Fitch Assigns Expected Ratings to Firstmac Mortgage Funding Trust No.4 Series 2020-3

(The following statement was released by the rating agency) Fitch Ratings-Sydney-19 October 2020: Fitch Ratings has assigned expected ratings to Firstmac Mortgage Funding Trust No.4 Series 2020-3's mortgage-backed scheduled amortisation and pass-through floating-rate notes. The issuance consists of notes backed by a pool of first-ranking Australian residential full-documentation mortgages originated by Firstmac nominee originators. The notes will be issued by Firstmac Fiduciary Services Pty Ltd in its capacity as trustee of Firstmac 2020-3. The total collateral pool consisted of 2,249 obligors and totalled AUD981,950,301 million at the 24 August 2020 cut-off date. Firstmac Mortgage Funding Trust No.4 Series 2020-3 ----A-1a ; Long Term Rating; Expected Rating; AAA(EXP)sf; Rating Outlook Stable ----A-1b ; Long Term Rating; Expected Rating; AAA(EXP)sf; Rating Outlook Stable ----A-2 ; Long Term Rating; Expected Rating; AAA(EXP)sf; Rating Outlook Stable ----AB ; Long Term Rating; Expected Rating; NR(EXP)sf ----B ; Long Term Rating; Expected Rating; NR(EXP)sf ----C ; Long Term Rating; Expected Rating; NR(EXP)sf ----D ; Long Term Rating; Expected Rating; NR(EXP)sf 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 an economic activity bounce in 3Q20 is followed by a slower recovery trajectory from 4Q20 amid high unemployment and 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. Pandemic-Related Impact: Measures 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 mortgage performance, but there should be no 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 coronavirus is available in these reports: - "Global Economic Outlook: September 2020" at www.fitchratings.com/site/re/10135033; - "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update" at www.fitchratings.com/site/re/10135320; and - "Global SF Rating Assumptions Updated to Reflect Coronavirus Risk" at www.fitchratings.com/site/pr/10117224. In addition, 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" at www.fitchratings.com/site/pr/10120792; and - "Fitch Ratings Updates Australia, NZ RMBS Criteria Assumptions on Coronavirus Effects" at www.fitchratings.com/site/pr/10130287. Liquidity Coverage for Payment Holidays: We reviewed the transaction's ability to survive a large proportion of borrowers taking a payment holiday, despite no borrowers in the pool having taken one up. The transaction benefits from a liquidity reserve sized at 1.2% of the outstanding aggregate invested balance of the notes, sufficient to cover over seven months of required payments at the bank-bill swap rate should there be no principal or interest collections. The transaction can also use any principal payments received to pay interest if not all borrowers use a payment holiday. Operational Risk: Firstmac, established in 1988, is a non-bank financial institution specialising in conforming Australian residential mortgage lending. Fitch undertook an onsite operational review and found that the operations of the originator and servicer are consistent with other conforming non-bank lenders in Australia. We do not expect the pandemic to disrupt operations, as staff are able to work remotely and some staff have been redeployed to deal with increased borrower communications. Asset Analysis: The 'AAAsf' weighted-average foreclosure frequency (WAFF) of 9.6% is driven by the weighted-average (WA) unindexed loan/value ratio (LVR) of 67.4% and, under Fitch's methodology, investment loans of 48.5% and steady-state arrears of 0.6% applied to the 60-89 day arrears category. The steady-state arrears adjustment increased the WAFF by 0.4% and is calculated using the five-year average 30+ day arrears to December 2019 for Firstmac's mortgage portfolio multiplied by 1.2. The 'AAAsf' lenders' mortgage insurance (LMI) dependent WA recovery rate of 76.7% is driven by the portfolio's WA indexed scheduled LVR of 70.2 %, 100.0% of the pool benefiting from LMI and the 'AAAsf' WA market value decline of 58.5%. Liquidity Analysis: The class A-1a/A-1b and A-2 notes benefit from credit enhancement of 15% and 6%, respectively. Structural features include a Japanese yen class A-1a note with a scheduled amortisation profile supported by the class A-1a currency-swap provider, a liquidity reserve sized at 1.2% of the note balance with a floor of AUD1.2 million. Classes A-1a, A-1b and A-2 can withstand all relevant Fitch 'AAAsf' stresses applied in our cash-flow analysis. Macroeconomic Factors: Fitch expects mortgage performance to deteriorate in the near term, but to continue to support the Stable Outlook for the notes. Fitch forecasts Australia's GDP will contract by 3.6% in 2020, with the unemployment rate at 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. Fitch expects GDP growth to bounce back to 3.9% in 2021, with the unemployment rate falling to 6.7%. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: The rated notes are at 'AAA(EXP)sf', 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. Fitch conducted sensitivity analysis by increasing gross default levels and decreasing recovery rates over the life of the transactions. Downgrade Sensitivity: Notes class: A-1a/A-1b / A-2 Current Expected Rating: AAAsf/AAAsf/AAAsf Impact on note ratings of increased defaults: Increase defaults by 15%: AAAsf/AAAsf/AAAsf Increase defaults by 30%: AAAsf/AAAsf/AAAsf Impact on note ratings of decreased recoveries: Reduce recoveries by 15%: AAAsf/AAAsf/AAAsf Reduce recoveries by 30%: AAAsf/AAAsf/AAAsf Impact on note ratings of multiple factors: Increase defaults by 15% and reduce recoveries by 15%: AAAsf/AAAsf/AAAsf Increase defaults by 30% and reduce recoveries by 30%: AAAsf/AAAsf/AA+sf The transaction structure supports an LMI-independent rating for the class A1 notes, as LMI is not required to support the ratings due to the level of credit support provided by the lower notes. The class A-2 note is LMI dependent and would be sensitive to a one notch downgrade upon a three-notch downgrade to 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. Fitch tested this scenario by increasing defaults by 15% and decreasing the recoveries by 15%. Notes class: A-1a/A-1b / A-2 Current Expected Rating: AAAsf/AAAsf/AAAsf Impact on note ratings of downside scenario: AAAsf/AAAsf/AAAsf 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 conducted a review of a small targeted sample of Firstmac'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. REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'. A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'. 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: Primary 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 Secondary Rating Analyst James Leung, Director +61 2 8256 0322 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 Criteria APAC Residential Mortgage Rating Criteria (pub. 27 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10123329) 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) 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) 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). Multi-Asset Cash Flow Model, v2.8.0 (1 (https://www.fitchratings.com/site/re/974535)) ResiGlobal Model: Australia, v1.59.4 (1 (https://www.fitchratings.com/site/re/974535)) Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10139717) Solicitation Status (https://www.fitchratings.com/site/pr/10139717#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10139717#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10139717#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). 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