Fitch Assigns Expected Ratings to Flexi ABS Trust 2020-1; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-01 October 2020: Fitch Ratings has assigned expected ratings to Flexi ABS Trust 2020-1's asset-backed floating-rate notes. The issuance consists of notes backed by a pool of Australian unsecured consumer receivables, branded as "humm", and originated by Certegy Ezi-Pay Pty Ltd (the originator), a wholly owned subsidiary of FlexiGroup Limited (flexigroup). The notes will be issued by Perpetual Corporate Trust Limited in its capacity as trustee of Flexi ABS Trust 2020-1 (the issuer). The collateral pool totalled AUD250.0 million and consisted of 83,562 receivables with an average balance of AUD2,992 at the cut-off date, 20 September 2020. The receivables are retail point-of-sale, buy-now-pay-later consumer finance loans used to finance a wide variety of products, such as solar equipment (48.0% of the portfolio), home items (18.6%), medical services (11.3%), and other items. Flexi ABS Trust 2020-1 ----A1 ; Long Term Rating; Expected Rating; AAA(EXP)sf; Rating Outlook Stable ----A1-G ; Long Term Rating; Expected Rating; AAA(EXP)sf; Rating Outlook Stable ----B-G ; Long Term Rating; Expected Rating; AA(EXP)sf; Rating Outlook Stable ----C-G ; Long Term Rating; Expected Rating; A(EXP)sf; Rating Outlook Stable ----D-G ; Long Term Rating; Expected Rating; BBB+(EXP)sf; Rating Outlook Stable ----E-G ; Long Term Rating; Expected Rating; BBB-(EXP)sf; Rating Outlook Stable ----F ; 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 the containment measures. In a base-case (most likely) scenario, Fitch assumes an initial activity bounce in 3Q20 is followed by a slower recovery trajectory from 4Q20 onward amid high unemployment and further pullback in private-sector investment. Fitch's downside (sensitivity) scenario sees a more severe and prolonged stress period 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 virus spread are affecting Australia's economy, with many businesses temporarily shut with little or no income. We expect these measures to affect asset 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. Liquidity Risk from Payment Holidays: We have reviewed the transaction's ability to survive a significant proportion of borrowers taking a payment holiday. The transaction benefits from a liquidity facility sized at 1.0% of the class A1 to E-G notes' invested balance. The transaction can withstand 70% of the portfolio being granted a payment holiday before needing to draw on principal and the liquidity facility, which is significantly above the proportion of receivables under payment-holiday arrangements with flexigroup. At closing, the pool did not include any COVID-19 hardship loans. Obligor Default Risk: Obligor default and recovery rates are key assumptions in Fitch's quantitative analysis. Base-case default expectations (and 'AAAsf' default multiples) were assigned for each product category with a weighted-average (WA) default-rate assumption of 7.8% for the portfolio and a WA default multiple of 4.0x for 'AAAsf'. Fitch took into consideration the historical performance of the flexigroup portfolio in reviewing the base-case assumptions, as well as the performance of US consumer loan receivables during the global financial crisis and flexigroup's response to the crisis in Australia. Cash Flow Dynamics: Fitch completed full cash-flow modelling for the transaction and determined that full and timely payment of principal and interest was made to the rated notes in all the target ratings scenarios. Structural Risks: A liquidity facility is available to ensure stable cash flow for classes A1 to E-G notes as well as trust expenses. The transaction includes fixed-for-floating swaps with asset notionals based on a fixed schedule and derivative reserve accounts to trap excess spread to the extent that voluntary prepayments and defaults cause the transaction to be over hedged, and to set aside voluntary prepayments made by borrowers that will ensure sufficient income is available to cover swap payments. Counterparty Risks: Fitch evaluated counterparty risk through the review of transaction documentation and structural features. The transaction includes structural mechanisms which ensure remedial actions take place in the event the swap providers or trust account bank fall below certain ratings. Servicer, Operational Risks: All receivables have been originated by Certegy Ezi-Pay Pty Ltd, a wholly owned subsidiary of flexigroup. Fitch undertook an operational review and found that the operations of the originator and servicer were comparable with other consumer finance lenders. We do not expect the servicer's operations to be disrupted by the pandemic, as staff are able to work remotely and have access to the office. Flexirent Capital Pty Ltd (servicer) is not rated and servicer disruption risk is mitigated via back-up arrangements. The nominated back-up servicer is illion Australia Pty Ltd, which has live access to the servicer's systems and can step in immediately upon servicer termination. Residual Value Risk: Residual value risk is not a driver for this transaction because each receivable is contracted to amortise to a zero balance at its respective maturity date. Macroeconomic Factors: Fitch expects loan performance to deteriorate in the near term, but to continue to support the Stable Outlook on the rated notes. Fitch forecasts Australia's GDP to contract by 3.6% in 2020, with the unemployment rate at 7.1%. This is to 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 3.9% in 2021 and for the unemployment rate to fall to 6.7%. Outlook on the Notes: The Stable Outlook on the notes reflects liquidity support and the ability to withstand the sensitivity to higher defaults stemming from the pandemic. 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 is likely to result in a decline in credit enhancement (CE) and remaining loss-coverage levels available to the notes. Decreased CE may make certain note ratings susceptible to negative rating action, depending on the extent of the coverage decline. Hence, Fitch conducts sensitivity analysis by stressing a transaction's initial base-case assumptions. This section provides insight into the model-implied sensitivities the transaction faces when one assumption - defaults or recoveries - is stressed, while holding others equal. The modelling process uses the estimation and stress of default and recovery assumptions to reflect asset performance in a stressed environment. The results below should only be considered as one potential outcome, as the transaction is exposed to multiple dynamic risk factors. Factors that could, individually or collectively, lead to positive rating action/upgrade: Macroeconomic conditions, loan performance and credit losses that are better than Fitch's baseline scenario or sufficient build-up of CE that would fully compensate for credit losses and cash flow stresses commensurate with higher rating scenarios, all else being equal. The class A1 and A1-G notes are rated at 'AAAsf', which is the highest level on Fitch's scale. The ratings cannot be upgraded. Upgrade Sensitivity: Class B-G / C-G / D-G / E-G Expected rating: AAsf / Asf / BBB+sf / BBB-sf Decrease defaults by 10%: AA+sf / A+sf / A-sf / BBBsf 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 CE cannot compensate for higher credit losses and cash flow stresses, all else being equal. Fitch conducted sensitivity analysis by increasing gross default levels over the life of the transaction. Downgrade Sensitivity: Impact on note ratings of increased defaults: Class A1 / A1-G / B-G / C-G / D-G / E-G Expected rating: AAAsf / AAAsf / AAsf / Asf / BBB+sf / BBB-sf Increase defaults by 10%: AA+sf / AA+sf / AA-sf / A-sf / BBBsf / BB+sf Increase defaults by 25%: AAsf / AAsf / Asf / BBB+sf / BBB-sf / BBsf Increase defaults by 50%: A+sf / A+sf / BBB+sf / BBB-sf / BBsf / Bsf Coronavirus Downside Scenario Sensitivity: Fitch has added a coronavirus downside sensitivity analysis that contemplates a more severe and prolonged economic stress caused by a re-emergence of infections in major economies and no meaningful recovery until around the middle of the decade. Under this more severe scenario, Fitch tested an increased base-case default rate and decreased recovery rate, as shown below. Impact on note ratings of multiple factors: Class A1 / A1-G / B-G / C-G / D-G / E-G Expected rating: AAAsf / AAAsf / AAsf / Asf / BBB+sf / BBB-sf Downside scenario: AA+sf / AA+sf / AA-sf / A-sf / BBBsf / BB+sf 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 Prior to the transaction closing, Fitch sought a third-party assessment of the asset portfolio information, but none was made available. Prior to the transaction closing, Fitch conducted a review of a small targeted sample of flexigroup'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 believes the asset pool information relied upon for its rating analysis, according to its applicable rating methodologies, 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'. 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 Marija Buzevska, Senior Analyst +61 2 8256 0340 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 Marija Buzevska, Senior Analyst +61 2 8256 0340 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 Consumer ABS Rating Criteria (pub. 09 Jun 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10124893) 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) 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). 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