Fitch Affirms Seven Classes in Three Auswide Transactions; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-08 October 2020: Fitch Ratings has affirmed seven classes of notes from three Auswide transactions. The transactions consist of notes backed by pools of first-ranking Australian residential full-documentation mortgage loans. All mortgages were originated by Auswide Bank Ltd (BBB+/Negative) and the notes were issued by Perpetual Trustee Company Limited or Perpetual Corporate Trust Limited in their capacities as trustees. The social and market disruption caused by the coronavirus pandemic and the related containment measures do not negatively affect the transactions' ratings, which are sufficiently supported by credit enhancement and adequate liquidity under Fitch's base-case scenario of the pandemic. The Stable Outlook is based on the notes' liquidity support and ability to withstand the sensitivity to higher defaults stemming from the pandemic. ABA Trust 2017-1 ----A AU3FN0036745; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable WB Trust 2010-1 ----A-2 AU3FN0012365; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----AB AU3FN0012373; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable WB Trust 2014-1 ----A AU3FN0025151; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----AB AU3FN0025169; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----B AU3FN0025177; Long Term Rating; Affirmed; A+sf; Rating Outlook Stable ----C AU3FN0025185; Long Term Rating; Affirmed; BBBsf; Rating Outlook Stable KEY RATING DRIVERS Pandemic-Related Economic Shock: Fitch has made assumptions about the spread of the coronavirus and the economic impact of containment measures. In a base-case (most likely) scenario, Fitch assumes economic activity will jump in 3Q20, to be followed by a slower recovery trajectory from 4Q20 amid high unemployment and a further pullback in private-sector investment. 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. Coronavirus-Related Impact: The 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 we do not expect a rating impact on the rated notes, as the ratings can absorb Fitch's base-case scenario of the pandemic. Commentary describing Fitch's credit views and analytical approach as a consequence of the coronavirus is available in the following reports: - "Global Economic Outlook: September 2020 - Recovery Underway" (www.fitchratings.com/site/re/10135033), published on 7 September 2020; - "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update" (www.fitchratings.com/site/re/10135320), published on 8 September 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 the transactions to survive a significant proportion of borrowers taking up payment holidays. The transactions benefit from a liquidity reserve ranging from 1.0%-2.9% of asset or note balances and can withstand 100% of the pools being granted a payment holiday for more than six months, to cover required payments at the current bank-bill swap rate, which is well above the proportion of mortgages on COVID-19 hardship arrangements as of end-August. WB 2010-1, WB 2014-1 and ABA 2017-1 had 8.8%, 10.2% and 8.8%, respectively, of their portfolios on COVID-19 hardship arrangements. In addition, the transactions can also use any principal payments received to pay interest if not all borrowers take up payment holidays. Operational Risk: Auswide is an authorised deposit-taking institution headquartered in Bundaberg, Queensland. Fitch undertook an onsite operational review and found that the operations of the servicer were comparable with those of other Australian conforming lenders and there were no material changes that may affect the servicer's ongoing ability to undertake administration and collection activities. We do not expect the servicer's operations to be disrupted by the pandemic, as staff members are able to work remotely and have access to the office, if needed. Asset Analysis: The asset model has not been run for WB Trust 2010-1 or ABA Trust 2017-1, in accordance with Fitch's criteria and after the review of COVID-19 hardship arrangements where the 30-59 day arrears status is applied to the proportion of mortgages with COVID-19 hardship arrangements. The asset model was re-run for WB Trust 2014-1 because the outstanding rated notes have a rating which is below 'AAAsf'. The 'AAAsf' weighted-average foreclosure frequency (WAFF) of 12.2% is driven by the weighted-average (WA) unindexed loan/value ratio (LVR) of 55.0%, investment loans of 19.0% and 10.2% of the pool had loans on COVID-19 hardship arrangements at end-August, which were modelled at 30-59 day arrears. The 'AAAsf' lenders' mortgage insurance (LMI) dependent WA recovery rate of 82.2% is driven by the portfolio's WA indexed scheduled LVR of 65.0%, 100% of the pool benefiting from LMI and the portfolio 'AAAsf' WA market value decline of 52.6%. The WB 2010-1, WB 2014-1 and ABA 2017-1 transactions had 30+ day arrears at 0%, 0.77% and 0%, respectively, at end-August, lower than Fitch's 2Q20 RMBS Dinkum Index of 1.16%. Loans in hardship are not part of arrears data unless they are in arrears. Total losses were about AUD1.4 million among the three trusts and were covered by LMI and excess spread. LMI cover is provided by Genworth Financial (NYSE:GNW) Mortgage Insurance Pty Limited (Insurer Financial Strength Rating: A/Negative) and QBE Lenders' Mortgage Insurance Limited (Insurer Financial Strength Rating: A+/Stable). Liability Analysis: Cash flow analysis was not performed for all trusts, in accordance with Fitch's criteria, as the notes are rated at the highest possible level (AAAsf or non-model related cap). Cash-flow distributions have been within Fitch's expectations since the last cash-flow model analysis and there have been no material changes to cash-flow assumptions. Macroeconomic Factors: Fitch expects near-term mortgage performance to deteriorate, but to continue to support the Stable Outlook on the notes. We forecast Australia's GDP to contract by 3.6% in 2020, with an unemployment rate of 7.1%. This will be partially offset by a low cash rate of 0.25% and the application of both central bank and government stimulus measures. GDP growth should bounce back to 3.9% in 2021, with the unemployment rate falling to 6.7%. All transactions have significant concentrations of loans in Queensland and our macroeconomic outlook for the state is stable, albeit with gross state product expected to remain under pressure into 2021 with an uncertain outlook as a result of the ongoing pandemic. The state's key tourism industry is expected to remain adversely affected by the continuing state and national border closures. Downward pressure on mining royalties is also expected over the next two years. Still, the Stable Outlook on the State of Queensland's 'AA' rating reflects the deleveraging achieved in recent years and the state's relatively strong economic liability burden - the primary rating metric - leading into the pandemic. A significant deterioration would be required in Queensland's forward estimates on a sustained basis before negative rating action may be taken. 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. WB 2010-1 and ABA 2017-1 Factors that could, individually or collectively, lead to positive rating action/upgrade: The notes are rated 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. The transactions' structure support LMI-independent ratings. LMI is not required to support the ratings due to the level of credit support provided by the lower notes. 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. Available subordination for the rated notes is expected to mitigate the sensitivity to potential negative movements in defaults due to the coronavirus pandemic. For more information on rating sensitivities, please refer to the new issue report for WB 2010-1, which can be accessed at www.fitchratings.com/site/re/592265, and the presale report for ABA 2017-1 which can be accessed at www.fitchratings.com/site/re/899596. WB 2014-1 Factors that could, individually or collectively, lead to positive rating action/upgrade: The class A and AB notes are rated at 'AAAsf', which is the highest level on Fitch's scale. The ratings cannot be upgraded. Upgrades to class B and C notes are constrained by tail risk concentration. 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 increasing gross default levels and decreasing recovery rates over the life of the transaction. The below sensitivities are generated from the asset model and consequently do not give credit to excess spread or incorporate the transaction structure. Class: A / AB / B / C Current Ratings: AAAsf / AAAsf / A+sf / BBBsf Increase defaults by 15%: AAAsf / AAAsf / A+sf / BBBsf Increase defaults by 30%: AAAsf / AAAsf / A+sf / BBBsf Decrease recoveries by 15%: AAAsf / AAAsf / A+sf / BBBsf Decrease recoveries by 30%: AAAsf / AAAsf / A+sf / BBBsf Increase defaults by 15%; decrease recoveries by 15%: AAAsf / AAAsf / A+sf / BBBsf Increase defaults by 30%; decrease recoveries by 30%: AAAsf / AAAsf / A+sf / BBBsf The transaction structures support LMI-independent ratings for class A notes. LMI is not required to support the ratings due to the level of credit support provided by the lower notes. The class AB, B and C notes' ratings are dependent on LMI. 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% across all rating levels. The impact on note ratings due to the coronavirus downside scenario: AAAsf / AAAsf / A+sf / BBBsf 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 pool ahead of WB 2010-1's initial transaction closing. Subsequent transaction performance over the years is consistent with the agency's expectations, given the operating environment. Therefore, Fitch is satisfied that the asset pool information relied upon for its rating analysis was adequately reliable. Prior to WB 2014-1 transaction closing, Fitch did not review the results of a third-party assessment conducted on the asset portfolio information. Prior to ABA 2017-1 transaction closing, Fitch sought to receive a third-party assessment conducted on the asset portfolio information, but none was available for this transaction. As part of its ongoing monitoring, Fitch reviewed a small targeted sample of Auswide'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 portfolios. 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. 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 Sambit Agasti, Associate Director +61 2 8256 0337 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) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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