Ratings Raised On 12 Tranches Of Australian 117 Affirmed

Stocks and Financial Services Press Releases Monday March 20, 2017 17:35
MELBOURNE--20 Mar--S&P Global Ratings

MELBOURNE (S&P Global Ratings) March 20, 2017--S&P Global Ratings today raised its ratings on 12 tranches of Australian residential mortgage-backed securities (RMBS) issued by transactions sponsored by lenders in the other banks category. At the same time, we affirmed our ratings on 117 tranches (see list).

The rating actions follow our periodic surveillance review of 41 securitization transactions sponsored by other banks, a group of diverse lenders that falls outside the major banks category and tends to have more geographically diverse loan portfolios than regional banks.

We have excluded from our review transactions in this sponsor group that are more likely to call in the near term, warehouse-style facilities, and those that have recently undergone a review.

We have published an analysis of our key findings and observations to accompany this review (see "Australian RMBS Originated By Other Banks: Strong Collateral Quality Supports Rating Stability," March 20, 2017).

The rationale for the rating actions reflects: That credit support provided through note subordination or excess spread is sufficient to cover expected losses at the recommended rating levels and withstand various cash-flow stresses, including future interest-rate rises.The stable collateral performance, as evidenced by low levels of arrears and losses.

A total of 0.98% of loans in the other banks sector are more than 30 days in arrears, the third lowest of all originator categories as of December 2016.

The high seasoning of around 80 months for this sector, indicating a strong repayment track record for most borrowers. By this point, most borrower defaults are likely to have occurred.Modest loan-to-value (LTV) ratios of around 61%, which provide a degree of insulation against potential property price declines.

The sector's insignificant exposure to low-documentation loans, at 0.8%. This decreases underlying loan portfolios' vulnerability to any deterioration in employment conditions, which is typically felt more keenly by self-employed borrowers.

The sector's high prepayment rates of around 23%, which supports the strong build-up in credit support to senior tranches of notes and modest LTV ratios. At a transactional level, this increases structural enhancement, particularly for transactions that pay sequentially, in addition to building up equity at the underlying loan level.Relatively stable economic growth and employment levels suggest ratings performance should remain stable in the medium term for this sector.

Our analytical review considers the credit quality and cash-flow mechanics of each of the transactions.

In our assessment of the expected loss/required credit support, we have considered each tranche in light of the collateral pool performance as of Nov. 30, 2016, with credit given to lenders' mortgage insurance (LMI) at their current rating levels.

All originators in this review have been categorized within "CA1", in line with our "Methodology For Assessing Mortgage Insurance And Similar Guarantees And Supports In Structured And Public Sector Finance And Covered Bonds" criteria, published Dec. 7, 2014.

For pools that we consider to be concentrated--i.e., those in which the 10 largest loan balances are at least 10% of the pool--we have assessed pool concentrations by sizing an alternate loss scenario for the pool, under which the top 10 loans, at the 'AAA' rating level, default and are recovered upon.

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 then the higher of that number and the number sized when applying our " Australian RMBS Rating Methodology And Assumptions" criteria, published Sept. 1, 2011.

We view transactions as being more susceptible to tail-end risk, including borrower concentration, when their junior tranches have no note subordination. As the pool amortizes, the junior notes form a larger part of the capital structure, and the notes become more sensitive to the timing and amount of losses. We have considered this risk factor in our cash-flow analysis.

Our cash-flow analysis demonstrates the timely payment of interest and ultimate payment of principal for the rated notes at their respective rating levels after the application of the appropriate rating stresses outlined in the criteria. We have taken into consideration the level of subordination and other credit support available, excess spread, liquidity, and other support mechanisms in each transaction, as well as the current level of credit support required at their respective rating levels, after giving credit to the current LMI insurance providers.

The cash-flow analysis takes into consideration various variables that could affect future cash flow, the portfolio performance of the transaction, and outlook, as well as the current and potential future payment mechanism. We will continue to monitor these variables as part of our surveillance and future rating review.


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