Fitch Affirms Four Illawarra RMBS Tranches at 'AAAsf'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-05 August 2020: Fitch Ratings has affirmed four tranches from three Illawarra series transactions. The transactions consist of notes backed by a pool of first-ranking Australian residential full-documentation mortgage loans, originated by IMB Ltd (BBB+/Negative), trading as IMB Bank. The notes were issued by BNY Trust Company of Australia Limited in its capacity as trustee of the trusts. The social and market disruption caused by the coronavirus and the related containment measures did not negatively affect the ratings, because there is sufficient credit enhancement to offset the effects under Fitch's base-case scenario and adequate liquidity to support the current ratings. The Stable Outlook is based on the notes' liquidity support and ability to withstand the sensitivity to higher defaults stemming from the pandemic. Illawarra Series IS Trust ----Class A AU3FN0022927; Long Term Rating; Affirmed; AAAsf; RO:Sta Illawarra Series 2013-1 RMBS Trust ----Class A AU3FN0018784; Long Term Rating; Affirmed; AAAsf; RO:Sta Illawarra Series 2017-1 RMBS Trust ----A AU3FN0035879; Long Term Rating; Affirmed; AAAsf; RO:Sta ----AB AU3FN0035887; Long Term Rating; Affirmed; AAAsf; RO:Sta KEY RATING DRIVERS Pandemic-Related Economic Shock: Fitch has made assumptions about the spread of the coronavirus and the economic impact of the related 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, followed by a recovery that begins in 3Q20 as the health crisis subsides. In a downside (sensitivity) scenario, Fitch assesses 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 put in place to limit the spread of the virus are affecting Australia's economy, with many businesses continuing to experience a decline in income. We expect these measures to affect the performance of mortgages, but there should be no rating impact on the notes, as the ratings can absorb Fitch's base-case scenario of the pandemic. In addition, the rated notes have subordination that is approximately 8.9x (Illawarra Series 2013-1 RMBS Trust), 2.9x (Illawarra Series 2017-1 RMBS Trust) and 2.7x (Illawarra Series IS Trust) of the 'AAAsf' portfolio loss. Commentary describing Fitch's credit views and analytical approach to the pandemic is available in the following reports: - "Global Economic Outlook: June 2020 - Coronavirus Disruption Easing" (www.fitchratings.com/site/re/10127783), published on 29 June 2020; - "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update" (www.fitchratings.com/site/re/10120570), published on 29 April 2020; and - "Global SF Rating Assumptions Updated to Reflect Coronavirus Risk" (www.fitchratings.com/site/pr/10117224), published on 3 April 2020. 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" (www.fitchratings.com/site/pr/10120792), published on 5 May 2020; and - "Fitch Ratings Updates Australia, NZ RMBS Criteria Assumptions on Coronavirus Effects" (www.fitchratings.com/site/pr/10130287), published on 28 July 2020. Liquidity Risk from Payment Holidays: We have reviewed the ability of transactions to survive a significant proportion of borrowers being offered and taking up a payment holiday. The transactions benefit from cash-collateralised liquidity facilities sized at 1.5% and 1.0%, respectively, of the outstanding invested note balance for Illawarra Series 2013-1 and Illawarra Series 2017-1 (with additional AUD1 million excess revenue reserve), and 1.3% of the outstanding asset balances for Illawarra Series IS, which are sufficient to cover more than 10 months of required payments at the current bank-bill swap rate should there be no principal or interest collections. This is well above the proportion of mortgages on payment holidays as of end-June (Illawarra 2013-1: 2.9%, Illawarra 2017-1: 3.4% and Illawarra IS: 3.2%). The transactions can also use any principal payments received to pay interest if not all borrowers take up payment holidays. Operational Risk: IMB is a mutual bank and authorised deposit-taking institution headquartered in Wollongong, New South Wales. Fitch undertook an onsite operational review and found that the operations of the originator and servicer were comparable with those of other conforming lenders, and that there were no material changes that may affect IMB's ongoing ability to undertake administration, origination, collections and servicing activities. The collections and servicing activities have not been disrupted by the pandemic, as staff can work remotely and systems are accessible. Asset Analysis: The asset models were not re-run for these three transactions, in accordance with Fitch's criteria and post review of payment-holiday arrangements. At end-June 2020, 30+ day arrears for Illawarra 2013-1, Illawarra 2017-1 and Illawarra IS were 0.73%, 0.08% and 0.40%, respectively, while 90+ day arrears were 0.31%, 0.00% and 0.07%, respectively. IMB's arrears figures include loans that are not in arrears but have a non-pandemic-related hardship status. All transactions' 30+ and 90+ day arrears tracked below Fitch's 1Q20 Dinkum RMBS Index of 1.16% and 0.57%, respectively. Transaction performance has been strong, with low levels of losses that have been covered by lenders' mortgage insurance (LMI) and excess spread. Illawarra IS has had three losses since closing, amounting to AUD329,957 at end-June 2020, while Illawarra 2013-1 and Illawarra 2017-1 had no losses. The pools for the three transactions are geographically concentrated in New South Wales, and specifically in the Illawarra region, which Fitch has incorporated in its most recent asset-model analysis. Liability Analysis: Cash-flow analysis has not been performed for these three transactions, in accordance with Fitch's criteria, as all rated notes are rated at the highest possible level, cash-flow distributions have been within Fitch's expectations and there have been no material changes to cash-flow assumptions since the last cash-flow analysis at closing. Macroeconomic Factors: Fitch expects mortgage performance to deteriorate in the near term, but to continue to support the Stable Outlook on the notes. Fitch forecasts Australia's GDP will contract by 2.7% in 2020, with the unemployment rate at 7.1%. This will be partially offset by a low official 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 the unemployment rate to fall to 6.7%. 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 and remaining loss-coverage levels available to the notes. Decreased credit enhancement may make certain note ratings susceptible to negative rating action, depending on the extent of the coverage decline. Factors that could, individually or collectively, lead to positive rating action/upgrade: The 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 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 transaction. The ratings of the rated notes are all lenders' mortgage insurance (LMI) independent and therefore are unaffected by downgrades in the LMI providers' ratings. 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. The 'AAAsf' rated notes have subordination that is approximately 8.9x (Illawarra Series 2013-1), 2.9x (Illawarra Series 2017-1) and 2.7x (Illawarra Series IS) of the 'AAAsf' portfolio loss and can absorb Fitch's downside scenario of the coronavirus-related impacts. For more information on rating sensitivities, please refer to the: - new issue report for Illawarra 2013-1, published on 15 May 2013, available at www.fitchratings.com/site/re/708435; - presale report for Illawarra 2017-1, published on 15 May 2017, available at www.fitchratings.com/site/re/897908; and - rating action commentary for Illawarra IS, published on 15 October 2018, available at www.fitchratings.com/site/pr/10048353. 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. Prior to the Illawarra 2013-1 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. Prior to the Illawarra Series IS transaction closing, Fitch did not review the results of a third-party assessment conducted on the asset-portfolio information. Prior to the Illawarra 2017-1 transaction closing, Fitch sought to receive a third-party assessment conducted on the asset-portfolio information, but none was made available to Fitch for this transaction. As part of its ongoing monitoring, Fitch reviewed a small targeted sample of IMB'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 information on the asset pools relied upon for the agency's rating analysis, according to its applicable rating methodologies, indicates that it is adequately reliable. Illawarra Series IS has a 10-year revolving period, of which four years remain. Fitch believes the risks associated with the long revolving period are commensurate with the ratings because IMB has a stable product history, portfolio stratifications have not changed significantly since initial issue and the portfolio is performing in line with Fitch's expectations. 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 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 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 Criteria APAC Residential Mortgage Rating Criteria (pub. 27 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10123329) 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) Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10131249) Solicitation Status (https://www.fitchratings.com/site/pr/10131249#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10131249#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10131249#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS (HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS). IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT (https://www.fitchratings.com/rating-definitions-document) DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY (https://www.fitchratings.com/site/regulatory). 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 RATINGS WEBSITE. Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes 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 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.