Fitch Affirms Flexi ABS Trust 2019-2; Revises Outlook on C-G & D-G to Negative; Removes D-G from UCO

(The following statement was released by the rating agency) Fitch Ratings-Sydney-23 August 2020: Fitch Ratings has affirmed six tranches of Flexi ABS Trust 2019-2. The Outlook has been revised to Negative, from Stable, for the class C-G and D-G notes, reflecting a potential increase in defaults due to the pandemic. The Outlook on the remaining notes is Stable, as the notes can withstand Fitch's baseline stresses. The ratings of the class D-G notes have been removed from Under Criteria Observation (UCO), on which they were placed on 12 June following the publication of the updated Consumer ABS Rating Criteria on 9 June 2020. The transaction is a securitisaiton of first-ranking Australian unsecured consumer receivables, branded as "humm", and originated by Certegy Ezi-Pay Pty Ltd, a wholly owned subsidiary of FlexiGroup Limited (flexigroup). The notes were issued by Perpetual Corporate Trust Limited in its capacity as trustee of Flexi ABS Trust 2019-2. Flexi ABS Trust 2019-2 ----A1 AU3FN0051660; Long Term Rating; Affirmed; AAAsf; RO:Sta ----A1-G AU3FN0051678; Long Term Rating; Affirmed; AAAsf; RO:Sta ----B-G AU3FN0051686; Long Term Rating; Affirmed; AA+sf; RO:Sta ----C-G AU3FN0051694; Long Term Rating; Affirmed; Asf; RO:Neg ----D-G AU3FN0051702; Long Term Rating; Affirmed; BBBsf; RO:Neg ----E-G AU3FN0051710; Long Term Rating; Affirmed; BB+sf; RO:Sta KEY RATING DRIVERS Cash Flow Dynamics: Cash flow analysis was performed for the A1, A1-G, B-G and E-G notes and found that the notes can withstand all Fitch stresses at their current rating levels. However, the Outlook on the class C-G and D-G notes has been revised to Negative, from Stable, reflecting their notes' vulnerability to downgrade due to a potential increase in defaults as a result of the coronavirus pandemic. Coronavirus-Related Economic Shock: Fitch has made assumptions about the spread of the coronavirus and the economic impact of the related containment measures. Fitch assumes as a base-case (most likely) scenario that global economic growth will begin to recover in 3Q20 as the health crisis subsides. Fitch's downside (sensitivity) scenario takes into consideration a more severe and prolonged period of stress, with recovery to pre-crisis GDP levels delayed until around the middle of the decade. Coronavirus-Related Impact: Measures to limit the virus spread are affecting Australia's economy, with many businesses continuing to experience a decline in income. We expect these measures to affect loan performance and have factored this into our revised base-case assumptions. Commentary describing Fitch's credit views and analytical approach as a consequence of the coronavirus is available in the following reports: - "Global Economic Outlook: June 2020 - Coronavirus Disruption Easing", published on 29 June 2020, available at www.fitchratings.com/site/re/10127783 - "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update", published on 29 April 2020, available at www.fitchratings.com/site/re/10120570 - "Global SF Rating Assumptions Updated to Reflect Coronavirus Risk", published on 3 April 2020, available at www.fitchratings.com/site/pr/10117224 Liquidity Risk from Payment Holidays: We have reviewed the transaction's ability to survive a significant proportion of borrowers being offered and taking up a payment holiday. The transaction benefits from a liquidity facility sized at 1.0% of the outstanding class A1, A1-G, B-G, C-G, D-G and E-G note balance. The transaction can withstand over 80% of the portfolio being granted a payment holiday before needing to draw on the liquidity facility. This is well above the 1.2% of receivables under payment holiday arrangements as of end-June. Obligor Default Risk: Obligor default and recovery rates are key assumptions in Fitch's quantitative analysis. Fitch took into consideration the historical performance of flexigroup's humm portfolio in reviewing its base-case assumptions, as well as the performance of US consumer receivables during the 2007-2008 global financial crisis. This resulted in the base-case default rate being increased by 1.6x. Fitch also adjusted its rating stress multiples and haircuts to reflect its through-the-cycle approach and to account for the fact that its base-case incorporates an additional element of economic stress. The revised assumptions are shown below and were applied in this analysis. Base-case default expectations (and 'AAAsf' default multiples) are as follows: Home and Other Items: 8.8% (4.0x) Jewellery: 11.5% (4.0x) Solar Products: 6.4% (4.0x) As of the July payment date, 30+ day arrears were 1.9%. Cumulative losses to date of 1.2% of the original portfolio balance have been covered by excess spread. Fitch expects loan performance to deteriorate in the near term, but to continue to support the Stable Outlook on most of the notes. Fitch forecasts Australia's GDP to contract by 2.7% in 2020, with an unemployment rate of 7.1% by the end of the year. This is to 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 3.1% in 2021 and for the unemployment rate to fall to 6.7% in the medium term. Structural Risk: Structural risk was evaluated in the initial transaction analysis through the review of transaction documentation, legal opinion and structural features. There have been no material changes to the transaction since closing. Counterparty Risk: Counterparty risk was evaluated in the initial transaction analysis through the review of transaction documentation, legal opinions and structural features. There have been no material changes to any transaction counterparties since closing. Servicer, Operational Risk: Fitch reviewed Certegy's servicing capabilities and found that the operations were comparable with those of other consumer-finance lenders. Certegy's servicing and collections teams in Adelaide and Manila are able to work remotely and access the office if needed, with minimal disruption to servicing procedures at present. Certegy is not rated and servicer disruption risk is mitigated through back-up arrangements. The nominated back-up servicer is illion Australia Pty Ltd, which has live access to Certegy's systems and can step in immediately upon servicer termination. RATING SENSITIVITIES This section provides insight into the model-implied sensitivities the transaction faces when one assumption − defaults and/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: Macroeconomic conditions, loan performance and credit losses that are better than Fitch's baseline scenario or sufficient build-up of credit enhancement that would fully compensate for credit losses and cash flow stresses commensurate with higher rating scenarios, all else being equal. The class A1 and A1-G notes are rated at 'AAAsf', which is the highest level on Fitch's scale. The ratings cannot be upgraded. Upgrade Sensitivity: Class B-G / C-G / D-G / E-G Recommended rating: AA+sf / Asf / BBBsf / BB+sf Decrease defaults by 10%; increase recoveries by 10%: AA+sf / Asf / BBBsf / BB+sf 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 positions in Australia beyond Fitch's baseline scenario. Credit enhancement cannot compensate for the higher credit losses and cash flow stresses, all else being equal. Fitch conducted sensitivity analysis by increasing gross default levels over the life of the transaction. Downgrade Sensitivity: Impact on note ratings of increased defaults: Class A1 / A1-G / B-G / C-G / D-G / E-G Current rating: AAAsf / AAAsf / AA+sf / Asf / BBBsf / BB+sf Increase defaults by 10%: AAAsf / AAAsf / AAsf / BBB+sf / BB+sf / BBsf Increase defaults by 25%: AA+sf / AA+sf / A+sf / BBBsf / BBsf / B+sf Increase defaults by 50%: AAsf / AAsf / Asf / BB+sf / B+sf / Below Bsf Coronavirus Downside Scenario Sensitivity: Fitch has added a coronavirus downside sensitivity analysis that contemplates a more severe and prolonged economic stress caused by a re-emergence of infections in major economies and no meaningful recovery until around the middle of the decade. Under this more severe scenario, Fitch tested an increased base-case default rate and decreased recovery rate, as shown below. Downside default expectations (and 'AAAsf' default multiples): Home and Other Items: 11.0% (3.5x) Jewellery: 14.4% (3.5x) Solar Products: 8.0% (3.5x) Impact on note ratings of multiple factors: Class A1 / A1-G / B-G / C-G / D-G / E-G Current rating: AAAsf / AAAsf / AA+sf / Asf / BBBsf / BB+sf Downside scenario: AAAsf / AAAsf / AA-sf / BBB+sf / BBsf / B+sf 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 closing, Fitch sought to receive a third-party assessment conducted on the asset portfolio information, but none was made available. As part of its ongoing monitoring, Fitch reviewed a small targeted sample of flexigroup's origination files and found the information in the reviewed files was adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. 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. SOURCES OF INFORMATION The data used in our rating analysis includes the following information from the following sources: -Issuer and servicer reports as of the interest payment date in July 2020, provided by flexigroup. -Aggregate and loan level data dated 30 June 2020 used to run the relevant model, provided by flexigroup. -Discussions and updates from the servicer in March 2020. ESG Considerations The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Contacts: Surveillance Rating Analyst Marija Buzevska, Senior Analyst +61 2 8256 0340 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 Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria Consumer ABS Rating Criteria (pub. 09 Jun 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10124893) 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) 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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