constitute deposits that are insured under the Canada Deposit Insurance Corporation Act (Canada) or by the United States Federal Deposit Insurance Corporation or under any other governmental insurance scheme of any country.

THE COVERED BONDS HAVE NOT BEEN APPROVED OR DISAPPROVED BY CANADA MORTGAGE AND HOUSING CORPORATION (“CMHC”) NOR HAS CMHC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. THE COVERED BONDS ARE NEITHER INSURED NOR GUARANTEED BY CMHC OR THE GOVERNMENT OF CANADA OR ANY OTHER AGENCY THEREOF.

Program Arrangers

 

Barclays				BMO Capital Markets

Joint Lead Managers

 

Co-Managers

 

Preliminary Prospectus Supplement dated [—], 2013

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WHERE YOU CAN FIND MORE INFORMATION

Additional information with respect to the Bank, the Guarantor, the Portfolio and certain other matters, together with copies of each of the Transaction Documents and the Investor Reports filed by the Bank from time to time, is also available on the Bank’s website at http://www.bmo.com/home/about/banking/investor-relations/financial-information/covered-bonds and through the CMHC’s covered bond registry at http://www.cmhc-schl.gc.ca/coveredbonds. Information on or accessible through the CMHC’s and the Bank’s websites do not form part of this prospectus and should not be relied upon.

SUMMARY

This section is meant as a summary and should be read in conjunction with the accompanying prospectus to help you understand the covered bonds. This preliminary prospectus supplement, together with the accompanying prospectus, contains the terms of the covered bonds and supersedes all prior or contemporaneous oral statements as well as any other written materials relating to the covered bonds, including preliminary or indicative pricing terms, correspondence, trade ideas, structures for implementation, sample structures, brochures or other educational materials. In the event of any inconsistency or conflict between the terms set forth in this preliminary prospectus supplement and the accompanying prospectus, the terms contained in this preliminary prospectus supplement will control.

An investment in the covered bonds entails significant risks relating to the covered bonds that are not associated with similar investments in a conventional debt security, including those described below. You should carefully consider, among other things, the matters set forth under “Risk Factors” beginning on page [—] of the accompanying prospectus. Before investing in the covered bonds, we urge you to consult your investment, legal, tax, accounting and other advisors.

In this preliminary prospectus supplement, unless the context otherwise indicates, the “Bank” means Bank of Montreal and “Guarantor” means BMO Covered Bond Guarantor Limited Partnership, and “we,” “us” or “our” means the Bank and Guarantor collectively. In this preliminary prospectus supplement, currency amounts are stated in Canadian dollars (“$”), unless specified otherwise.

 

Bank:

Bank of Montreal

 

Guarantor:

BMO Covered Bond Guarantor Limited Partnership

 

U.S. Registrar, Paying Agent, Transfer Agent and Exchange Agent:

[—]

 

Specified Currency:

[U.S. dollars (“U.S.$”)]

[(Condition 1.10)]

 

Aggregate Principal Amount:

U.S.$ [—]

 

Series:

[—]

 

Issue Price:

[—] percent of the Aggregate Principal Amount

 

Specified Denominations:

[U.S.$1,000]

[(Condition 1.08 or 1.09)]

 

Calculation Amount:

[U.S.$1,000]

 

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Issue Date:

[—], 2013

 

Interest Commencement Date:

[—], 2013

 

Final Maturity Date:

[—], 20[—]

 

Extended Due for Payment Date of Guaranteed Amounts corresponding to the Final Redemption Amount under the Covered Bond Guarantee:

[—]

 

Interest Rate Basis:

[—]% [Fixed Rate] payable semi-annually in arrears from and including the Interest Commencement Date to but excluding the Final Maturity Date

 

[—] month [USD LIBOR] [+[—]] bps per annum [Floating Rate] payable monthly in arrears and subject to adjustment from and including the Final Maturity Date to but excluding the Extended Due for Payment Date

 

Redemption/Payment Basis:

Redemption at par

 

Outstanding Series of Covered Bonds under the Program:

None

 

The Portfolio:

The assets in the “Portfolio” consist primarily of first lien Canadian residential mortgage loans and their related security interest in residential property, cash and in some cases certain Substitution Assets up to a certain threshold amount. As required by the CMHC Guide, the Portfolio does not include any Loans that are insured by a Prohibited Insurer. See “Summary of Principal Documents—Mortgage Sale Agreement” in the prospectus and Annex A and Annex B of this preliminary prospectus supplement. [As of the date of this preliminary prospectus supplement, the Guarantor does not own any Substitution Assets.]

 

Status of the Covered Bonds:

The covered bonds will constitute deposit liabilities of the Bank for purposes of the Bank Act, however the covered bonds will not be insured under the Canada Deposit Insurance Corporation Act (Canada), and will constitute legal, valid and binding direct, unconditional, unsubordinated and unsecured obligations of the Bank and rank pari passu with all deposit liabilities of the Bank without any preference among themselves and at least pari passu with all other unsubordinated and unsecured obligations of the Bank, present and future, except as prescribed by law and in certain limited circumstances described in [Conditions 9.1 (Issuer Events of Default) and 14 (Meetings of Covered Bondholders, Modification, Waiver and Substitution).]

 

Status of the Guarantee:

Secured with recourse to certain assets of the Guarantor, including the Portfolio and any Excess Proceeds

 

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Regulatory Maximum for Covered Bond Issuances:

Upon the issuance of the covered bonds, the Bank will have issued and have outstanding covered bonds which represent [—] of the OSFI Total Assets of the Bank as of the date hereof. The aggregate outstanding principal balance of all covered bonds issued by the Bank at any time is subject to a maximum of 4% of the OSFI Total Assets of the Bank

 

Asset Percentage:

As of the date of this preliminary prospectus supplement, the Asset Percentage is [—]%. The current maximum Asset Percentage is [—]%.

PROVISIONS RELATING TO INTEREST (IF ANY) PAYABLE

 

Fixed Rate Covered Bond Provisions (Condition 5.12)

[Applicable]

 

Rate of Interest:

[—]% per annum payable semi-annually in arrears

 

Interest Payment Date:

[—] and [—] in each year up to and including the Final Maturity Date

 

Fixed Coupon Amount:

U.S.$[—] per Calculation Amount

 

Broken Amount(s):

[Not Applicable] / [$[—] per Calculation Amount, payable on the Interest Payment Date falling on [—], [2014]]

 

Day Count Basis:

30/360

 

Other terms relating to the method of calculating interest for fixed rate covered bonds:

Not Applicable

 

 

Business Day Convention:

[Modified Following Business Day Convention (unadjusted)]

 

Business Day(s):

[New York and Toronto]

PROVISIONS RELATING TO EXTENDED DUE FOR PAYMENT DATE, IF APPLICABLE

Floating Rate Covered Bond Provisions

(Condition 5.12)

If applicable, from and including the Final Maturity Date to but excluding the Extended Due for Payment Date

 

Interest Period(s):

[The period from and including each Specified Interest Payment Date, to but excluding the following Specified Interest Payment Date with the first such period being the period from and including the Final Maturity Date to but excluding the first Specified Interest Payment Date]

 

Specified Interest Payment Dates:

The [—]th of each month from but excluding the Final Maturity Date to and including the Extended Due for Payment Date

 

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Calculation Agent:

The Bank, acting through its offices located at [—]

 

Business Day Convention:

[Modified Following Business Day Convention (adjusted)]

 

Business Day(s):

[New York and Toronto]

 

Manner in which the Rate of Interest is to be determined:

[Screen Rate Determination]

 

Reference Rate:

[1 month USD LIBOR]

 

Interest Determination Date(s):

[Second London Business Day prior to the start of each Interest Period]

 

Relevant Screen Page:

[Reuters Screen Page LIBOR01]

 

Relevant Time:

[11:00 A.M. (London time)]

 

Reference Banks:

Has the meaning given in the ISDA Definitions

 

Day Count Basis:

Actual/360

 

Margin(s):

[+[—]] bps per annum

PROVISIONS RELATING TO REDEMPTION

 

Early Redemption Amount:

[U.S.$1,000 per Calculation Amount]

GENERAL PROVISIONS APPLICABLE TO THE COVERED BONDS 

 

Covered Bond Swap Rate:

[1-month CAD-BA-CDOR plus [—] per cent]

DISTRIBUTION 

 

Dealers:

[—]

 

Additional selling restrictions:

See under “Supplemental Plan of Distribution” in this preliminary prospectus supplement

 

CUSIP:

[—]

 

ISIN:

[—]

 

Common Code:

[—]

 

Listing:

The covered bonds will not be listed on any securities exchange

 

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DESCRIPTION OF THE COVERED BONDS

In addition to the terms described in the “Summary” section above, the following general terms will apply to the covered bonds.

General

The covered bonds will constitute deposits for purposes of the Bank Act (Canada) and will constitute legal, valid and binding direct, unconditional, unsubordinated and unsecured obligations of the Bank and will rank pari passu with all deposit liabilities of the Bank without any preference among themselves and (save for any applicable statutory provisions) at least equally with all other present and future unsecured and unsubordinated obligations of the Bank, present and future, except as prescribed by law and in certain limited circumstances described in Conditions 9.1 (Issuer Events of Default) and 14 (Meetings of Covered Bondholders, Modification, Waiver and Substitution). The covered bonds will not be deposits insured under the Canada Deposit Insurance Corporation Act (Canada) or under any other governmental insurance scheme of any country.

The aggregate principal amount of the covered bonds is U.S.$[—]. The covered bonds are issued in denominations of U.S.$1,000, and integral multiples of U.S.$1,000 in excess thereof. The covered bonds may only be transferred in amounts of U.S.$1,000 and increments of U.S.$1,000 thereafter.

We will pay interest on the covered bonds [semi-annually on [—] and [—] of each year. We will make the first interest payment on the covered bonds on [—], [2014].]

Guarantee

Pursuant to the covered bond guarantee (the “Covered Bond Guarantee”), the Guarantor has irrevocably and unconditionally guaranteed the due and punctual payment of the Guaranteed Amounts on the covered bonds in accordance with the Trust Deed

Currency

The covered bonds are denominated, and amounts due on the covered bonds will be paid, in U.S. dollars (“U.S.$”).

Form of the Covered Bonds

The covered bonds will be issued only in the form of a global covered bond held by The Depository Trust Company. See “Ownership and Book-Entry” in the accompanying prospectus.

No Listing

The covered bonds will not be listed on any securities exchange.

Please note that the information about the issuance, Issue Date, Issue Price, commissions and net proceeds to the Bank of Montreal relates only to the initial issuance and sale of your covered bonds. If you have purchased your covered bonds in a market-making transaction after the initial issuance and sale, any such relevant information about the sale to you will be provided in a separate confirmation of sale.

 

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Final Maturity Date

The Final Maturity Date is or will be [—], 20[—]. The Final Maturity Date may be postponed under the Extended Due for Payment Date as further described in Condition 6 (Redemption and Purchase) under the “Terms and Conditions of the Covered Bonds” in the accompanying prospectus.

Manner of Payment and Delivery

Any payment on the covered bonds at maturity or otherwise will be made to accounts designated by you and approved by us, or at the office of the Bond Trustee. We also may make any payment or delivery in accordance with the applicable procedures of the depositary.

Terms Incorporated in the Global Covered Bond

All of the terms appearing above under “Summary” and the terms appearing in the first four paragraphs under the caption “—Payment of Additional Amounts” in this preliminary prospectus supplement, together with the Terms and Conditions of the Covered Bonds attached as Schedule 1 of the Trust Deed will be endorsed on the global covered bond that represent the covered bonds and is held by The Depository Trust Company. See “Terms and Conditions” in the accompanying prospectus.

DESCRIPTION OF THE COVERED BOND GUARANTEE

As described in the accompanying prospectus at pages [76-77], the Covered Bond Guarantee is secured by the pledge of certain assets of the Guarantor, which include the Portfolio and any Excess Proceeds, to the Bond Trustee under the Security Agreement. Statistical information about the Portfolio as of [—], 2013 is set forth in Annex A. Historical performance about the Portfolio is set forth in Annex B.

SWAP PROVIDERS

Interest Rate Swap Provider

The Bank, subject to replacement in accordance with the terms of the Covered Bond Swap Agreement.

Covered Bond Swap Provider

The Bank, subject to replacement in accordance with the terms of the Covered Bond Swap Agreement.

 

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SUPPLEMENTAL PLAN OF DISTRIBUTION

Bank of Montreal expects to agree to sell to the Dealers, and the Dealers severally and not jointly expect to agree to purchase from Bank of Montreal, the principal amount of the covered bonds specified, at the price specified, on the cover page of this preliminary prospectus supplement. The Dealers intend to resell each covered bond they purchase at the price to the public set forth on the cover page of this preliminary prospectus supplement. In the future, the Dealers or one of their affiliates, may repurchase and resell the covered bonds in market-making transactions, with resales being made at prices related to prevailing market prices at the time of resale or at negotiated prices. For more information about the plan of distribution, the underwriting agreement and possible market-making activities, see “Plan of Distribution” in the accompanying prospectus.

Dealer                                                                          Principal Amount

The Dealers have advised the Bank that the Dealers propose initially to offer the covered bonds to the public at the public offering price on the cover page of this preliminary prospectus supplement, and to certain dealers at that public offering price less a commission not in excess of [—]% of the principal amount of the covered bonds. The Dealers may allow, and those dealers may reallow to other dealers, a commission not in excess of [—]% of the principal amount.

After the initial public offering of the covered bonds is completed, the public offering price and commissions may be changed by the Dealers.

In connection with the sale of the covered bonds, the Dealers may engage in:

 

•

over-allotments, in which Dealers selling the covered bonds sell more covered bonds than the Bank actually sold to the Dealers, creating a Dealer short position;

 

•

stabilizing transactions, in which purchases and sales of the covered bonds may be made by the Dealers at prices that do not exceed a specified maximum in accordance with Rule 104 of Regulation M under the Securities Exchange Act of 1934; and

 

•

Dealer covering transactions, in which Dealers purchase the covered bonds in the open market after the distribution has been completed in order to cover Dealer short positions.

These stabilizing transactions and Dealer covering transactions may cause the price of the covered bonds to be higher than it would otherwise be. These transactions, if commenced, may be discontinued at any time.

The Dealers and their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. In the ordinary course of their respective businesses, the Dealers and/or their affiliates have engaged, and may in the future engage, in commercial banking, investment banking, trust or investment management transactions with us and our affiliates for which they have received, and will in the future receive, customary compensation.

 

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We will deliver the covered bonds against payment therefor in New York, New York on [—], which is the [fifth] scheduled business day after the trade date. Under Rule 15c6-1 of the Securities Exchange Act of 1934, trades in the secondary market generally are required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade covered bonds on any date prior to three business days before delivery will be required, by virtue of the fact that the covered bonds will initially settle in [five] business days [(T + 5)], to specify alternative settlement arrangements to prevent a failed settlement.

Selling Restrictions

General

Other than in the United States, no action has been or will be taken in any country or jurisdiction by the Bank, the Guarantor, the Dealers or the Bond Trustee that would permit a public offering of the covered bonds, or possession or distribution of any offering material in relation thereto, in such country or jurisdiction where action for that purpose is required and such action has not been taken. The Underwriting Agreement provides that each Dealer will (to the best of its knowledge and belief) comply with all applicable securities laws and regulations in each jurisdiction in which it purchases, offers, sells or delivers the covered bonds or has in its possession or distributes offering material.

 

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THE BANK’S CANADIAN RESIDENTIAL MORTGAGE PORTFOLIO

[As at the October 31, 2012 the Bank’s Canadian residential mortgage loans portfolio totaled $— billion and consisted of approximately — loans. The Bank’s uninsured residential mortgage loans portfolio (the “conventional mortgage portfolio”) totaled $— billion and consisted of approximately — loans as at October 31, 2012. For the years ended October 31, 2008 to 2012, the conventional mortgage portfolio’s percentage of non-performing loans (more than 90 days past due) was between —% and —% and its percentage of delinquent loans (more than 30 days past due) was between —% and —%. For the years ended October 31, 2008, 2009, 2010, 2011 and 2012, the conventional mortgage portfolio’s percentage of non-performing loans was —%, —%, —%, —% and —%, and its percentage of delinquent loans was —%, —%, —%, —% and —%, respectively. For a description of the Bank’s loan classifications see Note — to the Bank’s consolidated financial statements included in its 2012 Annual Report.]

 

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THE PORTFOLIO

The statistical and other information contained herein has been compiled by reference to the Loans in the Portfolio securing the covered bonds as of [—], 2013 (the “cut-off date”). The noon exchange rate of Canadian dollars into U.S. dollars on the cut-off date was CDN$1 = US$[—]. Columns stating percentage amounts may not add to 100% due to rounding.

The Loans in the Portfolio are selected on the basis of the seller’s Eligibility Criteria set forth in the Mortgage Sale Agreement. The material aspects of such Eligibility Criteria are described under “Summary of Principal Documents—Mortgage Sale Agreement—Eligibility Criteria” in the accompanying prospectus. As of the cut-off date, all Loans in the Portfolio complied with the Eligibility Criteria. One significant indicator of borrower credit quality is arrears and losses. The information presented below under “Loss Information” reflects the arrears and losses experience of the Portfolio as at the dates indicated. Any material change to the Eligibility Criteria, which could lead to arrears and losses deviating from the historical experience presented in the table under “Loss Information,” will be reported by the Guarantor on periodic reports filed with the SEC on Form 10-D. It is not expected that the characteristics of the Portfolio as of the closing date will differ materially from the characteristics of the Portfolio as of the cut-off date.

The cut-off date Portfolio was drawn up as at the cut-off date and comprised [—] Loans having an aggregate current balance of $[—] as at that date. The Bank originated the Loans in the cut-off date Portfolio between [—], 19[—] and [—], 2013.

[—] Loans in the cut-off date Portfolio (or [—]% of the aggregate current balance of the Loans as of the cut-off date) were fixed rate Loans. The remaining [—] Loans in the cut-off date Portfolio (or [—]% of the aggregate current balance of the Loans as of the cut-off date) were standard variable rate Loans, as described below.

In the prior three years, there have been no repurchases or replacement of Loans in the Portfolio as a result of breaches of representations or warranties and no demands for repurchase or replacement of any Loan.

No Loan in the Portfolio failed to meet the Bank’s Lending Criteria.

The Bank most recently filed a Form ABS-15G on [—], 2013. The Bank’s Central Index Key is: 0000927971.

As of the cut-off date, the Bank’s standard five-year variable rate for existing and new borrowers was [—]% (rate for “open,” or prepayable loans) and [—]% (rate for “closed,” or non-prepayable loans) per annum.

Review of the Portfolio

The Bank has performed a review of the Loans in the Portfolio and a review of the disclosure regarding the Loans in this preliminary prospectus supplement and the accompanying prospectus required by Item 1111 of Regulation AB (such disclosure, the “Rule 193 Information”). This review was designed and effected to provide the Bank with reasonable assurance that the Rule 193 Information is accurate in all material respects.

 

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Table of Contents

One aspect of the review consisted of a comparison of the statistical information contained in Annex A and Annex B hereto to statistical information relating to all of the Loans contained in the Bank’s data files. The data files are electronic records maintained by the Bank. For this comparison, the data files from the Bank’s loan servicing system, including relevant data elements, were extracted from the Bank’s information repository system. No material exceptions were found between the statistical information contained in Annex A and Annex B and the data files extracted from the Bank’s system.

A second aspect of the review consisted of a sample review by a third party of [—] randomly selected Loan files, which compared certain Loan characteristics selected by the Bank, such as amount financed, current balance, location of the property and property valuation, to the applicable information in the data files. No material exceptions were found between the Loan files reviewed and the data extracted from the Bank’s system.

A third aspect of the review consisted of a sample review of [—] randomly selected Loan files, which reviewed the Rule 193 Information related to descriptions of the transaction documents in this preliminary prospectus supplement and the accompanying prospectus. For this part of the review, the Bank and its legal counsel reviewed the Rule 193 Information consisting of descriptions of portions of the transaction documents and compared that Rule 193 Information to the related transaction documents. The Bank and its legal counsel also reviewed the Rule 193 Information consisting of descriptions of legal and regulatory provisions that may materially affect the performance of the Loans or payments on the covered bonds.

In addition to the elements of the review of the Rule 193 Information that were specifically conducted for purposes of this transaction as described above, with respect to Rule 193 Information relating to credit approvals and exceptions to credit policies, the Bank has observed the regular, ongoing application of its internal control procedures. These include quality assurance audits and portfolio level analyses on origination to ensure that all Loans comply with the Bank’s underwriting policies. These audits and portfolio level analyses are reviewed by the policy review committee as well as group risk management and other partners on a quarterly basis.

All Rule 193 Information consisting of textual disclosures of factual information and not otherwise described above was reviewed and approved by the Bank.

After undertaking the elements of the review described above, the Bank has found and concluded that it has reasonable assurance that the Rule 193 Information in this preliminary prospectus supplement and the accompanying prospectus is accurate in all material respects.

The review of disclosure relating to the description of the transaction documents and legal and regulatory matters and the reviews of statistical information and certain Loans characteristics were performed with the assistance of third parties engaged by the Bank. The Bank determined the nature, extent and timing of the review and the level of assistance provided by the third parties and by the Bank. The Bank has ultimate authority and control over, and assumes all responsibility for, the review and the findings and conclusions of the review. The Bank attributes all findings and conclusions of the review to itself.

 

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Annex A

The following tables set forth statistical information with respect to the Loans in the Portfolio as of the cut-off date for the periods indicated:

Overall Portfolio Statistics

 

		As at [—],  2013
Number of Loans in the Portfolio			[	—]
•   The percentage of Readiline Loans			[	—]%
•   The percentage of Loans other than Readiline Loans			[	—]%
Current aggregate outstanding balance of Loans			[	—]
•   The percentage of Readiline Loans			[	—]%
•   The percentage of Loans other than Readiline Loans			[	—]%
Average Loan size			[	—]
Number of primary borrowers			[	—]
Number of properties			[	—]
Weighted average of authorized LTV of Loans in the Portfolio			[	—]
Weighted average of current LTV of Loans in the Portfolio			[	—]
Weighted average of original LTV of Loans in the Portfolio			[	—]
Weighted average seasoning of Loans in the Portfolio			[	—]
Weighted average coupon of Loans in the Portfolio			[	—]
Weighted average original term of Loans in the Portfolio			[	—]
Weighted average remaining term of Loans in the Portfolio			[	—]

 

Portfolio Delinquency Distribution
Aging Summary		Number of Loans		Percentage		Principal Balance		Percentage
Current and <30 Days Past Due
30 to 59 Days Past Due
60 to 89 Days Past Due
90 or More Days Past Due
Total

 

Portfolio Provincial Distribution
Province		Number of Loans		Percentage		Principal Balance		Percentage
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland
Northwest Territories
Nova Scotia
Nunavut

 

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Portfolio Provincial Distribution
Province		Number of Loans		Percentage		Principal Balance		Percentage
Ontario
Prince Edward Island
Quebec
Saskatchewan
Yukon
Total

 

Portfolio Credit Bureau Score Distribution
Credit Bureau Score		Number of Loans		Percentage		Principal Balance		Percentage
Score Unavailable
599 and Below
600 – 650
651 – 700
701 – 750
751 – 800
800 and Above
Total

 

Portfolio Rate Type Distribution
Rate Type		Number of Loans		Percentage		Principal Balance		Percentage
Fixed
Variable
Total

 

Portfolio Occupancy Type Distribution
Occupancy Code		Number of Loans		Percentage		Principal Balance		Percentage
Not Owner Occupied
Owner Occupied
Total

 

Portfolio Mortgage Rate Distribution
Mortgage Rate (%)		Number of Loans		Percentage		Principal Balance		Percentage
3.4999 and Below
3.5000 – 3.9999
4.0000 – 4.4999
4.5000 – 4.9999
5.0000 – 5.4999
5.5000 – 5.9999
6.0000 – 6.4999
6.5000 – 6.9999
7.0000 – 7.4999
7.5000 – 7.9999
8.0000 – 8.4999
8.5000 and Above
Total

 

Portfolio Current LTV Distribution
Current LTV (%)		Number of Loans		Percentage		Principal Balance		Percentage
20.00 and Below
20.01 – 30.00
30.01 – 40.00
40.01 – 50.00
50.01 – 55.00
55.01 – 60.00

 

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Table of Contents

60.01 – 65.00
65.01 – 70.00
70.01 – 75.00
75.01 – 80.00
80.01 and Above
Total

 

Portfolio Remaining Term Distribution
Remaining Term (months)		Number of Loans		Percentage		Principal Balance		Percentage
Less than 12.00
12.00 – 23.99
24.00 – 35.99
36.00 – 41.99
42.00 – 47.99
48.00 – 53.99
54.00 – 59.99
60.00 – 65.99
66.00 – 71.99
72.00 – Above
Total

 

Remaining Principal Balance Distribution
Range of Remaining Principal Balance ($)		Number of Loans		Percentage		Principal Balance		Percentage
99,999 and Below
100,000 – 149,999
150,000 – 199,999
200,000 – 249,999
250,000 – 299,999
300,000 – 349,999
350,000 – 399,999
400,000 – 449,999
450,000 – 499,999
500,000 – 549,999
550,000 – 599,999
600,000 – 649,999
650,000 – 699,999
700,000 – 749,999
750,000 – 799,999
800,000 – 849,999
850,000 – 899,999
900,000 – 949,999
950,000 – 999,999
1,000,000 or Greater
Total

 

Portfolio Property Type Distribution
Property Type		Number of Loans		Percentage		Principal Balance		Percentage
Condo
Single Family
Multi Family/Other
Total

 

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Overall Portfolio Performance

For collection purposes, a Loan is considered delinquent when a scheduled payment is 30 days or more past due. In the tables below, a Loan for which a scheduled payment is less than 30 days past due is categorized as “Current.”

 

Portfolio Performance – Overall

Delinquency Status – Current Balance of Loans in Arrears ($)

As at Date

31-Dec-08

31-Dec-09

31-Dec-10

31-Dec-11

31-Dec-12

—-—-13

Current Balance of Loans Outstanding

No. Days Past Due

$

%

$

%

$

%

$

%

$

%

$

%

Current

<30 Days

1-2 Months

³30 and <60 Days

2-3 Months

³60 and <90 Days

3-4 Months

³90 and <120 Days

4-5 Months

³120 and <150 Days

5-6 Months

³150 and <180 Days

6-7 Months

³180 and <210 Days

7-8 Months

³210 and <240 Days

8-9 Months

³240 and <270 Days

9-10 Months

³270 and <300 Days

10-11 Months

³300 and <330 Days

11-12 Months

³330 and <360 Days

12-13 Months

³360 and <390 Days

13-14 Months

³390 and <420 Days

14-15 Months

³420 and <450 Days

15-16 Months

³450 and <480 Days

16-17 Months

³480 and <510 Days

17-18 Months

³510 and <540 Days

18 Months and more

³540 Days

Total

 

Delinquency Status – Number of Loans in Arrears

As at Date

31-Dec-08

31-Dec-09

31-Dec-10

31-Dec-11

31-Dec-12

—-—-13

Total Number of Loans Outstanding

No. Days Past Due

#

%

#

%

#

%

#

%

#

%

#

%

Current

<30 Days

1-2 Months

³30 and <60 Days

2-3 Months

³60 and <90 Days

3-4 Months

³90 and <120 Days

4-5 Months

³120 and <150 Days

5-6 Months

³150 and <180 Days

6-7 Months

³180 and <210 Days

7-8 Months

³210 and <240 Days

8-9 Months

³240 and <270 Days

9-10 Months

³270 and <300 Days

10-11 Months

³300 and <330 Days

11-12 Months

³330 and <360 Days

12-13 Months

³360 and <390 Days

13-14 Months

³390 and <420 Days

14-15 Months

³420 and <450 Days

15-16 Months

³450 and <480 Days

16-17 Months

³480 and <510 Days

17-18 Months

³510 and <540 Days

18 Months and more

³540 Days

Total

 

Loss Information

As at Date

31-Dec-08

31-Dec-09

31-Dec-10

31-Dec-11

31-Dec-12

—-— -13

%

%

%

%

%

%

Number of loans that have experienced a loss for the period / year ended

Gross loss amount for the period / year ended ($)

Cumulative number of loans that have experienced a loss

Cumulative gross loss amount ($)

 

 

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Annex B

HISTORICAL PORTFOLIO DATA

Historical pool information regarding the performance of the Loans in the Portfolio is contained in this Annex. Historical pool information contained in this Annex that relates to the performance of the Loans for periods commencing prior to [—] does not form a part of this preliminary prospectus supplement, the accompanying prospectus or the registration statement relating to the covered bonds. Historical pool information about the Loans in the Portfolio for periods prior to [—] is not provided as such information is not available for such years and cannot be obtained without unreasonable effort and expense.

The following vintage tables present historical pool information about the Loans in the [—] Portfolio in respect of arrears and cumulative losses as at the dates specified in respect of Loans originated in specific years. “Vintage 2008,” for example, indicates all Loans in the Portfolio originated in the calendar year 2008. All of the Loans originated by the Bank are secured by a mortgage with first ranking priority on residential property in Canada. All such Loans are originated in accordance with the Bank’s lending criteria at the time of offer of the Loan. There are no material differences between the lending and origination criteria used to originate the Loans and the Bank’s lending and origination criteria described in the accompanying prospectus. Notwithstanding any change to the lending criteria or other terms applicable to new Loans, new Loans and their related security may only be assigned to the Portfolio if those new Loans comply with the Seller’s representations and warranties set out in the Mortgage Sale Agreement, including a representation that those new Loans were originated in accordance with the Seller’s lending criteria applicable at the time of their origination. The Seller is obliged to repurchase Loans that are in breach of these representations and warranties. See “Summary of Principal Documents—Mortgage Sale Agreement—Repurchase of Loans” in the accompanying prospectus.

Historical pool information on prepayments on the Loans is not being provided because prepayment and repayment rates should not affect the maturities of the covered bonds. The single pool of Loans held by the Guarantor supports an ongoing issuance of covered bonds by the Bank. As Loans repay or prepay, reducing the size of the Portfolio, the Seller is required to add Loans to the Portfolio in order to maintain compliance with the Asset Coverage Test. See “Summary of Principal Documents—Guarantor Agreement—Asset Coverage Test” in the accompanying prospectus. Any new Loans may only be assigned to the Portfolio if those new Loans comply with the Seller’s lending criteria, the material aspects of which are described under “Loan Origination and Lending Criteria” in the accompanying prospectus.

For collection purposes, a Loan is considered delinquent when a scheduled payment is 30 days or more past due. In the tables below, a Loan for which a scheduled payment is less than 30 days past due is categorized as “Current.”

 

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2008 Vintage

 

Portfolio Performance—2008 Vintage

Delinquency Status—Current Balance of Loans in Arrears ($)

As at Date

31-Dec-08

31-Dec-09

31-Dec-10

31-Dec-11

31-Dec-12

—-—-13

Current Balance of Loans Outstanding

No. Days Past Due

$

%

$

%

$

%

$

%

$

%

$

%

Current

<30 Days

1-2 Months

³30 and <60 Days

2-3 Months

³60 and <90 Days

3-4 Months

³90 and <120 Days

4-5 Months

³120 and <150 Days

5-6 Months

³150 and <180 Days

6-7 Months

³180 and <210 Days

7-8 Months

³210 and <240 Days

8-9 Months

³240 and <270 Days

9-10 Months

³270 and <300 Days

10-11 Months

³300 and <330 Days

11-12 Months

³330 and <360 Days

12-13 Months

³360 and <390 Days

13-14 Months

³390 and <420 Days

14-15 Months

³420 and <450 Days

15-16 Months

³450 and <480 Days

16-17 Months

³480 and <510 Days

17-18 Months

³510 and <540 Days

18 Months and more

³540 Days

Total

 

Delinquency Status—Total Number of Loans in Arrears

As at Date

31-Dec-08

31-Dec-09

31-Dec-10

31-Dec-11

31-Dec-12

—-—-13

Total Number of Loans Outstanding

No. Days Past Due

#

%

#

%

#

%

#

%

#

%

#

%

Current

<30 Days

1-2 Months

³30 and <60 Days

2-3 Months

³60 and <90 Days

3-4 Months

³90 and <120 Days

4-5 Months

³120 and <150 Days

5-6 Months

³150 and <180 Days

6-7 Months

³180 and <210 Days

7-8 Months

³210 and <240 Days

8-9 Months

³240 and <270 Days

9-10 Months

³270 and <300 Days

10-11 Months

³300 and <330 Days

11-12 Months

³330 and <360 Days

12-13 Months

³360 and <390 Days

13-14 Months

³390 and <420 Days

14-15 Months

³420 and <450 Days

15-16 Months

³450 and <480 Days

16-17 Months

³480 and <510 Days

17-18 Months

³510 and <540 Days

18 Months and more

³540 Days

Total

 

Loss Information

As at Date

31-Dec-08

31-Dec-09

31-Dec-10

31-Dec-11

31-Dec-12

—-—-13

%

%

%

%

%

%

Number of loans that have experienced a loss for the period / year ended

Gross loss amount for the period / year ended ($)

Cumulative number of loans that have experienced a loss

Cumulative gross loss amount ($)

 

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2009 Vintage

 

Portfolio Performance—2009 Vintage

Delinquency Status—Current Balance of Loans in Arrears ($)

As at Date

31-Dec-09

31-Dec-10

31-Dec-11

31-Dec-12

—-—-13

Current Balance of Loans Outstanding

No. Days Past Due

$

%

$

%

$

%

$

%

$

%

Current

<30 Days

1-2 Months

³30 and <60 Days

2-3 Months

³60 and <90 Days

3-4 Months

³90 and <120 Days

4-5 Months

³120 and <150 Days

5-6 Months

³150 and <180 Days

6-7 Months

³180 and <210 Days

7-8 Months

³210 and <240 Days

8-9 Months

³240 and <270 Days

9-10 Months

³270 and <300 Days

10-11 Months

³300 and <330 Days

11-12 Months

³330 and <360 Days

12-13 Months

³360 and <390 Days

13-14 Months

³390 and <420 Days

14-15 Months

³420 and <450 Days

15-16 Months

³450 and <480 Days

16-17 Months

³480 and <510 Days

17-18 Months

³510 and <540 Days

18 Months and more

³540 Days

Total

 

Delinquency Status—Total Number of Loans in Arrears

As at Date

31-Dec-09

31-Dec-10

31-Dec-11

31-Dec-12

—-—-13

Total Number of Loans Outstanding

No. Days Past Due

#

%

#

%

#

%

#

%

#

%

Current

<30 Days

1-2 Months

³30 and <60 Days

2-3 Months

³60 and <90 Days

3-4 Months

³90 and <120 Days

4-5 Months

³120 and <150 Days

5-6 Months

³150 and <180 Days

6-7 Months

³180 and <210 Days

7-8 Months

³210 and <240 Days

8-9 Months

³240 and <270 Days

9-10 Months

³270 and <300 Days

10-11 Months

³300 and <330 Days

11-12 Months

³330 and <360 Days

12-13 Months

³360 and <390 Days

13-14 Months

³390 and <420 Days

14-15 Months

³420 and <450 Days

15-16 Months

³450 and <480 Days

16-17 Months

³480 and <510 Days

17-18 Months

³510 and <540 Days

18 Months and more

³540 Days

Total

 

Loss Information
As at Date		31-Dec-09		31-Dec-10		31-Dec-11		31-Dec-12		—-— -13
		%		%		%		%		%
Number of loans that have experienced a loss for the period / year ended
Gross loss amount for the period / year ended ($)
Cumulative number of loans that have experienced a loss
Cumulative gross loss amount ($)

2010 Vintage

 

Portfolio Performance—2010 Vintage

Delinquency Status—Current Balance of Loans in Arrears ($)

As at Date

31-Dec-10

31-Dec-11

31-Dec-12

—-—-13

Current Balance of Loans Outstanding

No. Days Past Due

$

%

$

%

$

%

$

%

Current

<30 Days

1-2 Months

³30 and <60 Days

2-3 Months

³60 and <90 Days

3-4 Months

³90 and <120 Days

4-5 Months

³120 and <150 Days

5-6 Months

³150 and <180 Days

6-7 Months

³180 and <210 Days

7-8 Months

³210 and <240 Days

8-9 Months

³240 and <270 Days

9-10 Months

³270 and <300 Days

10-11 Months

³300 and <330 Days

11-12 Months

³330 and <360 Days

12-13 Months

³360 and <390 Days

13-14 Months

³390 and <420 Days

14-15 Months

³420 and <450 Days

15-16 Months

³450 and <480 Days

16-17 Months

³480 and <510 Days

17-18 Months

³510 and <540 Days

18 Months and more

³540 Days

Total

 

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Delinquency Status —Total Number of Loans in Arrears

As at Date

31-Dec-10

31-Dec-11

31-Dec-12

—-—-13

Total Number of Loans Outstanding

No. Days Past Due

#

%

#

%

#

%

#

%

Current

<30 Days

1-2 Months

³30 and <60 Days

2-3 Months

³60 and <90 Days

3-4 Months

³90 and <120 Days

4-5 Months

³120 and <150 Days

5-6 Months

³150 and <180 Days

6-7 Months

³180 and <210 Days

7-8 Months

³210 and <240 Days

8-9 Months

³240 and <270 Days

9-10 Months

³270 and <300 Days

10-11 Months

³300 and <330 Days

11-12 Months

³330 and <360 Days

12-13 Months

³360 and <390 Days

13-14 Months

³390 and <420 Days

14-15 Months

³420 and <450 Days

15-16 Months

³450 and <480 Days

16-17 Months

³480 and <510 Days

17-18 Months

³510 and <540 Days

18 Months and more

³540 Days

Total

 

Loss Information
As at Date		31-Dec-10		31-Dec-11		31-Dec-12		—-— -13
		%		%		%		%
Number of loans that have experienced a loss for the period / year ended
Net loss amount for the period / year ended ($)
Cumulative number of loans that have experienced a loss
Cumulative net loss amount ($)

2011 Vintage

 

Portfolio Performance—2011 Vintage

Delinquency Status—Current Balance of Loans in Arrears ($)

As at Date

31-Dec-11

31-Dec-12

—-—-13

Current Balance of Loans Outstanding

No. Days Past Due

$

%

$

%

$

%

Current

<30 Days

1-2 Months

³30 and <60 Days

2-3 Months

³60 and <90 Days

3-4 Months

³90 and <120 Days

4-5 Months

³120 and <150 Days

5-6 Months

³150 and <180 Days

6-7 Months

³180 and <210 Days

7-8 Months

³210 and <240 Days

8-9 Months

³240 and <270 Days

9-10 Months

³270 and <300 Days

10-11 Months

³300 and <330 Days

11-12 Months

³330 and <360 Days

12-13 Months

³360 and <390 Days

13-14 Months

³390 and <420 Days

14-15 Months

³420 and <450 Days

15-16 Months

³450 and <480 Days

16-17 Months

³480 and <510 Days

17-18 Months

³510 and <540 Days

18 Months and more

³540 Days

Total

 

Delinquency Status—Total Number of Loans in Arrears

As at Date

31-Dec-11

31-Dec-12

—-—-13

Total Number of Loans Outstanding

No. Days Past Due

#

%

#

%

#

%

Current

<30 Days

1-2 Months

³30 and <60 Days

2-3 Months

³60 and <90 Days

3-4 Months

³90 and <120 Days

4-5 Months

³120 and <150 Days

5-6 Months

³150 and <180 Days

6-7 Months

³180 and <210 Days

7-8 Months

³210 and <240 Days

8-9 Months

³240 and <270 Days

9-10 Months

³270 and <300 Days

10-11 Months

³300 and <330 Days

11-12 Months

³330 and <360 Days

12-13 Months

³360 and <390 Days

13-14 Months

³390 and <420 Days

14-15 Months

³420 and <450 Days

 

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15-16 Months

³450 and <480 Days

16-17 Months

³480 and <510 Days

17-18 Months

³510 and <540 Days

18 Months and more

³540 Days

Total

 

Loss Information
As at Date		31-Dec-11		31-Dec-12		—-— -13
		%		%		%
Number of loans that have experienced a loss for the period / year ended
Gross loss amount for the period / year ended ($)
Cumulative number of loans that have experienced a loss
Cumulative gross loss amount ($)

2012 Vintage

 

Portfolio Performance—2012 Vintage
Delinquency Status— Current Balance of Loans in Arrears ($)
As at Date				31-Dec-12				—-—-13
Current Balance of Loans Outstanding
		No. Days Past Due		$		%		$		%
Current		<30 Days
1-2 Months		³30 and <60 Days
2-3 Months		³60 and <90 Days
3-4 Months		³90 and <120 Days
4-5 Months		³120 and <150 Days
5-6 Months		³150 and <180 Days
6-7 Months		³180 and <210 Days
7-8 Months		³210 and <240 Days
8-9 Months		³240 and <270 Days
9-10 Months		³270 and <300 Days
10-11 Months		³300 and <330 Days
11-12 Months		³330 and <360 Days
12-13 Months		³360 and <390 Days
13-14 Months		³390 and <420 Days
14-15 Months		³420 and <450 Days
15-16 Months		³450 and <480 Days
16-17 Months		³480 and <510 Days
17-18 Months		³510 and <540 Days
18 Months and more		³540 Days
Total

 

Delinquency Status—Total Number of Loans in Arrears
As at Date				31-Dec-12				—-—-13
Total Number of Loans Outstanding
		No. Days Past Due		#		%		#		%
Current		<30 Days
1-2 Months		³30 and <60 Days
2-3 Months		³60 and <90 Days
3-4 Months		³90 and <120 Days
4-5 Months		³120 and <150 Days
5-6 Months		³150 and <180 Days
6-7 Months		³180 and <210 Days
7-8 Months		³210 and <240 Days
8-9 Months		³240 and <270 Days
9-10 Months		³270 and <300 Days
10-11 Months		³300 and <330 Days
11-12 Months		³330 and <360 Days
12-13 Months		³360 and <390 Days
13-14 Months		³390 and <420 Days
14-15 Months		³420 and <450 Days
15-16 Months		³450 and <480 Days
16-17 Months		³480 and <510 Days
17-18 Months		³510 and <540 Days
18 Months and more		³540 Days
Total

 

Loss Information
As at Date		31-Dec-12		—-— -13
		%		%
Number of loans that have experienced a loss for the period / year ended
Gross loss amount for the period / year ended ($)
Cumulative number of loans that have experienced a loss
Cumulative gross loss amount ($)

 

 

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2013 Vintage

 

Portfolio Performance—2013 Vintage
Delinquency Status—Current Balance of Loans in Arrears ($)
As at Date				—-—-13
Current Balance of Loans Outstanding
		No. Days Past Due		$		%
Current		<30 Days
1-2 Months		³30 and <60 Days
2-3 Months		³60 and <90 Days
3-4 Months		³90 and <120 Days
4-5 Months		³120 and <150 Days
5-6 Months		³150 and <180 Days
6-7 Months		³180 and <210 Days
7-8 Months		³210 and <240 Days
8-9 Months		³240 and <270 Days
9-10 Months		³270 and <300 Days
10-11 Months		³300 and <330 Days
11-12 Months		³330 and <360 Days
12-13 Months		³360 and <390 Days
13-14 Months		³390 and <420 Days
14-15 Months		³420 and <450 Days
15-16 Months		³450 and <480 Days
16-17 Months		³480 and <510 Days
17-18 Months		³510 and <540 Days
18 Months and more		³540 Days
Total

 

Delinquency Status—Total Number of Loans in Arrears
As at Date				—-—-13
Total Number of Loans Outstanding
		No. Days Past Due		#		%
Current		<30 Days
1-2 Months		³30 and <60 Days
2-3 Months		³60 and <90 Days
3-4 Months		³90 and <120 Days
4-5 Months		³120 and <150 Days
5-6 Months		³150 and <180 Days
6-7 Months		³180 and <210 Days
7-8 Months		³210 and <240 Days
8-9 Months		³240 and <270 Days
9-10 Months		³270 and <300 Days
10-11 Months		³300 and <330 Days
11-12 Months		³330 and <360 Days
12-13 Months		³360 and <390 Days
13-14 Months		³390 and <420 Days
14-15 Months		³420 and <450 Days
15-16 Months		³450 and <480 Days
16-17 Months		³480 and <510 Days
17-18 Months		³510 and <540 Days
18 Months and more		³540 Days
Total

 

Loss Information
As at Date		—-— -13
		%
Number of loans that have experienced a loss for the period / year ended
Gross loss amount for the period / year ended ($)
Cumulative number of loans that have experienced a loss
Cumulative gross loss amount ($)

 

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U.S.$[—] [—]% Covered Bonds Due [—], 20[—]

unconditionally and irrevocably guaranteed as to payments by

Scotiabank Covered Bond Guarantor Limited Partnership

 

Bank of Montreal

Covered Bonds

 

 

PRELIMINARY PROSPECTUS SUPPLEMENT

 

 

Program Arrangers

 

Barclays				BMO Capital Markets

Joint Lead Managers

Co-Managers

[—], 2013

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PART II — INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 8.

Indemnification of Directors and Officers

Under the Bank Act, a bank may not, by contract, resolution or by-law, limit the liability of its directors for breaches of the Act, including their fiduciary duties imposed under the Act. However, a bank may indemnify a director or officer, a former director or officer or a person who acts or acted, at the bank’s request, as a director or officer of or in a similar capacity for another entity, and his or her heirs and personal representatives, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or her because of any civil, criminal, administrative, investigative or other proceeding in which he or she is involved because of that association and may advance funds to him or her for the costs, charges or expenses of such a proceeding, provided however, that a bank may not indemnify such a person unless:

 

1.	that person acted honestly and in good faith with a view to the best interests of, as the case may be, the bank or the other entity for which he or she acted at the bank’s request as a director or officer or in a similar capacity; and

 

2.	in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, that person had reasonable grounds for believing that his or her conduct was lawful.

Under the Bank Act, these individuals are entitled to be indemnified by the bank in respect of all costs, charges and expenses reasonably incurred by them in connection with the defense of any civil, criminal, administrative, investigative or other proceeding in which he or she is involved because of an association referred to above with the bank or other entity if the person was not judged by the courts or other competent authority to have committed any fault or omitted to do anything that they ought to have done and fulfilled the conditions set out in (1) and (2) above. A bank may, with the approval of a court, also indemnify these individuals in respect of, or advance amounts to him or her for the costs, charges and expenses of, a proceeding referred to above, in respect of an action by or on behalf of the bank or other entity to procure a judgment in its favor, to which the person is made a party because of an association referred to above with the bank or other entity, if he or she fulfills the conditions set out in (1) and (2) above.

The Guarantor’s limited partnership agreement provides that the Guarantor will indemnify and hold harmless the Managing GP and the Liquidation GP and their respective shareholders, directors, officers, employees, and agents from any costs, damages, liabilities, resulting from or arising out of any act or omission or error of judgment of the Managing GP or the Liquidation GP or any of their respective shareholders, directors, officers, employees, and agents on behalf of the Guarantor or in furtherance of the business of the Guarantor unless in the case of any such person such costs, damages, liabilities, or expenses result from or arise out of any act or omission or error of judgment as a result of which such person is adjudged to have been guilty of negligence or willful misconduct or to have failed to act honestly and in good faith or to have breached fiduciary duty to the Guarantor or the Limited Partner. The above-referenced indemnity is in addition to and not a limitation of any other obligation of the Guarantor to the Managing GP or the Liquidation GP including the obligation of the Guarantor to reimburse or repay the Managing GP and the Liquidation GP on account of costs outlays disbursements and expenditures incurred by or on their behalf.

 

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The Bank’s by-laws provide that the Bank will indemnify a director or officer, a former director or officer, or a person who acts or acted at the Bank’s request as a director or officer of or in a similar capacity for another entity, and such person’s heirs and personal representatives, to the maximum extent permitted by the Bank Act.

The Bank has purchased, at its expense, a Directors’ and Officers’ Liability Insurance Policy that provides protection for individual directors and officers of Bank of Montreal and its subsidiaries (including the Guarantor) in circumstances where Bank of Montreal cannot or will not indemnify its directors or officers for acts and omissions. The Insurance Policy provides for a limit of $300 million per policy year with no deductible. The policy is in effect until October 31, 2013.

In addition, the Bank has purchased a separate Directors’ and Officers’ Liability Insurance Policy which provides for payments on behalf of the Bank when the law permits or requires the Bank (including the Guarantor) to provide an indemnity to a director or an officer. This policy has a limit of $150 million per policy year and is subject to a $100 million self-insured retention. This policy is in effect until October 31, 2013.

In the underwriting agreement related to the issuance of the covered bonds, the Bank has agreed to indemnify the Dealers in respect of certain liabilities, including liabilities under the United States Securities Act of 1933 as amended (the “Securities Act”), or to contribute to payments that the Dealers may be required to make in respect thereof.

Insofar as indemnification for liabilities arising from the Securities Act may be permitted to directors, officers or persons controlling the Bank pursuant to the foregoing provisions, the Bank has been informed that in the opinion of the U.S. Securities and Exchange Commission (the “Commission”) such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

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Item 9.

Exhibits

 

Exhibit Number		Description of Exhibit
1.1		Form of Underwriting Agreement.**
4.1		Trust Deed dated September 30, 2013, between the Bank, the Guarantor and Computershare Trust Company of Canada, as Bond Trustee.**
4.2		Master Definitions and Construction Agreement dated September 30, 2013, by and among the Bank, the Guarantor, the Bond Trustee, 8429065 Canada Inc., BMO Covered Bond GP, Inc., Royal Bank of Canada, Bank of New York Mellon and KPMG LLP.**
4.3		Mortgage Sale Agreement, dated September 30, 2013, by and among the Bank, the Guarantor and the Bond Trustee.**
4.4		Cover Pool Monitor Agreement, dated September 30, 2013, by and among the Bank, the Guarantor, the Bond Trustee and KPMG LLP, as Cover Pool Monitor.**
4.5		Servicing Agreement, dated September 30, 2013, by and among the Bank, the Guarantor and the Bond Trustee.**
4.6		Agency Agreement dated September 30, 2013, by and among the Bank, the Guarantor, Bank of New York Mellon, as Principal Paying Agent, a Registrar, a Transfer Agent and the Exchange Agent and the Bond Trustee.**
4.7		Intercompany Loan Agreement, dated September 30, 2013, between the Guarantor, the Bank and the Bond Trustee.**
4.8		Limited Partnership Agreement, dated September 30, 2013, by and among BMO Covered Bond GP Inc., 8429065 Canada Inc., the Bank and the Bond Trustee.**
4.10		Corporate Services Agreement, dated September 30, 2013, by and among the Bank, the Guarantor, the Bond Trustee and 8429065 Canada Inc.**
4.11		Cash Management Agreement, dated September 30, 2013, by and among the Bank, the Guarantor and the Bond Trustee.**
4.12		General Security Agreement, dated September 30, 2013, by and among the Guarantor, the Bond Trustee and any other person who from time to time may become a party thereto.**
4.13		Bank Account Agreement, dated September 30, 2013, by and among the Guarantor, the Bank and the Bond Trustee.**
4.14		Stand-by Bank Account Agreement dated September 30, 2013, by and among the Guarantor, the Bank, Royal Bank of Canada, and the Bond Trustee.**

 

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Exhibit Number		Description of Exhibit
4.15		Guaranteed Deposit Account Contract dated September 30, 2013, by and among the Guarantor, the Bank and the Bond Trustee.**
4.16		Standby Guaranteed Deposit Account Contract dated September 30, 2013, by and among the Guarantor, the Bank, Royal Bank of Canada, and the Bond Trustee.**
4.17		Interest Rate Swap Agreement, including ISDA Master, Schedule and Credit Support Annex dated September 30, 2013 together with a form of Interest Rate Swap Confirmation between the Bank and the Guarantor.**
4.18		Covered Bond Swap Agreement including ISDA Master, Schedule and Credit Support Annex dated September 30, 2013 together with a form of Covered Bond Swap Confirmation between the Bank and the Guarantor.**
5.1		Opinion of Osler, Hoskin & Harcourt LLP, Canadian counsel for the Registrant, as to the legality of the covered bonds.
8.1		Opinion of Allen & Overy LLP, U.S. counsel for the Registrant, as to certain matters of United States federal income taxation.**
8.2		Opinion of Osler, Hoskin & Harcourt LLP, Canadian counsel for the Registrant, as to certain matters of Canadian taxation.**
12.1		Statement regarding the computation of consolidated ratio of earnings to fixed charges.**
23.1		Consent of KPMG LLP.
23.2		Consent of Osler, Hoskin & Harcourt LLP.**
23.3		Consent of Allen & Overy LLP.**
24.1		Powers of Attorney (included in the signature page hereto).**
25.1		Statement of Eligibility of Trustee on Form T-1 with respect to Exhibit 4.1 above.**

 

**	Previously filed.

Additional exhibits to this Registration Statement may be subsequently filed in reports on Form 40-F or on Form 6-K that specifically state that such materials are incorporated by reference as exhibits in Part II of this Registration Statement.

 

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Item 10.

Undertakings

 

(a)	Each undersigned registrant hereby undertakes, solely with respect to itself:

(1)    To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933 (the “Securities Act”);

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

(iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the registration statement;

Provided, however, That:

(A) Paragraphs (1)(i) and (1)(ii) above do not apply if the registration statement is on Form S-8 and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the Registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement; and

(B) Paragraphs (1)(i), (1)(ii) and (1)(iii) of this section do not apply if the registration statement is on Form S-3 or Form F-3 and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement.

(2)    That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment will be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof.

 

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(3)    To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(4)    If the registrant is a foreign private issuer, file a post-effective amendment to the registration statement to include any financial statements required by Item 8.A. of Form 20-F at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided, that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or Rule 3-19 of Regulation S-K if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3.

(5)    That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:

(i) If the registrant is relying on Rule 430B:

(A) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) will be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and

(B) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or

(ii) If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than

 

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registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

(6)    That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:

each undersigned registrant undertakes, solely with respect to itself, that in a primary offering of securities of the each undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, each undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

(i) Any preliminary prospectus or prospectus of each undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of each undersigned registrant or used or referred to by the each undersigned registrant;

(iii) The portion of any other free writing prospectus relating to the offering containing material information about each undersigned registrant or its securities provided by or on behalf of each undersigned registrant; and

(iv) Any other communication that is an offer in the offering made by the Registrant to the purchaser.

(b)    Each undersigned registrant hereby undertakes that, solely with respect to itself, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(c)    Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions set forth in Item 8 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful

 

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defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, Bank of Montreal certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on this Form F-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Toronto, Province of Ontario, Canada, on October 18, 2013.

 

 

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated.

 

Signature Name		Title
* William A. Downe		President and Chief Executive Officer, Director
* Thomas E. Flynn		Chief Financial Officer**
* J. Robert S. Prichard		Chairman of the Board
* Robert M. Astley		Director
* Jan Babiak		Director
* Sophie Brochu		Director
* George A. Cope		Director

 

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Signature Name		Title
* Christine A. Edwards		Director
* Ronald H. Farmer		Director
* Eric R. La Flèche		Director
* Bruce H. Mitchell		Director
* Philip S. Orsino		Director
* Martha C. Piper		Director
* J. Robert S. Prichard		Director
* Don M. Wilson III		Director
*By /s/ Cathryn E. Cranston
Cathryn E. Cranston – Attorney-in-fact
**     Principal Accounting Officer

Pursuant to the requirements of the Securities Act of 1933, BMO Covered Bond GP, Inc., in its capacity as managing general partner of BMO Covered Bond Guarantor Limited Partnership certifies that it has reasonable grounds to believe that BMO Covered Bond Guarantor Limited Partnership meets all of the requirements for filing on this Form F-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Toronto, Province of Ontario, Canada, on October 18, 2013.

 

 

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AUTHORIZED REPRESENTATIVE

Pursuant to the requirements of Section 6(a) of the Securities Act of 1933, the Authorized Representative has duly caused this Registration Statement to be signed on its behalf by the undersigned, solely in her capacity as the duly authorized representative of Bank of Montreal in the United States, in the City of Chicago, State of Illinois, on October 18, 2013.

 

Pursuant to the requirements of Section 6(a) of the Securities Act of 1933, the undersigned, the duly authorized representative in the United States of BMO Covered Bond GP, Inc., in its capacity as managing general partner of BMO Covered Bond Guarantor Limited Partnership in the United States, has signed this Registration Statement in the City of Chicago, State of Illinois, on October 18, 2013.

 

 

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INDEX TO EXHIBITS

 

Exhibit Number		Description of Exhibit
1.1		Form of Underwriting Agreement.**
4.1		Trust Deed dated September 30, 2013, between the Bank, the Guarantor and Computershare Trust Company of Canada, as Bond Trustee.**
4.2		Master Definitions and Constructions Agreement dated September 30, 2013, 2013, by and among the Bank, the Guarantor, the Bond Trustee, 8429065 Canada Inc., BMO Covered Bond GP, Inc., Royal Bank of Canada, Bank of New York Mellon and KPMG LLP.**
4.3		Mortgage Sale Agreement, dated September 30, 2013, by and among the Bank, the Guarantor and the Bond Trustee.**
4.4		Cover Pool Monitor Agreement, dated September 30, 2013, by and among the Bank, the Guarantor, the Bond Trustee and KPMG LLP, as Cover Pool Monitor.**
4.5		Servicing Agreement, dated September 30, 2013, by and among the Bank, the Guarantor and the Bond Trustee.**
4.6		Agency Agreement dated September 30, 2013, by and among the Bank, the Guarantor, Bank of New York Mellon, as Principal Paying Agent, a Registrar, a Transfer Agent and the Exchange Agent, and the Bond Trustee.**
4.7		Intercompany Loan Agreement, dated September 30, 2013, between the Guarantor, the Bank and the Bond Trustee.**
4.8		Limited Partnership Agreement, dated September 30, 2013, by and among BMO Covered Bond GP Inc., 8429065 Canada Inc., the Bank and the Bond Trustee.**
4.10		Corporate Services Agreement, dated September 30, 2013, by and among the Bank, the Guarantor, the Bond Trustee and 8429065 Canada Inc.**
4.11		Cash Management Agreement, dated September 30, 2013, by and among the Bank, the Guarantor and the Bond Trustee.**
4.12		General Security Agreement, dated September 30, 2013, by and among the Guarantor, the Bond Trustee and any other person who from time to time may become a party thereto.**
4.13		Bank Account Agreement, dated September 30, 2013, by and among the Guarantor, the Bank and the Bond Trustee.**
4.14		Standby Bank Account Agreement dated September 30, 2013 by and among the Guarantor, the Bank, Royal Bank of Canada, and the Bond Trustee.**

 

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Exhibit Number		Description of Exhibit
4.15		Stand-by Deposit Account Contract dated September 30, 2013, by and among the Guarantor, the Bank and the Bond Trustee.**
4.16		Stand-by Guaranteed Deposit Account Contract dated September 30, 2013, by and among the Guarantor, the Bank, Royal Bank of Canada, and the Bond Trustee.**
4.17		Interest Rate Swap Agreement, including ISDA Master, Schedule and Credit Support Annex dated September 30, 2013 together with a form of Interest Rate Swap Confirmation between the Bank and the Guarantor.**
4.18		Covered Bond Swap Agreement including ISDA Master, Schedule and Credit Support Annex dated together with a form of Covered Bond Swap Confirmation between the Bank and the Guarantor.**
5.1		Opinion of Osler, Hoskin & Harcourt LLP, Canadian counsel for the Registrant, as to the legality of the covered bonds.
8.1		Opinion of Allen & Overy LLP, U.S. counsel for the Registrant, as to certain matters of United States federal income taxation.**
8.2		Opinion of Osler, Hoskin & Harcourt LLP, Canadian counsel for the Registrant, as to certain matters of Canadian taxation.**
12.1		Statement regarding the computation of consolidated ratio of earnings to fixed charges.**
23.1		Consent of KPMG LLP.
23.2		Consent of Osler, Hoskin & Harcourt LLP.**
23.3		Consent of Allen & Overy LLP.**
24.1		Powers of Attorney (included in the signature page hereto).**
25.1		Statement of Eligibility of Trustee on Form T-1 with respect to Exhibit 4.1 above.**

 

**	Previously filed.

Additional exhibits to this Registration Statement may be subsequently filed in reports on Form 40-F or on Form 6-K that specifically state that such materials are incorporated by reference as exhibits in Part II of this Registration Statement.

 

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