(The following statement was released by the rating agency)
SYDNEY, July 24 (Fitch) Fitch Ratings has affirmed the ratings of two transactions of Australian non-conforming residential mortgages originated by Pepper Home loans Pty Limited - a wholly owned subsidiary of Pepper Australia Pty Limited. A full list of rating actions follows at the end of this commentary.
KEY RATING DRIVERS
The affirmation reflects Fitch's view that the available credit enhancement is sufficient to support the notes' current ratings, and the agency's expectations of Australia's economic conditions. Credit quality and performance of the underlying loans have remained within the agency's expectations.
As of 31 May 2016, 30+ days arrears for Pepper Residential Securities Trust No. 10 (PRS10) and Pepper Residential Securities Trust No. 11 (PRS11) were 6.73% and 9.16%, respectively, above the Fitch's 1Q16 Dinkum RMBS non-conforming index of 6.12%. As of 31 May 2016, realised losses were 0.47% (AUD1.6m) and 0.21% (AUD0.7m) for PRS10 and PRS11 respectively. Losses in PRS11 were covered entirely by excess spread, while PRS10 had a debit of AUD36,945 against an excess retention ledger in July 2015 to cover losses of AUD432,196 for the month.The mortgages in the non-conforming portfolios included approximately 40% reduced documentation loans, and Fitch's calculated weighted average (WA) seasoning was 52 months and 38 months in PRS10 and PRS11, respectively. WA loan-to-value ratios (LVR) were 68.8% and 70.7%, respectively, and reduced to 64.3% and 66.9%, respectively, after applying Fitch's indexation.The non-conforming transactions include a retention mechanism, which allows a certain level of excess income to be diverted towards payment of the most junior notes, excluding the unrated class G notes. The transactions also maintain a retention ledger, which replaces the credit protection provided by the unrated class F notes being paid down.
In addition, if the transactions are not called on the call option date, all post-tax excess income will be diverted to the principal waterfall to speed up the amortisation of the notes.
RATING SENSITIVITIES
Sequential pay-down has increased credit enhancement for the senior notes of PRS10 and PRS11, with the rated notes able to withstand multiples of the latest reported arrears. Fitch does not expect modest changes in performance to affect the ratings. PRS10 Fitch 'AAAsf' breakeven stressed default rate is 25.6%. The class A-1 notes can withstand an additional 69.5% in defaults at Fitch's 'AAAsf' loss severity. The class A-2 notes can withstand an additional 52.9% in defaults at Fitch's 'AAAsf' loss severity. PRS11 Fitch 'AAA'sf breakeven stressed default rate is 30.0%. The class A-1 notes can withstand an additional 77.9% in defaults at Fitch's 'AAAsf' loss severity. The class A-2 notes can withstand an additional 60.4% in defaults at Fitch's 'AAAsf' loss severity.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
DATA ADEQUACY
Fitch conducted a file review of 15 sample loan files focusing on the underwriting procedures conducted by Pepper Homeloans Pty Limited compared to the credit policy at the time of underwriting. Fitch has checked the consistency and plausibility of the information and no material discrepancies were noted that would impact Fitch's rating analysis.A comparison of the transaction's representations, warranties and enforcement mechanisms (RW&Es) to those of typical RW&Es for this asset class is available by accessing the reports and/or links given under Related Research below.The full list of rating actions follows: Pepper Residential Securities Trust No. 10 (PRS10):AUD59.6m Class A-1 (ISIN AU3FN0018651) affirmed at 'AAAsf'; Outlook StableAUD9.4m Class A-2 (ISIN AU3FN0018669) affirmed at 'AAAsf'; Outlook StablePepper Residential Securities Trust No. 11 (PRS11):AUD53.6m Class A-1 (ISIN AU3FN0020715) affirmed at 'AAAsf'; Outlook StableAUD11.5m Class A-2 (ISIN AU3FN0020723) affirmed at 'AAAsf'; Outlook StableContacts: Surveillance Analyst Stephen LoAnalyst+61 2 8256 0379Fitch Australia Pty Ltd., Level 15, 77 King St, Sydney, NSW 2000Committee Chairperson
Natasha Vojvodic Senior Director+61 2 8256 0350
Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com.Additional information is available at www.fitchratings.com.Sources of Information:The source of information used to assess this rating was Pepper Australia Pty Limited. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public.Applicable Criteria APAC Residential Mortgage Criteria (pub. 23 Jun 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867437Counterparty Criteria for Structured Finance and Covered Bonds (pub. 18 Jul 2016)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884963Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 18 Jul 2016)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884964Global Structured Finance Rating Criteria (pub. 27 Jun 2016)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=883130Related Research Pepper Residential Securities Trust No. 10 - Appendixhttps://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706577Pepper Residential Securities Trust No. 11 - Appendixhttps://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721435Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions (Applicable to Transactions Rated from Sept.26, 2011 until June 15, 2015) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863817Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=1009403Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009403Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det ail=31ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.