Fitch Affirms Two RedZed Series RMBS Transactions at 'AAAsf'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-25 June 2020: Fitch Ratings has affirmed four note classes from two RedZed Trust Series RMBS transactions at 'AAAsf'. The transactions are backed by first-ranking Australian prime and non-conforming residential full- and low-documentation mortgage loans originated by RedZed Lending Solutions Pty Limited. The notes were issued by Perpetual Trustee Company Limited in its capacity as trustee of the series. 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. The Stable Outlook is based on the notes' ability to withstand sensitivity to higher defaults stemming from the pandemic, as our high-investment-grade rating scenarios entail increased stress. RedZed Trust Series 2018-1 ----A-1L AU3FN0044673; Long Term Rating; Affirmed; AAAsf; RO:Sta ----A-2 AU3FN0044681; Long Term Rating; Affirmed; AAAsf; RO:Sta RedZed Trust Series 2019-1 ----A-1 AU3FN0049151; Long Term Rating; Affirmed; AAAsf; RO:Sta ----A-2 AU3FN0049169; 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. As 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. As a downside (sensitivity) scenario in the Rating Sensitivities section below, Fitch considers 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: The measures put in place to reduce the spread of the virus are affecting Australia's economy, with many businesses temporarily shut with little or no income. We expect these measures to affect mortgage performance, but we do not expect the transactions' notes to be affected. This is because the 'AAAsf' can absorb Fitch's base case scenario of the pandemic-related impacts and the notes have subordination that is at least 1.6x of the 'AAAsf' portfolio loss. Commentary describing Fitch's credit views and analytical approach to the pandemic is available in the reports: - Global Economic Outlook: Crisis Update May 2020 - Coronavirus Shock Broadens at www.fitchratings.com/site/re/10123265 -Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases — Update at www.fitchratings.com/site/re/10120570 -Global SF Rating Assumptions Updated to Reflect Coronavirus Risk at www.fitchratings.com/site/pr/10117224 Analytical notes for Australian and New Zealand RMBS transactions are discussed in Fitch Ratings' Approach to Addressing Coronavirus-Related Risks for Australian, NZ RMBS at www.fitchratings.com/site/pr/10120792 Liquidity Risk from Payment Holidays: We have reviewed the ability of the transactions to survive a significant proportion of borrowers taking a payment holiday. The transactions benefit from liquidity reserve facilities sized at 1.5% of the notes' balance, which are sufficient to cover more than seven months of required payments at the current bank-bill spot rate should there be no principal or interest collections. The transactions can also use any principal payments received to pay interest should not all borrowers take-up a payment holiday. Operational Risk: RedZed was established in 2006 and is an experienced specialist lender for self-employed borrowers. Fitch undertook an onsite operational review and found that the operations of the servicer were comparable with market standards and that there were no material changes that may affect RedZed's ongoing ability to undertake administration, collections and servicing activities. The collections and servicing activities have not been disrupted by the pandemic, as staff are working remotely and systems are accessible to all areas of the servicer's businesses. Asset Analysis: The asset model was not re-run for the transactions, in accordance with Fitch's criteria; 30+ and 90+ day arrears of RedZed 2018-1 (4.7% and 2.2%, respectively) and RedZed 2019-1 (3.3% and 1.6%, respectively) were comparable with Fitch's 1Q20 non-conforming RMBS Index arrears of 5.09% and 1.91%, respectively. RedZed's arrear figures include loans with non-pandemic-related hardship status. RedZed 2018-1 has had only one loss since closing, which was covered by excess spread, while RedZed 2019-1 has had no losses. Liability Analysis: Cash flow analysis was not performed, in accordance with Fitch's criteria, as the notes are rated at the highest possible level of 'AAAsf', 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 since the last cash-flow model analysis. 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 to contract by 5.0% in 2020, with the unemployment rate increasing to 7.5%. 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 4.8% in 2021 and for the unemployment rate to fall to 6.9% in the medium term. The Stable Outlook reflects the notes' liquidity support and ability to withstand the sensitivity to higher defaults stemming from the pandemic. RATING SENSITIVITIES 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 at least 1.6x greater than the 'AAAsf' portfolio loss. 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 prolonged pandemic that deteriorates 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's initial rating sensitivities were discussed in the transactions' presale reports. 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 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 portfolio information as part of its ongoing monitoring. Prior to the transactions closing, Fitch sought to receive third-party assessments conducted on the asset portfolio information, but none was made available to Fitch. As part of its ongoing monitoring, Fitch reviewed a small targeted sample of RedZed's origination files and found the information 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 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 Timothy Groombridge, Associate Director +61 2 8256 0339 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Committee Chairperson Natasha Vojvodic, Senior Director +61 2 8256 0350 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) Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 29 Jan 2020) (https://www.fitchratings.com/site/re/10108544) Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10127247) Solicitation Status (https://www.fitchratings.com/site/pr/10127247#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10127247#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10127247#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.