Fitch Affirms 14 Note Classes from Six ConQuest Transactions; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-16 December 2020: Fitch Ratings has affirmed 14 note classes from six ConQuest transactions, which consist of notes backed by pools of first-ranking Australian residential full-documentation mortgage loans. All mortgages were originated by MyState Bank Limited and the notes were issued by Perpetual Trustee Company Limited in its capacity as trustee. The social and market disruptions caused by the coronavirus and related containment measures have not negatively affected the ratings because there is sufficient credit enhancement to cover our expectation of higher defaults, and because Fitch views liquidity protection as sufficient to support the current ratings. The Stable Outlook on the notes reflects their liquidity support and ability to withstand the sensitivity to higher defaults stemming from the coronavirus pandemic. ConQuest 2010-1R Trust ----A AU3FN0024428; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ConQuest 2014-2 Trust ----A1 AU3FN0026076; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----A2 AU3FN0026084; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----AB AU3FN0026092; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----B1 AU3FN0026100; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----B2 AU3FN0026118; Long Term Rating; Affirmed; BBB+sf; Rating Outlook Stable ConQuest 2016-2 Trust ----A1 AU3FN0033254; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----A2 AU3FN0033262; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ConQuest 2017-1 Trust ----A1 AU3FN0035804; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----A2 AU3FN0035812; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ConQuest 2018-1 Trust ----A1 AU3FN0041190; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----A2 AU3FN0041208; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ConQuest 2019-2 Trust ----A1 AU3FN0049813; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----A2 AU3FN0049821; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable KEY RATING DRIVERS Asset Performance Resilient to Pandemic: Arrears on all transactions at end-October 2020 (11 November 2020 for ConQuest 2010-1R) 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 ranged from 0.14% for ConQuest 2016-2 to 0.51% for ConQuest 2018-1. The proportion of loans on Covid-19 hardship arrangements at end-October 2020 ranged from 1.6% for ConQuest 2014-2 to 6.4% for ConQuest 2010-1R. Transaction performance has been strong, with low levels of losses that have been covered by lenders' mortgage insurance (LMI) and excess spread. For all transactions, except ConQuest 2014-2 and ConQuest 2010-1R, the asset model was not rerun for this review, in accordance with Fitch's criteria. This is after a review of Covid-19 hardship arrangements - where the 30-59 day arrears status is applied to the proportion of mortgages on Covid-19 hardship arrangements as an arrears adjustment - shows that the 'AAAsf' rated notes will not be affected in these transactions because the ratings can absorb Fitch's base-case scenario of the coronavirus-related impact. The rated notes have subordination that is at least 1.9x greater than the 'AAAsf' portfolio loss. The asset model was rerun for ConQuest 2010-1R using the pool cut as of 11 November 2020. The 'AAAsf' weighted-average foreclosure frequency (WAFF) of 14.4%, driven by the weighted-average (WA) unindexed loan/value ratio (LVR) of 68.4%, investment loans under Fitch's methodology making up 31.0% of the pool and a steady-state arrears adjustment where loans with Covid-19 hardship assistance were applied to the 30-59 day arrears category. The steady-state arrears adjustment increased the WAFF modelled by 0.7%. The LMI-dependent 'AAAsf' WA recovery rate of 68.5% is driven by the portfolio's WA indexed scheduled LVR of 67.8%, WA market value decline of 54.3% and 29.8% of loans in the pool having LMI coverage. The asset model was also rerun for ConQuest 2014-2 using the pool cut as of 31 October 2020. The 'AAAsf' WAFF is 8.7%, driven by the unindexed WA LVR of 53.0%, investment loans under Fitch's methodology making up 35.5% of the pool and a steady-state arrears adjustment where loans with Covid-19 hardship assistance were applied to the 30-59 day arrears category. The steady-state arrears adjustment had no impact on the WAFF because it is driven by the criteria minimum 'AAAsf' expected credit enhancement (excluding credit to LMI) of 4%. The LMI-dependent 'AAAsf' WA recovery rate of 85.0% is driven by the portfolio's WA indexed scheduled LVR of 56.5%, WA market value decline of 54.7% and 100% of loans in the pool having LMI coverage. See the following links for Fitch's pandemic-related credit views and analytical approach: - "Global Economic Outlook - December 2020 ", published on 7 December 2020, available at www.fitchratings.com/site/re/10145707; - "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update", published on 7 December 2020, available at www.fitchratings.com/site/re/10145938; 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; and - "Fitch Ratings 2021 Outlook: Australia and New Zealand Structured Finance", published on 3 December 2020, available at www.fitchratings.com/site/re/10143773. Credit Enhancement Supports Ratings: ConQuest 2014-2, 2016-2 and 2018-1 are paying down pro rata, while ConQuest 2017-1 will move to pro rata payment from the next payment period because the subordination triggers have been met. The transactions will revert to sequential paydown, building up credit enhancement, if performance deteriorates significantly or at the call option date. ConQuest 2019-1 is currently paying sequentially, as the subordination triggers have not been met. ConQuest 2010-1R has a 10-year revolving period, of which 3.5 years remain. Fitch is comfortable with the long revolving period because of MyState's stable product history, the portfolio parameters and the eligibility criteria that maintain portfolio characteristics during the revolving period. Limited Liquidity Risk from Payment Holidays: We have reviewed the ability of the transactions to survive a significant proportion of borrowers taking a payment holiday. The transactions benefit from liquidity facilities that cover at least five months of required payments at the current bank-bill swap rate if 100% of the pools are under payment holiday arrangements, which is well above the proportion of mortgages on Covid-19 hardship arrangements as of 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: MyState is an authorised deposit-taking institution headquartered in Hobart, Tasmania. Fitch undertook an onsite operational review and found that the operations of the servicer were comparable with market standards and that there were no material changes that may affect MyState's ongoing ability to undertake administration and collection activities. The collection and servicing activities have not been disrupted by the pandemic as staff can work remotely and have access to the office, if needed. 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 2.8% in 2020, with the unemployment rate at 6.5%. This is to 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 bounce back to 3.8% in 2021, with the unemployment rate falling to 6.2%. The key rating drivers listed in the applicable sector criteria, but not mentioned above, are not material to this rating action. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: The class B2 notes of ConQuest 2014-2 are restricted at 'BBB+sf' due to their sensitivity to Fitch's senior expenses floor in the cash flow modelling. The rating is unlikely to be upgraded. 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. Available credit enhancement cannot fully compensate for higher credit losses and cash flow stresses, all else being equal. Fitch conducted sensitivity analysis by increase gross default levels and decreasing recovery rates over the life of the transactions. Rating sensitivities for ConQuest 2014-2 were generated using the cash flow model, while rating sensitivities for ConQuest 2010-1R were derived from the asset model. ConQuest 2014-2 Downgrade Sensitivity: Notes class: A1/ A2/ AB/ B1/ B2 Current Rating: AAAsf/ AAAsf/ AAAsf/ AAAsf/ BBB+sf Impact on note ratings of increased defaults: Increase defaults by 15%: AAAsf/ AAAsf/ AAAsf/ AAAsf/ BBB+sf Increase defaults by 30%: AAAsf/ AAAsf/ AAAsf/ AAAsf/ BBB+sf Impact on note ratings of decreased recoveries: Reduce recoveries by 15%: AAAsf/ AAAsf/ AAAsf/ AAAsf/ less than Bsf Reduce recoveries by 30%: AAAsf/ AAAsf/ AAAsf/ AAAsf/ less than Bsf Impact on note ratings of multiple factors: Increase defaults by 15% and reduce recoveries by 15%: AAAsf/ AAAsf/ AAAsf/ AAAsf/ less than Bsf Increase defaults by 30% and reduce recoveries by 30%: AAAsf/ AAAsf/ AA+sf/ AA+sf/ less than Bsf The transaction structure supports an LMI-independent rating for the class A1 and A2 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 to downgrade upon a three-notch downgrade to the LMI providers' ratings, while class B2 would be sensitive to downgrade upon a two-notch downgrade. ConQuest 2010-1R Downgrade Sensitivity: Notes class: A Current Rating: AAAsf Impact on note ratings of increased defaults: Increase defaults by 15%: AAAsf Increase defaults by 30%: AA+sf Impact on note ratings of decreased recoveries: Reduce recoveries by 15%: AAAsf Reduce recoveries by 30%: AA+sf Impact on note ratings of multiple factors: Increase defaults by 15% and reduce recoveries by 15%: AA+sf Increase defaults by 30% and reduce recoveries by 30%: AA-sf 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. Under Fitch's downside scenario, ConQuest 2014-2's class A1, A2, AB and B1 notes will not be downgraded; class B2 notes will be downgraded to less than 'Bsf'. The class A notes for ConQuest 2010-1R will be downgraded to 'AA+sf' under Fitch's downside scenario. The 'AAAsf' rated notes of the remaining transactions have subordination that is at least, 1.9x of the 'AAAsf' portfolio loss, and can absorb Fitch's downside scenario of the coronavirus-related impact. Fitch's previous rating sensitivities for each of the remaining transactions were discussed in: - rating action commentary for ConQuest 2016-2, published on 3 November 2016, available at www.fitchratings.com/site/pr/1014240; - rating action commentary for ConQuest 2017-1, published on 8 June 2017, available at www.fitchratings.com/site/pr/1024814; - rating action commentary for ConQuest 2018-1, published on 27 March 2018, available at www.fitchratings.com/site/pr/10024664; and - rating action commentary for ConQuest 2019-2, published on 18 September 2019, available at www.fitchratings.com/site/pr/10089553. 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 portfolios as part of its ongoing monitoring. Fitch did not review the information provided about the underlying asset pools ahead of ConQuest 2010-1R's initial closing. Prior to the closing of ConQuest 2014-2, Fitch did not review the results of a third-party assessment conducted on the asset portfolio information. Prior to the closing of ConQuest 2016-2, 2017-1, 2018-1 and 2019-2, Fitch sought to receive a third-party assessment conducted on the asset portfolio information, but none was available for these transactions. As part of its ongoing monitoring, Fitch reviewed a small targeted sample of MyState'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 Eugene Wang, Senior Analyst +61 2 8256 0373 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 Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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