(The following statement was released by the rating agency)SYDNEY, September 25 (Fitch) Fitch Ratings has affirmed the ratings of two transactions of Australian non-conforming residential mortgages originated by Pepper Homeloans Pty Limited -a wholly owned subsidiary of Pepper Australia Pty Limited. A full list of rating actions follows at the end of this commentary.KEY RATING DRIVERSThe affirmations reflect Fitch's view that available credit enhancement levels are sufficient to support the notes' current ratings, the agency's expectations of Australia's economic conditions, Pepper's mortgage underwriting and servicing capabilities, the quality of the collateral, and performance of the underlying loans, which have remained in line with our expectations.At end-August 2015, the non-conforming transactions' 30+ days arrears was 5.41% in Pepper Residential Securities Trust No. 10 (PRS10) and 8.98% in Pepper Residential Securities Trust No. 11 (PRS11), compared to Fitch's 1Q15 Dinkum non-conforming low-doc index of 7.58%. Recorded losses were 0.43% (AUD1.5m) and 0.14% (AUD0.5m) of the original pool balances for PRS10 and PRS11, respectively. Losses in PRS11 were fully covered by excess spread, while PRS10 had a debit of AUD36,945 against an excess retention ledger in July 2015 to cover losses of AUD432,196 for the month.The mortgages in the non-conforming portfolios included approximately 40% reduced documentation loans, and the weighted average (WA) seasoning of the pools was 44 months and 30 months in PRS10 to PRS11, respectively. Fitch's calculated WA loan/value ratios (LVR) were between 68.9% and 71.0%, reducing to 64.1% and 67.2% after indexation.The non-conforming transactions include a retention mechanism, which allows a certain level of excess income to be diverted towards payment of the most junior notes, excluding the unrated Class G notes, with retention ledger being maintained, replacing the credit protection provided by the unrated F notes being paid down. In addition, if the transactions are not called on the call option date, all post-tax excess income will be diverted to the principal waterfall to speed up the amortisation of the notes.RATING SENSITIVITIES The prospect for downgrades is considered remote given the level of subordination available to the rated notes, which has increased since issuance in both transactions as a result of the sequential paydown.PRS10 Fitch 'AAAsf' breakeven stressed default rate is 25.6%. The Class A-1 notes can withstand an additional 72.5% in defaults at Fitch's 'AAAsf' loss severity. The Class A-2 notes can withstand an additional 55.4% in defaults at Fitch's 'AAAsf' loss severity. PRS11 Fitch 'AAA'sf breakeven stressed default rate is 28.9%. The Class A-1 notes can withstand an additional 78.0% in defaults at Fitch's 'AAAsf' loss severity. The Class A-2 notes can withstand an additional 60.0% in defaults at Fitch's 'AAAsf' loss severity.DUE DILIGENCE USAGE No 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 Pepper Homeloans Pty Limited compared to the 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.The full list of rating actions is shown below:Pepper Residential Securities Trust No. 10 (PRS10):AUD74.2m Class A-1 (ISIN AU3FN0018651) affirmed at 'AAAsf'; Outlook Stable; andAUD11.8m Class A-2 (ISIN AU3FN0018669) affirmed at 'AAAsf'; Outlook Stable.Pepper Residential Securities Trust No. 11 (PRS11):AUD72.5m Class A-1 (ISIN AU3FN0020715) affirmed at 'AAAsf'; Outlook Stable; andAUD15.5m Class A-2 (ISIN AU3FN0020723) affirmed at 'AAAsf'; Outlook Stable.Initial Key Rating Drivers and Rating Sensitivity are described further in the new issue reports listed under 'Related Research' and available on www.fitchratings.com. 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.Contacts:Lead surveillance analyst
Hai Duong LeAssociate Director+61 2 8256 0358Fitch Australia Pty Ltd., Level 15, 77 King St, Sydney, NSW 2000Committee Chairperson
Natasha VojvodicSenior Director+61 2 8256 0350Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0304, Email: leni.vu@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, Pepper Australia Pty Limited. 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=744175Global Structured Finance Rating Criteria (pub. 06 Jul 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952Related Research Pepper Residential Securities Trust No. 10 https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706596Pepper Residential Securities Trust No. 10 - Appendixhttps://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706577Pepper Residential Securities Trust No. 11 https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721296Pepper Residential Securities Trust No. 11 - Appendixhttps://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721435Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867166Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=991322Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991322Endorsement 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.