Fitch Assigns Final Ratings to Sapphire XIV Series 2016-1 Trust

(The following statement was released by the rating agency)Link to Fitch Ratings' Report: Sapphire XIV 2016-1 Trusthttps://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881103SYDNEY, May 05 (Fitch) Fitch Ratings has assigned final ratings to Sapphire XIV Series 2016-1 Trust's residential mortgage-backed fixed- and floating-rate notes. The issuance consists of notes backed by Australian non-conforming residential loans originated by Bluestone Group Pty Limited and Bluestone Mortgages Pty Limited (Bluestone). The ratings are as follows:AUD92.4m Class A1a notes: 'AAAsf'; Outlook StableAUD40.0m Class A1b notes: 'AAAsf'; Outlook StableAUD30.0m Class A2 notes: 'AAAsf'; Outlook StableAUD8.2m Class B notes: 'AAsf'; Outlook StableAUD9.6m Class C notes: 'Asf'; Outlook StableAUD6.6m Class D notes: 'BBBsf'; Outlook StableAUD3.6m Class E notes: 'BBsf'; Outlook StableAUD3.0m Class F notes: 'Bsf'; Outlook StableAUD4.6m Class G notes: 'NRsf'AUD2.0m Class H notes: 'NRsf'AUD2.25m Class X1 notes: 'NRsf'.The notes were issued by Permanent Custodians Limited in its capacity as trustee of Sapphire XIV Series 2016-1 Trust. KEY RATING DRIVERSSufficient Credit Enhancement: The Class A1 and A2 notes benefit from credit enhancement of 33.8% and 18.8%, respectively, provided by the subordinate Class B, C, D, E, F, G and H notes; from the liquidity facility; and Bluestone's servicing and underwriting capabilities.Experienced Originator/Servicer: Bluestone is a specialist non-conforming originator and servicer. Bluestone Servicing Pty Limited is a wholly owned subsidiary of Bluestone. Bluestone Group has originated more than AUD6.0bn worth of loans and completed 20 residential mortgage securitisations in Australia and New Zealand.Delinquent Loans Included: The portfolio contains loans that were in arrears at the cut-off date. The 30+ day arrears were 7.7%, with 90+ day arrears totalling 1.9% of the pool. Portfolio arrears increased after the cut-off date, Fitch has incorporated this into its analysis. The weighted-average seasoning of the portfolio is 14.2 months, with a weighted-average indexed loan-to-value ratio of 67.2%. Low-documentation loans make up 53.7% of the portfolio and credit-impaired loans comprise 50.0%. Loans with greater than 80% loan-to-value ratio comprise 18.3%.Strong Excess Spread: The transaction benefits from a strong flow of excess income, which is available to cover losses. Bluestone's non-conforming borrowers pay significantly higher interest rates than borrowers of conforming loans. The weighted-average interest rate is 7.2%. RATING SENSITIVITIESUnexpected decreases in residential property value, increases in the frequency of foreclosures, and loss severity on defaulted mortgages 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 ratings assigned to Sapphire XIV Series 2016-1 Trust to increased defaults and decreased recovery rates over the life of the transaction. Its analysis found that the rating on the Class A1a note was not impacted under Fitch's moderate and severe default stress scenarios (15% increase and 30% increase in defaults, respectively). The Class A1b notes' ratings declined to 'AA+sf' and 'AAsf' in the moderate and severe scenarios, respectively. The class A2, B, C, D and E notes' ratings each declined by two notches in the moderate scenario and three notches in the severe scenario.There was no impact on the Class A1a note under Fitch's moderate and severe recovery scenarios, whereby recoveries are reduced by 15% and 30%, respectively. The remaining notes' ratings declined by at least two notches in the moderate scenario and by at least three notches in the severe scenario. The transaction shows greater sensitivity to a combination of both increased defaults and decreased recovery rates.Portfolio arrears increased subsequent to the cut-off date. As part of its analysis, Fitch assessed the effect of the updated arrears levels on the ratings assigned and determined that the notes' ratings were not negatively impacted. DUE DILIGENCE USAGENo third party due diligence was provided or reviewed in relation to this rating action.DATA ADEQUACYFitch conducted a file review of 10 sample loan files focusing on the underwriting procedures conducted by Bluestone compared to Bluestone's credit policy at the time of underwriting. Fitch has 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 Rating Sensitivities are further discussed in the corresponding new issue report entitled "Sapphire XIV 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 Ben NeweyDirectorPhone +612 8256 0341Committee 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 Bluestone, Macquarie Bank Limited as arranger, and the issuer's counsel Clayton Utz. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public.Applicable Criteria APAC Residential Mortgage Criteria (pub. 23 Jun 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867437Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158Exposure Draft: Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 Apr 2016)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878412Global 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=878450Sapphire XIV Series 2016-1 Trust - Appendixhttps://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879914Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=1004014Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004014Endorsement 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.