Fitch Affirms 11 Classes in Five Light Trust Transactions; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-04 December 2020: Fitch Ratings has affirmed the ratings on 11 tranches from five Light Trust transactions. The Outlooks are Stable. The transactions are securitisations of Australian prime mortgage loans originated by People's Choice Credit Union (PCCU, a trading name of Australian Central Credit Union Ltd). The notes were issued by Perpetual Corporate Trust Limited in its capacity as trustee. 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. Light Trust 2017-1 ----A1 AU3FN0035358; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----A2 AU3FN0035366; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable Light Trust 2018-1 ----A1 AU3FN0041265; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----A2 AU3FN0041273; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable Light Trust 2019-1 ----A AU3FN0048955; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable Light Trust No. 4 ----A AU3FN0017034; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----AB AU3FN0017042; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----B1 AU3FN0017059; Long Term Rating; Affirmed; AA-sf; Rating Outlook Stable Light Trust No.6 ----A1 AU3FN0028676; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----A2 AU3FN0028684; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----AB AU3FN0028692; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable KEY RATING DRIVERS Asset Performance Resilient to Pandemic: Arrears on all transactions, except Light Trust No. 4, at end-October 2020 were below Fitch's 3Q20 Dinkum RMBS Index for 30+ day and 90+ day arrears of 1.0% and 0.64%, respectively. The 30+ day arrears for Light Trust No. 4 at 1.79% are higher than Fitch's Dinkum Index due to the low bond factor; however, arrears as a balance are relatively stable. All Light Trust arrears included loans in hardship, but not loans on COVID-19-related payment holidays. At end-October 2020, all transactions had less than 2.6% of pool loans on COVID-19 hardship arrangements. Transaction performance has been strong, with low levels of losses that have been covered by lenders' mortgage insurance (LMI) and excess spread. The 'AAAsf' weighted-average (WA) foreclosure frequency for Light Trust No. 4 is 20.1%, driven by tail risk constraint at 0.8% of the initial pool, the WA unindexed loan/value ratio (LVR) of 45.4% and investment loans, under Fitch's methodology, making up 11.5% of the pool and payment holiday arrears of 1.1% applied to the 30-59 day arrears category. The LMI-independent 'AAAsf' WA recovery rate of 75.2% is driven by the portfolio's WA indexed scheduled LVR of 47.3% and WA market value decline of 54.2%. A review of payment holiday arrangements, where the 30-59 day arrears status is applied to the proportion of mortgages on payment holiday terms as an arrears adjustment, shows that the 'AAAsf' rated notes will not be affected in these transactions as the ratings can absorb Fitch's base-case scenario of the coronavirus-related impact. The 'AAAsf' rated notes have subordination that is at least 2.3x greater than the 'AAAsf' portfolio loss, while the 'AA-sf' rated note has subordination that is 2.4x greater than the 'AA-sf' portfolio loss. See the following links for Fitch's pandemic-related credit views and analytical approach: - "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 at https://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 28 July 2020, available at www.fitchratings.com/site/pr/10130287. Credit Enhancement Supports Ratings: All transactions, with the exception of Light Trust 2018-1 and Light Trust 2019-1, are currently paying down pro rata, and will revert to sequential paydown, building up credit enhancement, if performance significantly deteriorates. Limited 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 transactions benefit from liquidity facilities, which cover at least eight months of required payments at the current bank-bill spot rate if 100% of the pools are under payment holiday arrangements, which is well above the 2.6% maximum proportion of mortgages on COVID-19 payment holiday arrangements at end-October 2020. The transactions can also use any principal payments received to pay interest if not all borrowers take up payment holidays. Low Operational and Servicing Risk: PCCU's collection and servicing activities have not been disrupted due to the pandemic as staff work remotely. PCCU has extensive experience originating, servicing and managing its mortgage portfolio, which mitigates the operational risk of the transactions. PCCU's collection timelines, policies, procedures and origination practices are largely in line with the market standards for conforming mortgages, evident from the historical performance of Light Trust transactions. Economic Rebound to Support Stable Outlook: Fitch expects loan performance to deteriorate in the near term, but to continue to support the Stable Outlook on the rated notes. Fitch forecasts Australia's GDP to contract by 3.6% in 2020, with the unemployment rate at 7.1%. This will be partially offset by a low official cash rate of 0.10% and the application of both central bank and government stimulus measures. Fitch expects GDP growth to rebound to 3.9% in 2021, with the unemployment rate falling to 6.7%. The key rating drivers listed in the applicable sector criteria, but not mentioned above, are not material to this rating action. 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 (CE) and remaining loss-coverage levels available to the notes. Decreased CE may make certain note ratings susceptible to negative rating action, depending on the extent of the coverage decline. Hence, Fitch conducts sensitivity analysis by stressing a transaction's initial base-case assumptions. This section provides insight into the model-implied sensitivities the transaction faces when one assumption - defaults or recoveries - is stressed, while holding others equal. The modelling process uses the estimation and stress of default and recovery assumptions to reflect asset performance in a stressed environment. The results below should only be considered as one potential outcome, as the transaction is exposed to multiple dynamic risk factors. Factors that could, individually or collectively, lead to positive rating action/upgrade: The class B1 notes of Light Trust No. 4 may be upgraded if there is sufficient increase in credit enhancement as the transaction amortises to fully compensate for credit losses and cash flow stresses commensurate with higher rating scenarios, all else being equal. The remaining 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 may lead to a downgrade. 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 transaction. Light Trust No. 4 Downgrade Sensitivity: Notes class: A/AB/B1 Current Rating: AAAsf/AAAsf/AA-sf Impact on note ratings of increased defaults: Increase defaults by 15%: AAAsf/AA+sf/AA-sf Increase defaults by 30%: AAAsf/AA+sf/AA-sf Impact on note ratings of decreased recoveries: Reduce recoveries by 15%: AAAsf/AA+sf/less than Bsf' Reduce recoveries by 30%: AAAsf/AA+sf/less than Bsf' Impact on note ratings of multiple factors: Increase defaults by 15% and reduce recoveries by 15%: AAAsf/AA+sf/less than Bsf' Increase defaults by 30% and reduce recoveries by 30%: AAAsf/AAsf/less than Bsf' The transaction structure supports an LMI-independent rating for the class A notes, as LMI is not required to support the ratings due to the level of credit support provided by the lower notes. The class AB and B1 notes are LMI dependent and would be sensitive downgrade upon a one-notch downgrade to the LMI providers' ratings. Fitch's previous rating sensitivities for each the remaining transactions were discussed in: - rating action commentary for Light Trust No. 6, published on 5 October 2015, available at www.fitchratings.com/site/pr/991838; - rating action commentary for Light Trust 2017-1, published on 20 April 2017, available at www.fitchratings.com/site/pr/1022444; - rating action commentary for Light Trust 2018-1, published on 22 April 2018, available at www.fitchratings.com/site/pr/10027550; - rating action commentary for Light Trust 2019-1, published on 1 August 2019, available at www.fitchratings.com/site/pr/10084088; 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 recoveries by 15%. Under Fitch's downside scenario, Light Trust No. 4's class A notes would not be downgraded, its class AB notes would be vulnerable to a one-notch downgrade, while the class B1 notes' rating would be downgraded to less than 'Bsf'. The remaining 'AAAsf' rated notes of the transactions have subordination that is at least 2.3x the 'AAAsf' portfolio loss, and can absorb Fitch's downside scenario of the coronavirus-related impact. 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 Light Trust No. 4 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. Prior to Light Trust No.6 transaction closing, Fitch did not review the results of a third-party assessment conducted on the asset portfolio information. Prior to Light Trust 2017-1, Light Trust 2018-1 and Light Trust 2019-1 transactions closing, Fitch sought to receive a third-party assessment conducted on the asset portfolio information, but none were made available to Fitch for these transactions. As part of its ongoing monitoring, Fitch conducted a file review of a small targeted sample of PCCU'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 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 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 Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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