Fitch Assigns Final Ratings to Liberty Series 2020-3 Trust

(The following statement was released by the rating agency) Fitch Ratings-Sydney-01 November 2020: Fitch Ratings has assigned final 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 have been 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; New Rating; AAAsf; Rating Outlook Stable ----A2 ; Long Term Rating; New Rating; AAAsf; Rating Outlook Stable ----B ; Long Term Rating; New Rating; NRsf ----C ; Long Term Rating; New Rating; NRsf ----D ; Long Term Rating; New Rating; NRsf ----E ; Long Term Rating; New Rating; NRsf ----F ; Long Term Rating; New Rating; NRsf ----G ; Long Term Rating; New Rating; NRsf Transaction Summary The collateral pool consists of 3,243 obligors with a total of AUD1.3 billion, an increase from the AUD800 million at the time of the expected rating on 26 October 2020. KEY RATING DRIVERS Steady-state Arrears Adjustment Mitigates Expected Coronavirus Impact: Fitch has updated criteria assumptions for Australia to account for the anticipated effects of the coronavirus pandemic. A steady-state arrears adjustment of 3.0% was applied and increased the weighted-average foreclosure frequency (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. See the following links for Fitch's pandemic-related credit views and analytical approach: - "Global Economic Outlook: September 2020", 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 following commentaries: - "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. Foreclosure Risk Higher than Previous Transactions: The 'AAAsf' WAFF of 14.8%, from 11.8% in the previous transaction, is driven by the weighted-average (WA) unindexed loan/value ratio (LVR) of 57.5% and, under Fitch's methodology, investment loans of 31.7% and steady-state arrears of 3.0% applied to the 60-89 day arrears category. The arrears adjustment and the higher WA LVRs are the key determinants of the WAFF difference to the previous transaction. The class A1 and A2 notes, both rated 'AAAsf', benefit from credit enhancement of 25% and 10%, respectively. Ratings Independent of LMI: 10.8% of the pool is benefiting from lenders' mortgage insurance (LMI). The 'AAAsf' LMI dependent weighted-average recovery rate (WARR) of 58.9% is driven by the portfolio's WA indexed scheduled LVR of 69.3%, and the portfolio 'AAAsf' WA market value decline of 56.9%. Limited Liquidity Risk from Payment Holidays: There are currently no borrowers in the pool with a payment deferral as of the cut-off date. 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. Low Operational and Servicing 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. Economic Rebound in the Medium Term Supports Rating Outlook: 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%. The key rating drivers listed in the applicable sector criteria, but not mentioned above, are not material to this rating action. 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 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. Hence, Fitch conducts sensitivity analysis by stressing - upwards and downwards - a transaction's initial base-case assumptions. This section provides insight into the model-implied sensitivities the transaction faces when one assumption - WAFF or WARR − is stressed, while holding others equal. The modelling process uses the estimation and stress of default and loss 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: 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. Downgrade Sensitivity: Notes class: A1/ A2 Current Final Rating: AAAsf / AAAsf 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 / AAAsf 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 / AAsf The transaction structure supports LMI-independent ratings for the class A1 and A2 notes. LMI is not required to support the rating due to the level of credit support provided by the lower notes. Upgrade Sensitivity: Upgrade sensitivity is not applicable given that class A1 and A2 are rated 'AAAsf'. 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 Final 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. Date of Relevant Committee 21 October 2020 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)) Read More On This Topic Liberty Series 2020-3 Trust - Appendix (https://www.fitchratings.com/site/re/10140080) Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10141292) Solicitation Status (https://www.fitchratings.com/site/pr/10141292#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10141292#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10141292#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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