(The following statement was released by the rating agency) Fitch Ratings-Sydney-May 07: Fitch Ratings has placed five tranches from two Australian RMBS transactions on Rating Watch Negative (RWN) and revised the rating Outlook to Negative on seven tranches from three RMBS transactions. The rating actions are driven by Fitch's expectation that coronavirus-related disruptions are likely to affect performance in the short to medium term. Sapphire XV Series 2016-2 Trust ----D AU3FN0033387; Long Term Rating; Rating Watch On; A+sf; RW: Neg ----E AU3FN0033395; Long Term Rating; Rating Watch On; A-sf; RW: Neg ----F AU3FN0033403; Long Term Rating; Rating Watch On; BBBsf; RW: Neg Sapphire XVI Series 2017-1 Trust ----D AU3FN0036083; Long Term Rating; Revision Outlook; A-sf; RO:Neg ----E AU3FN0036091; Long Term Rating; Revision Outlook; BBBsf; RO:Neg ----F AU3FN0036109; Long Term Rating; Revision Outlook; BBB-sf; RO:Neg Five Star 2019-1 Trust ----C AU3FN0052288; Long Term Rating; Revision Outlook; Asf; RO:Neg ----D AU3FN0052296; Long Term Rating; Revision Outlook; BBB+sf; RO:Neg ----E AU3FN0052304; Long Term Rating; Rating Watch On; BBB-sf; RW: Neg ----F AU3FN0052312; Long Term Rating; Rating Watch On; BB+sf; RW: Neg Sapphire XIV Series 2016-1 Trust ----E AU3FN0031233; Long Term Rating; Revision Outlook; Asf; RO:Neg ----F AU3FN0031241; Long Term Rating; Revision Outlook; A-sf; RO:Neg KEY RATING DRIVERS Coronavirus Stresses The Rating Watch Negative (RWN) reflects the high probability that the five tranches will be downgraded as a result of the coronavirus pandemic affecting transactions with insufficient credit enhancement to compensate for additional projected losses on the portfolios. The Negative Outlook on the ratings of the seven tranches reflects the likely downgrade as a result of the coronavirus pandemic affecting transactions with a larger-than-average exposure to self-employed borrowers, who Fitch expects to be the most vulnerable in the current crisis due to income volatility and rapid job losses. The Australian government implemented lockdown measures on 19 March 2020 while New Zealand took containment measures on 25 March. Fitch has made assumptions about the spread of coronavirus and the economic impact of the related containment measures. As a base-case 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. However, if a longer lockdown period is required to contain the virus in 2H20 or the health crisis extends to 2021 because of the re-emergence of infections, a prolonged economic contraction will take place that will be accompanied by continued job losses and depressed markets. Commentary describing Fitch's credit views and analytical approach as a consequence of coronavirus is available in these reports: - Global Economic Outlook: Crisis Update Late April 2020, published 22 April 2020 - Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases — Update, published 29 April 2020 - Global SF Rating Assumptions Updated to Reflect Coronavirus Risk, published 3 April 2020 Additionally, analytical notes relevant for Australian and New Zealand RMBS transactions are discussed in the commentary Fitch Ratings' Approach to Addressing Coronavirus-Related Risks for Australian, NZ RMBS , published 5 May 2020. Weaker Asset Performance Outlook We expect a general weakening in borrowers' ability to keep up with mortgage payments, as large-scale job losses may take place in the manufacturing, tourism, hospitality and tertiary sectors. We have focused on ratings in the 'Asf' category and below as we expect less sensitivity to macroeconomic changes in the corresponding rating assumptions at high investment-grade ratings. The RWN on the class E and F notes from Five Star 2019-1 Trust and the class D, E and F notes from Sapphire XV Series 2016-2 Trust reflects the heightened probability of downgrade with the changed macroeconomic baseline assumptions. Large Exposure to Self-Employed Notes rated up to and including 'Asf' from transactions with self-employed borrower concentrations above 50% and notes rated up to and including 'BBBsf' of transactions with self-employed borrower concentrations between 25% and 50% have had their rating Outlooks revised to Negative from Stable. This is because we expect the performance of these transactions to weaken as income support for self-employed borrowers offered by the Australian and New Zealand governments may not be sufficient or the borrowers may not be eligible for the measures. Some self-employed borrowers will not be able to recover lost income, increasing the risk of mortgage arrears and ultimately default. The tranches affected are: the class E and F notes from Sapphire XIV Series 2016-1 Trust, the class D, E and F notes from Sapphire XVI Series 2017-1 Trust, and the class C and D notes from Five Star 2019-1 Trust. At present, we believe the performance of loans to self-employed and other employment types will converge in higher investment-grade rating scenarios. Liquidity Risk The option for borrowers to take up a payment holiday of up to six months on their mortgage payments has been provided by lenders in Australia and New Zealand. Fitch believes the take-up rate will be moderate for conforming RMBS transactions but high for non-conforming RMBS transactions or transactions with high exposures to self-employed borrowers, resulting in a reduction of available revenue to pay transaction senior costs and note interest. Transactions may rely on other sources of funds, such as the use of principal collections, liquidity facility or reserves, to ensure timely payment of such items. We have tested the ability of all Fitch-rated Australian and New Zealand transactions to meet senior costs and note interest payments based on current interest rates. In the unlikely scenario of no mortgage payments being collected, all transactions will be able to cover these costs from the liquidity facilities or reserves for at least the next five months. The transactions can also use any principal payments received to pay interest if the take-up rate for payment holidays is less than 100%. RATING SENSITIVITIES Developments that may, individually or collectively, lead to positive rating action/upgrade or affirmations include: - Credit enhancement ratios increase as the transactions deleverage to fully compensate for the credit losses and cash-flow stresses that are commensurate with higher rating scenarios, all else being equal. Developments that may, individually or collectively, lead to negative rating action/downgrade include: - Transaction liquidity positions weaken due to large take-ups on mortgage payment moratoriums and new defaults as a consequence of the coronavirus crisis. - A longer-than-expected recessionary period that weakens macroeconomic fundamentals beyond Fitch's current base case. Credit enhancement ratios cannot fully compensate for the credit losses and cash-flow stresses associated with the current rating scenarios, all else being equal. Fitch expects to resolve the RWN within the next six months, with the likely rating impact ranging from affirmations to multi-notch downgrades, depending on the trajectory of the coronavirus crisis and the take-up rate on payment holidays. 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 sought to receive a third-party assessment conducted on the initial asset portfolio information prior to these transactions' closing, but none was made available to Fitch. Fitch has not reviewed the results of any third-party assessment of the asset portfolios as part of its ongoing monitoring. As part of its ongoing monitoring, Fitch reviewed a small targeted sample of Bluestone Group's and Victorian Mortgage Group's origination files and found the information contained in the reviewed files to be adequately consistent with the originators' policies and practices and the other information provided to the agency about the asset portfolios. 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. SOURCES OF INFORMATION The information below was used in the analysis: - Transaction reporting data provided by Bluestone Group and Victorian Mortgage Group as of March 2020 - Loan enforcement details provided by Bluestone Group and Victorian Mortgage Group as of March 2020 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 listed below. In addition, the sources described under Sources of Information above, which are not discussed in the criteria were used. The issuers have informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. ESG Considerations Sapphire XIV Series 2016-1, Sapphire XV Series 2016-2 and Sapphire XVI Series 2017-1 have an ESG Relevance Score of 4 for Exposure to Social Impact due to our consideration in the cash flow analysis of the mortgage lender's limited ability to reprice loans as a result of borrowers paying above-market rates, which has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors. Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Contacts: Surveillance Rating Analyst Sambit Agasti, Associate Director +61 2 8256 0337 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Surveillance Rating Analyst Marija Buzevska, Senior Analyst +61 2 8256 0340 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Committee Chairperson Natasha Vojvodic, Senior Director +61 2 8256 0350
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. 04 Jun 2019) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10076316 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. 02 May 2019) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10073280 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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