(The following statement was released by the rating agency) Fitch Ratings-Sydney-July 31: Fitch Ratings has downgraded six classes of Emerald Reverse Mortgage Series transactions following the resolution of a previously identified error. The Outlook on the ratings is Stable. The ratings have been removed from Rating Watch Negative (RWN), on which they were placed on 25 May 2018: The rating action is as follows: Emerald Reverse Mortgage Series 2006-1 Trust - note balances as of April 2018: AUD63.3 million Class A notes (ISIN AU300EMER013) downgraded to 'AAsf' from 'AAAsf'; Outlook Stable, off RWN AUD13.2 million Class B notes (ISIN AU300EMER021) downgraded to 'BBBsf' from 'AAsf'; Outlook Stable, off RWN AUD15.9 million Class C notes (ISIN AU300EMER039) downgraded to 'Bsf' from 'Asf'; Outlook Stable, off RWN Emerald II Reverse Mortgage Series 2007-1 Trust - note balances as of March 2018: AUD72.6 million Class A notes (ISIN AU3FN0003307) downgraded to 'BBBsf' from 'AAAsf'; Outlook Stable, off RWN AUD13.6 million Class B notes (ISIN AU3FN0003315) downgraded to 'BBsf' from 'AAsf'; Outlook Stable, off RWN AUD12.2 million Class C notes (ISIN AU3FN0003323) downgraded to 'Bsf' from 'Asf'; Outlook Stable, off RWN The transactions are backed by pools of Australian reverse-mortgage receivables originated by Bluestone Equity Release Pty Limited. KEY RATING DRIVERS Error Resolved: Fitch's previous liability cash flow modelling did not accurately reflect the derivative structure mechanics. The swap notional profile follows a fixed pre-determined schedule that has deviated from the actual asset profile over time, thereby creating a significant hedging mismatch. The mismatch between the fixed-rate swap notional balance and fixed-rate mortgage assets as of each respective payment date is 16% for Emerald 2006-1 and 23% for Emerald 2007-1. The previous modelling did not take this mismatch into account and overstated cash flows available to repay noteholders. The cash flow model-implied ratings fell by one to three categories upon correcting the error. Application of Bespoke Criteria: Fitch applied its Australian Emerald Reverse Mortgage Bespoke Rating Criteria /a , updated on 31 July 2018, to reflect the product-specific features of equity release. The key assumptions underpinning the asset cash flows include borrowers' mortality and morbidity (long-term care) rates, voluntary prepayment rates, property price stresses and property price growth. The updated criteria revise voluntary prepayment rates to reflect changes in prepayment experience and expectations as the transaction matures. The new criteria also introduce the concept of deviating from the model-implied rating where it is 'CCCsf' or lower, in which case Fitch may consider assigning a 'Bsf' rating if the term to final maturity is greater than 10 years. Criteria Revision Impact: Fitch's cash flow analysis produced a model-implied rating of 'CCCsf' for Emerald 2007-1's class C note, which was driven by the decreasing interest-rate scenario. The agency considered the transaction's long-term nature (legal final maturity is in 2057 for both transactions) and the application of long-term stress on variables, such as property prices and interest rates. In line with the criteria revision, Fitch determined there was a margin of safety in regards to these key variables commensurate with a 'Bsf' rating. Timing of Borrower Exits: The rate of borrower exits declined over the 12 months to June 2018, driven by lower voluntary prepayments, which averaged 3.9% per annum for Emerald 2006-1 and 2.5% per annum and Emerald 2007-1. The low interest rate environment continues to deter borrowers from prepayment due to the obligation to pay high fixed-rate break costs at termination. The accumulation of exits to date has resulted in the liabilities amortising to 13.3% and 7.7% below the asset balances for Emerald 2006-1 and Emerald 2007-1, respectively, leading to overcollateralisation as a percentage of liabilities, excluding mark-to-market of the swap and step-up interest. Falling Residential Property Values: Property price growth across Australia decelerated sharply over the 12 months to June 2018, with annual growth rates falling to -0.8% per annum in June 2018, from 10.2% per annum in June 2017. However, property prices are significantly above those at origination, with national price rises of 63.2% since the origination of Emerald 2006-1 and 52.1% since the origination of Emerald 2007-1. Portfolio Characteristics: At the 30 April 2018 cut-off date the Emerald 2006-1 portfolio consisted of 558 borrower groups with a weighted-average loan/value ratio (LVR) of 41.2%. The loans were spread geographically, with the largest concentration of 45.8% of the portfolio in New South Wales. At 31 March 2018 cut-off date, the Emerald 2007-1 portfolio consisted of 589 borrower groups with a weighted-average LVR of 45.1%. The mortgages are geographically diversified, with the largest concentration of 37.8% in New South Wales. RATING SENSITIVITIES Unanticipated sustained property-price falls or a deviation from expected borrower longevity could result in property sale proceeds being insufficient to cover the accrued balance outstanding on each loan. Fitch's analysis found the two transactions ratings' were sensitive to changes to mortality expectations, additional property-market stress and interest rates. Due to the long-term nature of the transactions, changes in the economic environment and property prices need to be sustained over a long period to significantly affect the transactions. Fitch will consider if a safety margin is provided by long-term to maturity and whether there is potential for property prices increases over the long term. Emerald 2006-1: Expected impact on note rating from a percentage change in mortality rates: Rating: AAsf/BBBsf/Bsf Decrease mortality rates by 10%: AAsf/Asf/Bsf Increase mortality rates by 10%: AAsf/BBBsf/CCCsf Expected impact on note rating from additional sustained residential property market value decline (MVD): Rating: AAsf/BBBsf/Bsf Decrease property values by 10%: Asf/BBBsf/CCCsf Decrease property values by 20%: BBBsf/Bsf/CCCsf Expected impact on note rating assuming various interest rate paths: Rating: AAsf/BBBsf/Bsf Stable interest rates: AAsf/Asf/BBsf Decreasing interest rates: AAsf/BBBsf/Bsf To see a one-category downgrade on the class A, B and C notes, an additional sustained MVD of 5%, 15% and 5%, respectively, would have to occur. To see a downgrade to non-investment grade, an additional sustained MVD of 25% and 15% would have to occur for the Class A and B notes, respectively. To see a downgrade to 'CCCsf', an additional sustained MVD of 35%, 25% and 5%, respectively, would have to occur.
Emerald 2007-1: Expected impact on note rating from a percentage change in mortality rates: Rating: BBBsf/BBsf/Bsf Decrease mortality rates by 10%: Asf/BBsf/Bsf Increase mortality rates by 10%: BBBsf/BBsf/CCCsf Expected impact on note rating from additional sustained residential property MVD: Rating: BBBsf/BBsf/Bsf Decrease property values by 10%: BBBsf/Bsf/CCCsf Decrease property values by 20%: Bsf/CCCsf/CCCsf Expected impact on note rating assuming various interest rate paths: Rating: BBBsf/BBsf/Bsf Stable interest rates: Asf/BBBsf/BBsf Decreasing interest rates: BBBsf/BBsf/Bsf To see a one-category downgrade on the class A, B and C notes, an additional sustained MVD of 15%, 5% and 5%, respectively, would have to occur. To see a downgrade to non-investment grade, an additional sustained MVD of 15% would have to occur for the Class A and B notes, respectively. To see a downgrade to 'CCCsf', an additional sustained MVD of 25%, 15% and 5% would have to occur for the class A, B and C notes, respectively. 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 Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and transactions. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third-party assessment of the asset portfolio or conducted a review of origination files as part of its ongoing monitoring. Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations, given the operating environment, and Fitch is therefore satisfied that the asset pool information relied upon for its rating analysis was adequately reliable. 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. SOURCES OF INFORMATION The information below was used in the analysis: Loan-by-loan data provided by Bluestone as at 30 April 2018 for Emerald 2006-1 and 31 March 2018 for Emerald 2007-1. Transaction reporting data provided by Bluestone as at 21 May 2018 for Emerald 2006-1 and 21 April 2018 for Emerald 2007-1.
The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. Contacts: Lead Surveillance Analyst James Leung Director +61 2 8256 0322 Fitch Australia Pty Ltd Level 15, 77 King St, Sydney NSW 2000 Australia Committee Chairperson Ben McCarthy Managing Director +61 2 8256 0388 Media Relations: Leslie Tan, Singapore, Tel: +6567967234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria APAC Residential Mortgage Rating Criteria (pub. 14 Jul 2017) https://www.fitchratings.com/site/re/901072 Australian Emerald Reverse Mortgage Bespoke Rating Criteria (pub. 30 Jul 2018) https://www.fitchratings.com/site/re/10039600 Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 02 Feb 2018) https://www.fitchratings.com/site/re/10018863 Global Structured Finance Rating Criteria (pub. 15 May 2018) https://www.fitchratings.com/site/re/10029600 Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) https://www.fitchratings.com/site/re/898537 Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 31 May 2018) https://www.fitchratings.com/site/re/10029891 Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 02 Feb 2018) https://www.fitchratings.com/site/re/10018549 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10039598 Solicitation Status https://www.fitchratings.com/site/pr/10039598#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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