Fitch Affirms Light Trust No. 5R's Class A Notes at 'AAAsf'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-20 December 2020: Fitch Ratings has affirmed the ratings on Light Trust No. 5R's class A notes. The Outlook is Stable. The transaction is a securitisation of Australian prime mortgage loans originated by People's Choice Credit Union (PCCU), the 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 No. 5R ----A AU3FN0029963; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable KEY RATING DRIVERS Asset Performance Resilient to Pandemic: The 30+ day and 90+ day arrears at end-October 2020 were 0.4% and 0.2%, respectively, below Fitch's 3Q20 Dinkum RMBS Index of 1.0% and 0.64%. Arrears included loans on hardship arrangements, but not loans on Covid-19-related payment holidays. The pool had less than 2.2% of loans on Covid-19 hardship arrangements at end-October 2019. Transaction performance has been strong, with low levels of losses that have been covered by lenders' mortgage insurance (LMI) and excess spread. Light Trust No. 5R has a 10-year revolving period, of which four years remain. Fitch is of the view that the risks associated with the remaining revolving period are commensurate with the ratings because of the eligibility criteria, pool parameters are in place to ensure transaction maintains a stable credit profile and PCCU's product mix and underwriting guidelines have not materially changed over this period. In addition, the portfolio is performing well. Fitch's analysis is based on a proxy pool, which was stressed on pool parameters and historical data and to reflect Fitch's expectation of the pool's future composition. Fitch has updated criteria assumptions for Australia to account for the expected effects of the coronavirus pandemic. Fitch applied an arrears adjustment of 1.5 times the five-year average of PCCU's mortgage portfolio arrears to December 2019 for each arrears bucket, which increased the weighted-average foreclosure frequency (WAFF) modelled by 1.5%. The 'AAAsf' WAFF of 21.5% is driven by Fitch's stressed weighted-average (WA) unindexed loan/value ratio (LVR) of 68.6%, loans with LVR greater than 80% making up 30% of the portfolio, stressed investment loans of 29.4% and Fitch-adjusted 30+ day arrears of 1.36%. The 'AAAsf' WA recovery rate of 76.9% is driven by the stressed portfolio's WA indexed scheduled LVR of 71.0% and the portfolio's 'AAAsf' WA market value decline of 48.1%. The geographical distribution of the portfolio is concentrated in South Australia (74.8%) and the Northern Territory (13.2%), and is representative of PCCU's origination network. See the following links for Fitch's pandemic-related credit views and analytical approach: - "Global Economic Outlook: December 2020 - Light at the End of the Tunnel", 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; and - "Fitch Ratings Updates Australia, NZ RMBS Criteria Assumptions on Coronavirus Effects", published on 29 July 2020, available at www.fitchratings.com/site/pr/10130287. Credit Enhancement Supports Ratings: The 'AAAsf' rated notes can absorb Fitch's base-case scenario of the coronavirus-related impact. The rated notes have subordination that is at least 1.2x greater than the 'AAAsf' portfolio loss. 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 transaction benefits from a liquidity reserve, which cover at least 11 months of required payments at the current bank-bill swap rate if 100% of the pool is under payment holiday arrangements, which is well above the 2.2% maximum proportion of mortgages on Covid-19 payment holiday arrangements as of end-October 2020. The transaction 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 by the pandemic as staff can work remotely. PCCU has extensive experience originating, servicing and managing its mortgage portfolio, which mitigates the operational risk of the transaction. 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 forecast Australia's GDP to contract by 2.8% in 2020, with an unemployment rate of 6.5%. This will be partially offset by a low cash rate of 0.1% and the application of both central bank and government stimulus measures. GDP growth is forecast to bounce back to 3.8% in 2021, with the unemployment rate falling to 6.2%. The transaction has a significant concentration of loans in South Australia and Fitch's Stable Outlook on the state is supported by stable revenue in the general-government sector. The revenue comes from grants, goods and services tax distributions and state taxation. These are linked to the macroeconomic performance of the nation and state. The Stable Outlook on the notes reflects their liquidity support and ability to withstand the sensitivity to higher defaults stemming from the pandemic. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: The Class A 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 increasing gross default levels and decreasing recovery rates over the life of the transaction. 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 class B notes. Fitch's previous rating sensitivities were discussed in: - rating action commentary, published on 2 February 2018, available at https://www.fitchratings.com/site/pr/10019185; 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, the class A notes would not be downgraded. The above sensitivities are consistent with the issuer's target ratings and support the rating recommendations. 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 the 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. As part of its on-going 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 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 Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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