(The following statement was released by the rating agency) Fitch Ratings-Sydney-January 31: Fitch Ratings has upgraded four and affirmed three classes of notes from Sapphire XV Series 2016-2 Trust. The transaction consists of notes backed by a pool of first-ranking Australian residential conforming and non-conforming mortgage loans. All mortgages were originated by Bluestone Group Pty Ltd and the notes were issued by Permanent Custodians Limited in its capacity as trustee. The ratings were upgraded due to the buildup of credit enhancement supporting the notes. Sapphire XV Series 2016-2 Trust ----A1 AU3FN0033346; Long Term Rating; Affirmed; AAAsf; RO:Sta ----A2 AU3FN0033353; Long Term Rating; Affirmed; AAAsf; RO:Sta ----B AU3FN0033361; Long Term Rating; Affirmed; AAAsf; RO:Sta ----C AU3FN0033379; Long Term Rating; Upgrade; AA+sf; RO:Sta ----D AU3FN0033387; Long Term Rating; Upgrade; A+sf; RO:Sta ----E AU3FN0033395; Long Term Rating; Upgrade; A-sf; RO:Sta ----F AU3FN0033403; Long Term Rating; Upgrade; BBBsf; RO:Sta KEY RATING DRIVERS Operational Risk: Bluestone is a non-bank lender with extensive experience in originating, servicing and managing its mortgage portfolio. Fitch undertook an onsite operational review and found that there were no material changes that may affect Bluestone's ongoing ability to undertake administration and collection activities. Bluestone's collection timelines, policies and procedures are largely in line with those of other lenders in Australia after taking into account the large amount of non-conforming borrowers in their portfolio. Asset Analysis: As of 31 December 2019, 30+ day arrears were 11.9% (including hardship), higher than Fitch's 3Q19 non-conforming Dinkum RMBS Index of 5.98%, which does include a number of transactions with a lower proportion of non-conforming loans. Higher levels of arrears have been incorporated into Fitch's asset analysis. Cumulative losses have increased marginally to 0.2% of the transaction original balance, indicating that the higher level of arrears has not translated to increased losses. All losses to date have been absorbed by excess spread. Liability Analysis: Sapphire 2016-2 reverted to pro rata paydown of capital as at December 2019 as a result of the performance triggers being satisfied, having switched back to paying sequentially in August 2019 during the pro rata period due to performance triggers being breached. Class G and H notes do not amortise during the pro rata period, which improves the credit enhancement of all rated notes as the portfolio amortises. Fitch's cash flow analysis incorporates transaction-specific principal pro rata conditions, subject to tranche balance floors and a turbo that activates on the call date. This transaction benefits from a liquidity facility sized at the higher of 2.0% of the aggregate outstanding note balance and AUD400,000. This transaction also includes the accumulation of the reverse-turbo class RM notes, which have reached the AUD500,000 limit. The threshold margin was capped at 1x the transaction's weighted-average asset margin, which is lower than the maximum of 1.5x in Fitch's criteria to take into consideration the portfolio's above-market average asset margins. The notes passed all relevant Fitch stresses applied in our cash flow analysis at their respective ratings. Macroeconomic Factors: Fitch expects stable mortgage performance, supported by sustained economic growth in Australia. Fitch forecasts GDP growth of 2.3% for 2020, with stable labour markets and low interest rates to support the Outlook on the rated notes. RATING SENSITIVITIES Fitch does not expect the ratings to be affected by any foreseeable change in performance. The prospect of a downgrade is remote, given the level of subordination to all rated notes, pool performance and adequate excess spread. Fitch conducted sensitivity analysis by stressing the transaction's base-case assumptions. The results of rating-sensitivity testing, using the cash flow model, are shown below. Notes: Class A1/A2/B/C/D/E/F Ratings: AAAsf/AAAsf/AAAsf/AA+sf/A+sf/A-sf/BBBsf Rating sensitivity to increased defaults: Increase defaults by 15%: AAAsf/AAAsf/AAAsf/AAsf/Asf/BBB+sf/BB+sf Increase defaults by 30%: AAAsf/AAAsf/AAAsf/AA-sf/BBB+sf/BBBsf/BBsf Rating sensitivity to decreased recoveries: Reduce recoveries by 15%: AAAsf/AAAsf/AAAsf/AAsf/A-sf/BBB-sf/B+sf Reduce recoveries by 30%: AAAsf/AAAsf/AAAsf/A+sf/BBB-sf/Bsf/less than Bsf Rating sensitivity to multiple factors: Increase defaults by 15%, reduce recoveries by 15%: AAAsf/AAAsf/AAAsf/A+sf/BBBsf/BBsf/less than Bsf Increase defaults by 30%, reduce recoveries by 30%: AAAsf/AAAsf/AAsf/BBB+sf/Bsf/less than Bsf/less than Bsf 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 sought to receive a third-party assessment conducted on the initial asset portfolio information prior to the transaction closing, but none was made available to Fitch. Fitch has not reviewed the results of any third-party assessment of the asset portfolio as part of its ongoing monitoring. As part of its ongoing monitoring, Fitch reviewed a small targeted sample of Bluestone's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. 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 of December 2019 - Transaction reporting data provided by Bluestone as of December 2019 - Loan enforcement details provided by Bluestone as of December 2019 The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the transaction, either due to their nature or the way in which they are being managed. Sapphire XV Series 2016-2 Trust has an ESG Relevance Score of 4 for Exposure to Social Impact due to our consideration in the cash flow analysis of the mortgage lender's limited ability to reprice loans as a result of borrowers paying above-market rates, which has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors. Contacts: Surveillance Rating Analyst Marc Dinkelmann, CA Associate Director +61 2 8256 0371 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Committee Chairperson Natasha Vojvodic, Senior Director +61 2 8256 0350
Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria APAC Residential Mortgage Rating Criteria (pub. 04 Jun 2019) https://www.fitchratings.com/site/re/10076316 Fitch Ratings Interest Rate Stress Assumptions for Structured Finance and Covered Bonds (Excel) (pub. 06 Dec 2019) https://www.fitchratings.com/site/re/10104368 Global Structured Finance Rating Criteria (pub. 02 May 2019) https://www.fitchratings.com/site/re/10073280 Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 29 Jan 2020) https://www.fitchratings.com/site/re/10108544 Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 06 Dec 2019) https://www.fitchratings.com/site/re/10103887 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10107159 Solicitation Status https://www.fitchratings.com/site/pr/10107159#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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