Fitch Downgrades Five Classes of Interstar RMBS Notes

(The following statement was released by the rating agency)SYDNEY, May 31 (Fitch) Fitch Ratings has downgraded five and affirmed nine classes of notes from five transactions of the Interstar Millennium Series. These transactions are backed by pools of Australian conforming residential mortgages originated through a network of mortgage originators and brokers under Interstar Millennium Trust Securitisation programme. A full list of rating actions can be found at the end of this commentary.KEY RATING DRIVERSThe downgrades of the class A and AB notes of Interstar Millennium Series 2006-1, the class AB notes of Interstar Millennium Series 2006-3L Trust and the class A2 and AB notes of Interstar Millennium Series 2006-4H Trust reflect the pro-rata pay structure throughout the majority of the life of the transactions that leaves the downgraded notes exposed to tail risk as the transaction gets smaller. Payment priority in these transactions reverts to sequential paydown if there are carryover charge-offs or 60+ days arrears are greater than 5% of the pool balance. Fitch makes the assumption in all structured finance ratings that no clean-up call options are exercised unless originators are obligated to do so, which is not the case in the Interstar transactions. In recent years, the transactions' servicer Challenger Mortgage Management Pty Ltd. (Challenger) has chosen not to exercise clean-up call options. The 60+ days arrears for Interstar 2006-3L were 4.30% as of 31 March 2016. While the class AB notes are exposed to concentration risk due to the current pro-rata pay structure, there is a higher likelihood the transaction will revert to sequential paydown with further portfolio deterioration or with continued paydown of the portfolio. Low-documentation mortgages, which typically perform worse than full-documentation loans, make up 88.9% of the Interstar 2006-3L portfolio. The current pool factor for Interstar 2006-3L is 16.7%.Full-documentation loans make up 68.1% of Interstar 2006-1's portfolio, and as a result, the credit enhancement was lower at closing compared with Interstar 2006-3L. This feature, in conjunction with the credit enhancement level specified in the pro-rata triggers, results in the transaction providing less credit enhancement to support the class A notes. The low level of subordination exposes the class A notes to some degree of concentration risk at the tail of the transaction. As of March 2016, the 60+ days arrears were 2.45%, which is well below the trigger of 5% at which the transaction would revert to sequential paydown. The original note balance of Interstar 2006-4H was significantly smaller compared with the other Interstar transactions with the pro-rata pay structure. As a result, the transaction is expected to pay pro rata until a smaller pool size remains. In addition, the pool also is mainly made up of loans with higher loan-to-value ratios and as a result, the transaction is subject to greater concentration risk at the tail of the transaction. As of March 2016, the 60+ days arrears were 1.11%, which is well below the trigger of 5% at which the transaction would be required to revert to sequential paydown. Interstar Millennium Series 2005-3E is exposed to foreign-currency risk in the event that GBP Libor turns negative and the trust has to make additional payments to the currency swap provider in the relevant foreign currency. Excess spread is likely to be sufficient to cover any payments the trust has to make. Since closing, the trust has had a positive coupon. The Royal Bank of Scotland (LON:RBS) PLC (RBS, BBB+/F2/Stable) is the currency swap provider for Interstar 2005-3E. RBS has been collateralising in accordance with the transaction documents, which reflected Fitch's counterparty criteria at the time of the transaction's closing. Fitch always applies its current criteria in assessing transactions. Fitch has assessed the gap in collateralisation between the two criteria remains significant and the class A and AB notes remain capped at 'Asf' in accordance with the minimum derivative counterparty ratings under Fitch's counterparty criteria.As of 31 March 2016, the 30+ days arrears for Interstar 2006-3L were 7.20%, which is line with the 4Q15 low-doc RMBS Index of 7.29%. The 30+ days arrears for the remaining transactions ranged from 1.72% (Interstar 2005-3E) to 5.14% (Interstar 2006-4H), all above the 4Q15 Dinkum Index of 0.95%. All loans in the underlying portfolios have 100% lenders' mortgage insurance (LMI) in place, provided mainly by QBE Lenders' Mortgage Insurance Limited (Insurer Financial Strength Rating: AA-/Stable) and Genworth Financial (NYSE:GNW) Mortgage Insurance Pty Limited (Insurer Financial Strength Rating: A+/Stable). Losses have remained within expectations. At end-March 2016, LMI covered between 92.1% (Interstar 2006-1) and 98.3% (Interstar 2006-4H) of the claims submitted from the five transactions. All losses that were not covered by LMI have been covered by excess spread or the residual unit holders.The affirmations of the nine RMBS classes reflect Fitch's view that the available credit enhancement supports the notes' current ratings, the agency's expectations of Australia's economic conditions and that the credit quality and performance of the loans in the collateral pools have remained within the agency's expectations. Interstar Series 2004-5 and Interstar 2005-3E do not have the same structural features that exposes the senior notes to tail risk as they pay sequentially for the life of the transaction.VARIATIONS FROM CRITERIAIn our analysis of foreign-currency exposure for Interstar 2005-3E in case the pound sterling Libor turned negative, Fitch assumed the foreign-currency path assumption for AUD/GBP for the class A2 notes was year 1: +/-60%, year 2: +/-80%, year 3: +/-100%, year 4 and onwards: +/-120% in a 'Asf' scenario.RATING SENSITIVITIES Credit enhancement levels for the class A notes across the transactions can support many multiples of the arrears levels reported in the latest investor reports. The ratings are not expected to be affected by modest changes in performance.The class A and AB notes that have been affirmed at 'AAAsf' can withstand a significant increase in foreclosures, ranging from 33.5% (Interstar 2006-3L) to 100% (Interstar 2004-5), at their modelled loss severity.At the 'AAsf' loss severity, the class A notes of Interstar 2006-1 can withstand additional foreclosure of 54.1%. The Class A and AB notes rated at 'Asf' can withstand further increase in foreclosure at their modelled loss severity, ranging from 85.5% (Interstar 2006-3L) to 100% (Interstar 2005-3E and Interstar 2006-4H).The class AB notes of Interstar 2006-1 can withstand a significant rise in foreclosure of 79.5% at their 'BBBsf' loss severity. Similarly, the class AB notes for Interstar 2006-4H can withstand a further 100% increase in foreclosure at their 'BBsf' loss severity.The class B notes for all transactions would be downgraded if there was a significant reduction in payment of LMI claims and an unexpected deterioration in delinquencies, defaults and losses. All the class B notes are LMI dependent and there are currently no charge-offs to date. Fitch's analysis excludes credit to excess spread. DUE DILIGENCE USAGENo third party due diligence was provided or reviewed in relation to this rating action.DATA ADEQUACY Fitch conducted a file review of 10 sample loan files focusing on the underwriting procedures conducted by Challenger compared to its 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.A comparison of the transaction's representations, warranties and enforcement mechanisms (RW&Es) to those of typical RW&Es for this asset class is available by accessing the reports and/or links given under Related Research below.The rating actions are as follows (note balances as end-March 2016):Interstar Millennium Series 2004-5 TrustAUD23.2m Class AB (ISIN AU300INTA032) affirmed at 'AAAsf'; Outlook StableAUD11.3m Class B (ISIN AU300INTA040) affirmed at 'Bsf'; Outlook StableInterstar Millennium Series 2005-3E TrustGBP34.2m Class A2 (ISIN XS0232803709) affirmed at 'Asf'; Outlook StableAUD37.0m Class AB (ISIN AU300INTD010) affirmed at 'Asf'; Outlook StableAUD44.5m Class B (ISIN AU300INTD028) affirmed at 'Bsf'; Outlook StableInterstar Millennium Series 2006-1 TrustAUD65.5m Class A (ISIN AU300INTE018) downgraded to 'AAsf' from 'AAAsf'; Outlook StableAUD2.4m Class AB (ISIN AU300INTE026) downgraded to 'BBBsf' from 'AA+sf'; Outlook StableAUD2.8m Class B (ISIN AU300INTE034) affirmed at 'Bsf'; Outlook StableInterstar Millennium Series 2006-3L TrustAUD150.3m Class A2 (ISIN AU0000INNHB3) affirmed at 'AAAsf'; Outlook StableAUD11.7m Class AB (ISIN AU0000INNHC1) downgraded to 'Asf' from 'AA+sf'; Outlook StableAUD8.9m Class B (ISIN AU0000INNHD9) affirmed at 'Bsf'; Outlook StableInterstar Millennium Series 2006-4H TrustAUD42.0m Class A2 (ISIN AU3FN0000816) downgraded to 'Asf' from 'AAAsf'; Outlook StableAUD7.6m Class AB (ISIN AU3FN0000824) downgraded to 'BBsf' from 'AAAsf'; Outlook StableAUD7.9m Class B (ISIN AU3FN0000832) affirmed at 'Bsf'; Outlook StableContacts: Lead Surveillance Analyst Stephen LoAnalyst+61 2 8256 0379Fitch Australia Pty Ltd.Level 15, 77 King St, Sydney, NSW 2000, AustraliaCommittee Chairperson Natasha VojvodicSenior Director+ 61 2 8256 0350Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com.Additional information is available at www.fitchratings.com.Sources of Information:The source of information used to assess these ratings was the servicer, Challenger Mortgage Management Pty Ltd. 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=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=744175Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879815Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 17 May 2016)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=880522Global Criteria for Lenders’ Mortgage Insurance in RMBS (pub. 23 Jun 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865195Global 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 (Applicable to Transactions Rated from Sept.26, 2011 until June 15, 2015) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863817Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=1005321Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005321Endorsement 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 PUBLIC WEBSITE '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.