Fitch Upgrades Two Tranches, Affirms Six from Three Progress RMBS Transactions; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-29 July 2020: Fitch Ratings has upgraded two tranches and affirmed another six across three Progress RMBS series transactions. The transactions are securitisations of Australian conforming residential mortgages originated by AMP Bank Limited. The notes were issued by Perpetual Trustee Company Limited in its capacity as trustee of the series. The upgrades to classes B and C of Progress 2014-2 Trust were due to the build-up of credit enhancement as well as a reduction in the large obligor-concentration test due to the amortisation of the pool. The class B notes were upgraded to 'AAAsf' as they are no longer constrained by the large obligor-concentration test, while further upgrades to the class C notes are constrained by the large obligor-concentration test. The social and market disruption caused by the coronavirus and the related containment measures did not negatively affect the ratings, because there is sufficient credit enhancement to offset the effects under Fitch's base-case scenario and adequate liquidity to support the current ratings. The Stable Outlook is based on the notes' liquidity support and ability to withstand the sensitivity to higher defaults stemming from the pandemic. Progress 2012-1 Trust ----A AU3FN0015616; Long Term Rating; Affirmed; AAAsf; RO:Sta ----AB AU3FN0015624; Long Term Rating; Affirmed; AAAsf; RO:Sta Progress 2012-2 Trust ----A AU3FN0016473; Long Term Rating; Affirmed; AAAsf; RO:Sta ----AB AU3FN0016481; Long Term Rating; Affirmed; AAAsf; RO:Sta Progress 2014-2 Trust ----A AU3FN0025672; Long Term Rating; Affirmed; AAAsf; RO:Sta ----AB AU3FN0025680; Long Term Rating; Affirmed; AAAsf; RO:Sta ----B AU3FN0025698; Long Term Rating; Upgrade; AAAsf; RO:Sta ----C AU3FN0025706; Long Term Rating; Upgrade; AAsf; RO:Sta KEY RATING DRIVERS Pandemic-Related Economic Shock: Fitch has made assumptions about the spread of the coronavirus and the economic impact of containment measures. In a base-case (most likely) scenario, Fitch assumes a global recession in 1H20, driven by sharp economic contractions in major economies, with a rapid spike in unemployment, followed by a recovery that begins in 3Q20 as the health crisis subsides. In a downside (sensitivity) scenario, Fitch assesses a more severe and prolonged period of stress, with recovery to pre-crisis GDP levels delayed until around the middle of the decade. Pandemic-Related Impact: Measures to limit the spread of the coronavirus are affecting Australia's economy, with many businesses continuing to experience a decline in income. We expect these measures to affect mortgage performance, but there should be no rating impact on the rated notes, as the ratings can absorb Fitch's base-case scenario of the pandemic. Commentary describing Fitch's credit views and analytical approach as a consequence of the coronavirus is available in the following reports: - "Global Economic Outlook: June 2020 - Coronavirus Disruption Easing", published on 29 June 2020, available at www.fitchratings.com/site/re/10127783; - "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update", published on 29 April 2020, available at www.fitchratings.com/site/re/10120570; and - "Global SF Rating Assumptions Updated to Reflect Coronavirus Risk", published on 3 April 2020, available at www.fitchratings.com/site/pr/10117224. Analytical notes relevant for Australian and New Zealand RMBS transactions are discussed in the following commentary: - "Fitch Ratings' Approach to Addressing Coronavirus-Related Risks for Australian, NZ RMBS", published on 5 May 2020, available at www.fitchratings.com/site/pr/10120792. - "Fitch Ratings Updates Australia, NZ RMBS Criteria Assumptions on Coronavirus Effects", published on 29 July 2020, available at www.fitchratings.com/site/pr/10130287. Liquidity Risk from Payment Holidays: We reviewed the transactions' ability to survive a large portion of borrowers taking a payment holiday. The transactions benefit from a liquidity reserve ranging from 0.8%-1.0% of notes' balances and can withstand over 84% of the pool being granted a payment holiday for more than six months and with the remaining loans making interest only payments, to cover required payments at the current bank-bill spot rate, which is well above the proportion of mortgages on payment holiday arrangements as of end-June. Progress 2012-1 Trust, Progress 2012-2 Trust and Progress 2014-2 have 9.6%, 8.4% and 8.6%, respectively, of their portfolios on payment holiday arrangements. The Progress 2014-2 also benefits from an excess reserve that has a current balance of AUD1 million and provides additional liquidity support. In addition, the transactions can also use any principal payments received to pay interest if not all borrowers take up payment holidays. Operational Risk: All assets are originated by AMP Bank Limited. Fitch undertook an onsite operational review and found that the operations of the originator and servicer were comparable with market standards and that there were no material changes that may affect AMP's ongoing ability to undertake administration and collection activities. The collection timelines, policies and procedures are in line with those of other conforming lenders in Australia. We do not expect the servicer's operations to be disrupted by the pandemic, as staff members are able to work remotely and have access to the office, if needed. Asset Analysis: The asset model has not been run for Progress 2012-1 and Progress 2012-2, in accordance with Fitch's APAC Residential Mortgage Rating Criteria. The asset model was re-run for Progress 2014-2 as the outstanding rated notes have a rating which is below 'AAAsf'. The 'AAAsf' weighted-average foreclosure frequency (WAFF) of 8.3% is driven by the weighted-average (WA) unindexed loan/value ratio (LVR) of 56.9% and, under Fitch's methodology, investment loans of 36.3% and 9.1% of the pool had loans on payment holiday arrangements at end-May which were modelled at 30-59 day arrears. The 'AAAsf' lenders' mortgage insurance (LMI) dependent WA recovery rate of 82.2% is driven by the portfolio's WA indexed scheduled LVR of 57.4%, 99.3% of the pool benefiting from LMI and the portfolio 'AAAsf' WA market value decline of 59.9%. The Progress 2012-1 and Progress 2014-2 transactions had 30+ day arrears at 0.85% and 0.75%, respectively, as of end-June, lower than Fitch's 1Q20 RMBS Dinkum Index of 1.16%. The arrears for Progress 2012-2 at 1.69% are higher than Fitch's Dinkum Index, however arrears as a balance are relatively stable since last review. Total losses were AUD2.8 million among the three trusts and were covered mostly by LMI and excess spread. Losses that were not paid by LMI have been covered by AMP Bank due to breaches of representations and warranties. LMI cover is provided by Genworth Financial (NYSE:GNW) Mortgage Insurance Pty Limited (Insurer Financial Strength Rating: A/Negative) and QBE Lenders' Mortgage Insurance Limited (Insurer Financial Strength Rating: A+/Stable). Liability Analysis: Cash-flow analysis has not been performed for Progress 2012-1 and Progress 2012-2 transactions, as all rated notes are rated at the highest possible level, cash-flow distributions have been within Fitch's expectations and there have been no material changes to cash-flow assumptions since the last cash-flow analysis. For Progress 2014-2, the class A, AB, B, and C notes benefit from current credit enhancement of 16.2%, 7.3%, 3.4% and 2.0%, respectively. Structural features include a liquidity facility sized at 0.85% of the invested note balance, with a floor of AUD850,000. The class A, AB and B notes can withstand all relevant Fitch 'AAAsf' stresses applied in our cash-flow analysis and the class C notes can withstand all 'AAsf' stresses. Macroeconomic Factors: Fitch expects mortgage performance to deteriorate in the near term, but to continue to support the Stable Outlook for the notes. Fitch forecasts Australia's GDP will contract by 2.7% in 2020, with the unemployment rate at 7.1%. This will be partially offset by a low cash rate of 0.25% and the application of both central bank and government stimulus measures. Fitch expects GDP growth to bounce back to 3.1% in 2021 and the unemployment rate to fall to 6.7% in the medium term. RATING SENSITIVITIES Unanticipated increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than Fitch's base case and are likely to result in a decline in credit enhancement and remaining loss-coverage levels available to the notes. Decreased credit enhancement may make certain note ratings susceptible to negative rating action, depending on the extent of the coverage decline. Hence, Fitch conducts sensitivity analysis of the ratings by stressing the transaction's initial base-case assumptions. Fitch applies recovery rate stress to the pre-LMI recovery rate to isolate the effect of a change in recovery proceeds at the borrower level. Progress 2014-2 Notes class: A / AB / B / C Current Rating: AAAsf / AAAsf / AAAsf / AAsf Downside Sensitivity Expected impact on note ratings of increased defaults: Increase defaults by 15%: AAAsf / AAAsf / AAAsf / AAsf Increase defaults by 30%: AAAsf / AAAsf / AAAsf / AAsf Expected impact on note ratings of decreased recoveries: Reduce recoveries by 15%: AAAsf / AAAsf / AAAsf / AAsf Reduce recoveries by 30%: AAAsf / AAAsf / AA+sf / AAsf Expected impact on note ratings of multiple factors: Increase defaults by 15% and reduce recoveries by 15%: AAAsf / AAAsf / AA+sf / AAsf Increase defaults by 30% and reduce recoveries by 30%: AAAsf / AAAsf / AA+sf / AAsf Upside Sensitivity The class A, AB and B notes are at 'AAAsf', which is the highest level on Fitch's scale. The ratings cannot be upgraded. Further upgrades to class C notes are constrained by the large obligor-concentration test. The transaction structure supports LMI-independent ratings for the class A and AB notes. LMI is not required to support the rating due to the level of credit support provided by the lower notes. The class B and C notes can withstand a one-notch downgrade to the LMI-providers' ratings at their respective ratings. Coronavirus Downside Scenario Sensitivity Under Fitch's downside scenario, re-emergence of infections in the major economies prolongs the health crisis and confidence shock, prompts extensions or renewals of lockdown measures and prevents a recovery in financial markets. Fitch tested this scenario by increasing defaults by 15% and decreasing the recoveries by 15% for the rated notes. Expected coronavirus downside impact on note ratings of multiple factors: AAAsf / AAAsf / AA+sf / AAsf Progress 2012-1 and Progress 2012-2 Factors that could, individually or collectively, lead to positive rating action/upgrade: The rated notes are at 'AAAsf', which is the highest level on Fitch's scale. The ratings cannot be upgraded. Factors that could, individually or collectively, lead to negative rating action/downgrade: A longer pandemic than Fitch expects that leads to deterioration in macroeconomic fundamentals and consumers' financial position in Australia beyond Fitch's baseline scenario. Available credit enhancement cannot fully compensate for higher credit losses and cash flow stresses, all else being equal. The ratings of the rated notes are LMI independent and, therefore, are unaffected by downgrades in the LMI providers' ratings. Coronavirus Downside Scenario Sensitivity Under Fitch's downside scenario, re-emergence of infections in the major economies prolongs the health crisis and confidence shock, prompts extensions or renewals of lockdown measures and prevents a recovery in financial markets. The 'AAAsf' rated notes have subordination that is at least 2.6x greater than the 'AAAsf' portfolio loss and can absorb Fitch's downside scenario of the coronavirus-related impacts. For more information on rating sensitivities, please refer to the new issue reports available at www.fitchratings.com/site/re/679869 for Progress 2012-1 and www.fitchratings.com/site/re/687633 for Progress 2012-2. Best/Worst Case Rating Scenario International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third-party assessment of the asset portfolio as part of its ongoing monitoring. Prior to the transactions' closing, Fitch did not review the results of a third-party assessment conducted on the asset portfolio information. Prior to the transactions closing, Fitch reviewed a small targeted sample of AMP Bank's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. Overall, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis, according to its applicable rating methodologies, indicates that it is adequately reliable. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. ESG Considerations The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Contacts: Surveillance Rating Analyst Sambit Agasti, Associate Director +61 2 8256 0337 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Committee Chairperson Chris Stankovski, Senior Director +61 2 8256 0341 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria APAC Residential Mortgage Rating Criteria (pub. 27 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10123329) Fitch Ratings Interest Rate Stress Assumptions for Structured Finance and Covered Bonds (Excel) (pub. 06 Dec 2019) (https://www.fitchratings.com/site/re/10104368) Global Structured Finance Rating Criteria (pub. 17 Jun 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10126475) RMBS Lenders' Mortgage Insurance Rating Criteria (pub. 12 Mar 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10110807) Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 29 Jan 2020) (https://www.fitchratings.com/site/re/10108544) Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 29 Jan 2020) (https://www.fitchratings.com/site/re/10108546) Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 06 Dec 2019) (https://www.fitchratings.com/site/re/10103887) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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