Fitch Places Two Emerald Reverse Mortgage Transactions on Rating Watch Negative

(The following statement was released by the rating agency) Fitch Ratings-Sydney-May 25: Fitch Ratings has placed six classes from two Emerald Reverse Mortgage Series transactions on Rating Watch Negative (RWN). This follows the discovery of errors in the modelling of the swap structure in the cash flow analysis. The transactions are backed by pools of Australian reverse-mortgage receivables originated by Bluestone Equity Release Pty Limited. A full list of rating actions follows at the end of this commentary. Fitch expects to resolve the RWN by updating its analysis no later than the end of July 2018. KEY RATING DRIVERS The RWN actions are due to the discovery of errors in the modelling of the swap structure in the cash flow analysis. The swap notional follows a fixed pre-determined schedule that has deviated from the actual asset profile over time, thereby creating a significant hedging mismatch. This feature was previously incorrectly modelled, which overstated cash flows available to repay noteholders. The corrected model will reflect increased cash flows being directed to the derivative providers, which can have a negative impact on the note ratings. Derivative payments make up a significant portion of cash flow distributions for the Emerald transactions in low interest rate scenarios, making the results of the cash flow analysis particularly sensitive to changes in the way derivatives are modelled. RATING SENSITIVITIES Negative rating action will be taken if the effect of the greater derivative mismatch results in the transactions being unable to meet its required payments to the noteholders under each note's respective rating stress. 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 the 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 Transaction reporting data provided by Bluestone as at 21 February 2018 for Emerald Reverse Mortgage Series 2006-1 Trust and 23 April 2018 for Emerald II Reverse Mortgage Series 2007-1 Trust. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. The full list of rating actions is shown below: Emerald Reverse Mortgage Series 2006-1 Trust (note balances as of January 2018): AUD63.7 million Class A notes rated 'AAAsf' placed on RWN AUD13.2 million Class B notes rated 'AAsf' placed on RWN AUD15.9 million Class C notes rated 'Asf' placed on RWN Emerald II Reverse Mortgage Series 2007-1 Trust (note balances as of March 2018): AUD72.6 million Class A notes rated 'AAAsf' placed on RWN AUD13.6 million Class B notes rated 'AAsf' placed on RWN AUD12.2 million Class C notes rated 'Asf' placed on RWN Contacts: Lead Surveillance Analyst James Leung Director Phone +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: +65 67 96 7234, 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. 06 Nov 2017) https://www.fitchratings.com/site/re/900057 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. 23 May 2017) https://www.fitchratings.com/site/re/898538 Additional Disclosures Solicitation Status https://www.fitchratings.com/site/pr/10032282#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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