Fitch Affirms Medallion Trust Series 2008-1R; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-06 October 2020: Fitch Ratings has affirmed two classes of notes from Medallion Trust Series 2008-1R. The transaction consists of notes backed by Australian residential mortgages originated by Commonwealth Bank of Australia (CBA, A+/Negative/F1). The notes were issued by BNY Trust Company of Australia Limited in its capacity as trustee of Medallion Trust Series 2008-1R. The social and market disruption caused by the coronavirus pandemic and the related containment measures did not negatively affect the ratings because there was sufficient credit enhancement to provide an offset under Fitch's base-case scenario as well as adequate liquidity to support the ratings. The Stable Outlook is based on the notes' liquidity support and ability to withstand sensitivity to higher defaults stemming from the pandemic. Medallion Trust Series 2008-1R ----Class A AU3FN0005617; Long Term Rating; Affirmed; AAAsf ----Class B ; Long Term Rating; Affirmed; AAsf 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, will be followed by a recovery that begins in 3Q20 as the health crisis subsides. In a downside (sensitivity) scenario in the Rating Sensitivities section below, Fitch considers 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. In addition, the class A notes will have subordination that is at least 1.7x greater than the 'AAAsf' portfolio loss. Commentary describing Fitch's credit views and analytical approach as a consequence of the coronavirus is available in the following reports: - "Global Economic Outlook - September 2020 ", published on 7 September 2020, available at https://www.fitchratings.com/site/re/10135033; - "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update", published on 8 September 2020, available athttps://www.fitchratings.com/site/re/10135320; 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 have reviewed the ability of the transaction to survive a significant proportion of borrowers taking a payment holiday. The transaction benefit from a liquidity facility sized at AUD1.35 billion that is sufficient to cover six months of required payments at the current bank-bill spot rate, should there be no principal or interest collections, which is well above the 9.3% of mortgages on payment holiday arrangements at the end of July 2020. The transaction can also use any principal payments received to pay interest if not all borrowers take up payment holidays. Operational Risk: CBA has a strong franchise in Australia and New Zealand, particularly in retail banking, leading to high market share that allows the bank to operate a simple business model with stable earnings. CBA, as a regulated bank, is obliged to comply with minimum lending standards set by the Australian Prudential (LON:PRU) Regulation Authority; these are consistent with market standards. Fitch undertook an onsite operational review and found the originator's and servicer's operations were in line with market standards for conforming lenders and that there were no material changes that may affect CBA'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 are able to work remotely and have access to the office. Asset Analysis: The transaction allows for the addition of new receivables during the substitution period, ending May 2030, in accordance with eligibility criteria and portfolio parameters. Structural features and performance-based triggers have been included to restrict the ability to add new receivables in certain circumstances. At end-July 2020, 30+ days and 90+ days arrears, including loans in hardship, were 0.47% and 0.21%, respectively, below Fitch's 2Q20 Dinkum RMBS Index arrears of 1.16% and 0.61%, respectively. Loans in hardship not related to the pandemic were included in the arrears reporting. Medallion Trust Series 2008-1R had low levels of losses since closing. At end-July 2020, the transaction recorded a loss of AUD255,017 that, after exhausting available excess spread, resulted in a charge-off on the class C notes. Liability Analysis: The class A and B notes have sufficient credit enhancement of 10.9% and 4.5%, respectively, provided by their respective subordinated notes. Structural features include a liquidity facility sized at AUD1.35 billion, with a floor of AUD135 million. While not all rated notes are at the highest possible rating because the transaction features a revolving period, the cash flow model was not updated for surveillance purposes during the revolving period given the following conditions were met: cash flow distributions have been within expectations since the last cash flow model analysis and there have been no material changes to cash flow assumptions since the last cash flow model analysis. At end-July 2020, there was a charge-off that reduced the stated balance of the class C notes by AUD255,017. The charge-off had a minor impact on the credit enhancement of the rated notes, but no material effect on the ratings, as the rated notes have sufficient enhancement to support their ratings. 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 3.6% 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 3.9% in 2021 and the unemployment rate to fall to 6.7%. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: The class A notes are at 'AAAsf', which is the highest level on Fitch's scale. The ratings cannot be upgraded. The class B notes may be upgraded if there is sufficient increase in credit enhancement due to restructuring or as the transaction amortises to fully compensate for credit losses and cash flow stresses commensurate with higher rating scenarios, all else being equal. 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 compensate for higher credit losses and cash flow stresses, all else being equal. Fitch conducted sensitivity analysis by increasing gross default levels and decreasing recovery rates over the life of the transactions. Notes class: A / B Current Rating: AAAsf / AAsf Expected impact on note ratings of increased defaults: Increase defaults by 15%: AAAsf / A+sf Increase defaults by 30%: AAAsf / Asf Expected impact on note ratings of decreased recoveries: Reduce recoveries by 15%: AAAsf / A+sf Reduce recoveries by 30%: AAAsf / A+sf Expected impact on note ratings of multiple factors: Increase defaults by 15% and reduce recoveries by 15%: AAAsf / Asf Increase defaults by 30% and reduce recoveries by 30%: AAAsf / BBBsf Coronavirus Downside Scenario Sensitivity Fitch's coronavirus downside scenario assumes that a re-emergence of infections in the major economies prolongs the health crisis and confidence shock, prompting extensions or renewals of lockdown measures and preventing a recovery in financial markets. Under Fitch's downside scenario, the class A notes would not be downgraded, while the class B notes rating would be vulnerable to a three-notch downgrade. 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 pool and the transaction. 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 transaction closing, Fitch reviewed the results of a third-party assessment conducted on the asset portfolio information and concluded that there were no findings that affected the rating analysis. As part of its ongoing monitoring, Fitch reviewed a small targeted sample of CBA'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. In our previous loan file review on CBA, there were discrepancies noted in the security valuations provided in the loan file data compared with the source data from CBA. These discrepancies in the valuation data have now been resolved. 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 Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg Contacts: Surveillance Rating Analyst Hai Duong Le, Associate Director +61 2 8256 0358 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Committee Chairperson Claire Heaton, Senior Director +61 2 8256 0361 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@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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