Fitch Assigns Expected Ratings to SMART ABS Series 2016-1 Trust

(The following statement was released by the rating agency)Link to Fitch Ratings' Report: SMART ABS Series 2016-1 Trusthttps://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=880137SYDNEY, April 17 (Fitch) Fitch Ratings has assigned expected ratings to SMART ABS Series 2016-1 Trust's automotive and equipment-backed floating-rate notes. The issuance consists of notes backed by automotive and equipment lease receivables originated by Macquarie Leasing Pty Limited (Macquarie Leasing). The ratings are as follows:- AUD425.0m Class A notes: 'AAA(EXP)sf'; Outlook Stable- AUD12.5m Class B notes: 'AA(EXP)sf'; Outlook Stable- AUD62.5m Seller notes: 'NR(EXP)sf'.The notes will be issued by Perpetual Trustee Company Limited in its capacity as trustee of SMART ABS Series 2016-1 Trust. The latter is a legally distinct trust established pursuant to a master trust and security trust deed.The collateral backing the SMART ABS Series 2016-1 Trust transaction is of similar credit quality to prior pools securitised under the SMART programme. The pool comprises lease and loan receivables backed by motor vehicles and equipment, with weighted-average seasoning of 6.2 months and average receivable size of AUD33,104. Novated contracts contributed to the relatively low arrears levels on prior SMART transactions and make up 38.1% of the current transaction pool.KEY RATING DRIVERS Sufficient Enhancement: The SMART ABS Series 2016-1 Trust transaction incorporates a sequential pay/pro-rata pay structure, consistent with prior transactions. Initial hard credit enhancement to the 'AAA(EXP)sf' notes totals 15%. Pro-rata pay-down will commence when hard credit enhancement reaches 19.9%. Overall credit enhancement is sufficient to cover the 'AAAsf' and 'AAsf' stressed cumulative net loss (CNL) assumptions in all Fitch scenarios.Consumer/Equipment Included: This is the sixth SMART transaction to include both consumer and equipment receivables. Macquarie Leasing has originated consumer loans and leases directly to individual retail consumers since 2008. Historical gross losses by quarterly vintage for novated leases (cars) range from 0.3% to 1.6%; non-novated leases (cars) from 1.0% to 3.5%; trucks 0.5%-5.4%; equipment 0.2%-5.0%; and consumer 0.8%-5.0%. Balloon Loans in Portfolio: The pool comprises amortising principal and interest lease and loan receivables, with varying balloon amounts payable at maturity. The weighted-average balloon by original balance is 16.3%, however, 45.4% of the portfolio has no balloon payment. Adequate Liquidity: Liquidity support is provided by the liquidity reserve and will ensure stable cash flows for the required payments. The reserve will initially be funded at AUD5.0m on the closing date (funded by issuance proceeds) and subsequently the greater of: 1) 1.0% of the aggregate invested amount of the notes for that payment date; and 2) AUD300,000.Fitch modelled various loss distributions and recovery profiles, as well as prepayment speeds, in its analysis. In running the scenarios, Fitch observed that most scenarios passed, however, the model did observe one minor (less than 0.5%) scenario failure. Fitch determined the small amount of discrepancy caused by severe stress on a number of variables simultaneously in a short time period is within the tolerance level of the rating assigned. EXPECTED RATING SENSITIVITIES Unexpected increases in the frequency of defaults and loss severity on defaulted loans could produce loss levels higher than Fitch's base case, which could result in negative rating actions on the notes. Fitch has evaluated the sensitivity of the expected ratings assigned to SMART ABS Series 2016-1 Trust to increased gross default levels and decreased recovery rates over the life of the transaction.Its analysis found the Class A notes displayed sensitivity to increased defaults, showing downgrades of one notch under Fitch's mild (10% increase) scenario, two notches under Fitch's moderate (25% increase) scenario and four notches ('A+sf') under Fitch's severe default (50% increase) scenario. The Class B notes were sensitive to Fitch's moderate and severe scenario, with the rating declining to 'A+sf' and 'Asf', respectively.When subject to reduced recovery rates, the Class A note rating declined to 'AA+sf' under the mild, moderate and severe scenarios, whereby recovery rate assumptions are reduced by 10%, 25% and 50%, respectively. The Class B notes were not susceptible to downgrades under these scenarios.The analysis also showed that under a combination of mild, moderate and severe default and recovery scenarios, the Class A notes would be downgraded to 'AA+sf', 'AA-sf' and 'Asf', respectively. The Class B note rating declined to 'A+sf' under the moderate combination scenario and declined to 'BBB+sf' under the severe combination scenario.DUE DILIGENCE USAGENo third party due diligence was provided or reviewed in relation to this rating action.DATA ADEQUACYFitch conducted a file review of 15 sample loan files focusing on the underwriting procedures conducted by Macquarie Leasing compared to its credit policy at the time of underwriting. Fitch checked the consistency and plausibility of the information and no material discrepancies were noted that would impact Fitch's rating analysis.Key Rating Drivers and Expected Rating Sensitivities are further discussed in the corresponding presale report entitled, "SMART ABS Series 2016-1 Trust", published today. Included as an appendix to the report are a description of the representations, warranties and enforcement mechanisms.Contacts: Primary Analyst Brenden Asplin, CFAAssociate DirectorPhone +612 8256 0340Fitch Australia Pty Ltd.Level 15, 77 King St, Sydney, NSW 2000Secondary Analyst David CarrollDirectorPhone +612 8256 0333Committee Chairperson Natasha VojvodicSenior DirectorPhone +612 8256 0350Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com.Additional information is available at www.fitchratings.comThe sources of information identified for this rating action were Macquarie Bank Limited, as arranger, and the issuer's counsel Allen Overy. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public.Applicable Criteria Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 14 May 2014)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744175Global Consumer ABS Rating Criteria (pub. 03 Dec 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=874105Global Structured Finance Rating Criteria (pub. 06 Jul 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952Related Research Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878450SMART ABS Series 2016-1 Trust - Appendixhttps://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=880139Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=1002719Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002719Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det ail=31ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. 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. 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 WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises 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.