Interstar NZ Millennium Series 2004-A Trust Tranche 2 And Tranche 3 Ratings Lowered

Stocks and Financial Services Press Releases Tuesday November 29, 2016 09:16
MELBOURNE--29 Nov--S&P Global Ratings

MELBOURNE (S&P Global Ratings) Nov. 29, 2016--S&P Global Ratings today lowered its ratings on two classes of notes issued by Trustees Executors Ltd. as trustee for Interstar NZ Millennium Series 2004-A Trust. We lowered our rating on the tranche 2 notes to 'AA (sf)' from 'AAA (sf)' and the tranche 3 notes to 'BB (sf)' from 'BBB (sf)'.

The rating actions are a consequence of further analysis of the exposure to long-dated arrears, combined with an increasingly concentrated pool. The timing and level of interest and principal recoveries is uncertain for the long-dated arrears portfolio because Challenger Mortgage Management Pty Ltd. has amended the original terms and conditions for a portion of the loans.

The pool has become increasingly concentrated. A total of 91 consolidated loans remain in the pool, with a total loan balance of approximately NZ$13.1 million. Currently, the 10 largest borrowers by current balance account for about 32% of the total pool, and the largest exposure to a single loan is 6%. The long-dated arrears portfolio in which the timing and level of recoveries is uncertain amounts to about 18% and NZ$2.2 million of the remaining pool balance.

The current ratings on the tranche 2 and tranche 3 notes reflect our view of the credit risk of the performing loans, low weighted-average loan-to-value ratio and significant seasoning of the loans, the provision of lenders' mortgage insurance policies on the performing loans, and, for the tranche 2 notes, the 34.6% of subordination provided by the tranche 3 notes. The current ratings also reflects the ability of the tranche 2 and tranche 3 notes to withstand losses that could occur from loans with long-dated arrears due to the current generation of sufficient excess spread to cover any losses or interest shortfalls.

Our lowering of the ratings reflects our view of the notes' increasing sensitivity to the timing of recoveries from the long-dated arrears, and the ability to cover losses at the tail end of the transaction if excess spread is eroded because of the amortization profile of the assets and the level of outstanding recoveries.

Downward pressure on the ratings would increase if long-dated arrears were to remain outstanding and no recoveries were to eventuate, particularly if lenders' mortgage insurance is unavailable and the availability of excess spread to cover any loss amounts were tested by the amortization of the asset pool.

We have assessed pool concentrations by sizing an alternate loss scenario for the pool. Under this scenario, the top 10 loans, at the 'AAA' rating level, default and are recovered upon. The loss severity for each loan is the higher of 50%, the loan's loss severity, and the pool's weighted-average loss severity. The expected loss for the pool is the higher of that number, and the number sized applying our "Australian RMBS Rating Methodology And Assumptions" criteria, published Sept. 1, 2011. This approach is consistent with the "U.S. RMBS Surveillance Credit And Cash Flow Analysis For Pre-2009 Originations" criteria, published March 2, 2016.

RATINGS LOWERED
Class Rating To Rating From
Tranche 2 AA (sf) AAA (sf)
Tranche 3 BB (sf) BBB (sf)

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