Fitch Assigns Expected Ratings to Liberty Series 2020-3 Trust

(The following statement was released by the rating agency) Fitch Ratings-Sydney-25 October 2020: Fitch Ratings has assigned expected ratings to Liberty Series 2020-3 Trust's mortgage-backed pass-through floating-rate notes. The issuance consists of notes backed by a pool of first-ranking Australian residential predominantly prime full-documentation mortgage loans originated by Liberty Financial Pty Ltd. The notes will be issued by Liberty Funding Pty Ltd in its capacity as issuer of Liberty Series 2020-3 Trust, which is a separate and distinct trust created under a master trust deed. Liberty Series 2020-3 Trust ----A1 ; Long Term Rating; Expected Rating; AAA(EXP)sf; Rating Outlook Stable ----A2 ; Long Term Rating; Expected Rating; AAA(EXP)sf; Rating Outlook Stable ----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 ----E ; Long Term Rating; Expected Rating; NR(EXP)sf ----F ; Long Term Rating; Expected Rating; NR(EXP)sf ----G ; Long Term Rating; Expected Rating; NR(EXP)sf Transaction Summary The asset pool totalled AUD800 million at the 23 September cut-off date and consisted of 1,747 obligors with a weighted-average (WA) unindexed loan/value ratio (LVR) of 70.1%. 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 onward 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 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 there should be no rating impact on the 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 the following reports: - "Global Economic Outlook: September 2020 - Recovery Underway", published on 7 September 2020, available at www.fitchratings.com/site/re/10135033; - "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update", published on 8 September 2020, available at www.fitchratings.com/site/re/10135320; and - "Global SF Rating Assumptions Updated to Reflect Coronavirus Risk", published on 3 April 2020, available at www.fitchratings.com/site/pr/10117224. In addition, analytical notes relevant for Australian and New Zealand RMBS transactions are discussed in the 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 28 July 2020, available at www.fitchratings.com/site/pr/10130287. Liquidity Coverage for Payment Holidays: There are currently no borrowers in the pool with a payment deferral. However, we 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 2.0% of the note balance (stated balance for class G and invested balance for remaining notes) and is sufficient to cover more than nine months of required payments at the current bank-bill swap rate should there be no principal or interest collections. The transaction can also use any principal payments received to pay interest. Operational Risk: Liberty was established in 1997 and has an extensive lending record. Its lending practices and servicing capabilities are consistent with market standards. The originator/servicer offers products and services ranging from mortgage lending to business and auto loans to over 350,000 customers, both in the prime and non-conforming space. We do not expect the coronavirus to disrupt operations, as staff are able to work remotely. Asset Analysis: The 'AAAsf' weighted-average foreclosure frequency (WAFF) of 15.5% is driven by the WA unindexed LVR of 70.1%, and, under Fitch's methodology, investment loans of 35.6% and steady-state arrears of 3.0% applied to the 60-89 day arrears category. The steady-state arrears adjustment increased the WAFF modelled by 1.6%, and is calculated using the five-year average 30+ day arrears to December 2019 for Liberty's mortgage portfolio multiplied by 1.2. The 'AAAsf' lender's mortgage insurance (LMI) dependent weighted-average recovery rate of 58.0% is driven by the portfolio's WA indexed scheduled LVR of 70.8%, 10.9% of the pool benefiting from LMI and the portfolio 'AAAsf' WA market value decline of 56.7%. Liability Analysis: The class A1 and A2 notes benefit from credit enhancement of 25.0% and 10.0%, respectively. Structural features include a liquidity facility sized at 2.0% of the invested amount of the class A1 to F notes and the stated amount of the class G notes with a floor of AUD600,000 and a guarantee fee reserve that is able to cover losses and liquidity shortfalls. The class A1 and A2 notes 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%. 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 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 longer pandemic than Fitch expects that leads to deterioration in macroeconomic fundamentals and consumers' financial position in Australia beyond Fitch's baseline scenario. 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 potential negative rating action, depending on the extent of the coverage decline. Fitch conducted sensitivity analysis by increasing gross default levels and decreasing recovery rates over the life of the transaction. Downgrade Sensitivity: Notes class: A1/ A2 Current Expected Rating: AAAsf / AAAsf Downside Sensitivity Impact on note ratings of increased defaults: Increase defaults by 15%: AAAsf / AA+sf Increase defaults by 30%: AAAsf / AA+sf Impact on note ratings of decreased recoveries: Reduce recoveries by 15%: AAAsf / AAAsf Reduce recoveries by 30%: AAAsf / AA+sf Impact on note ratings of multiple factors: Increase defaults by 15% and reduce recoveries by 15%: AAAsf / AA+sf Increase defaults by 30% and reduce recoveries by 30%: AAAsf / AA-sf Coronavirus Downside Scenario Sensitivity: Under Fitch's downside scenario, re-emergence of infections in major economies prolongs the health crisis and confidence shock, prompts extensions or renewals of lockdown measures and prevents a financial-market recovery. Fitch tested this scenario by increasing defaults by 15% and decreasing recoveries by 15%. Notes class: A1/ A2 Current Expected Rating: AAAsf / AAAsf Impact on note ratings of downside scenario: AAAsf / AA+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 As part of its ongoing monitoring, Fitch reviewed a small targeted sample of Liberty Financial'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. Fitch sought to receive a third-party assessment conducted on the asset portfolio information, but none was available. 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'. 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 Jimmy Tanzil, Senior Analyst +61 2 8256 0305 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 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) 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 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/10139052) Solicitation Status (https://www.fitchratings.com/site/pr/10139052#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10139052#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10139052#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.