(The following statement was released by the rating agency) Fitch Ratings-Sydney-February 13: Fitch Ratings has upgraded five and affirmed two classes of notes from Sapphire XV Series 2016-2 Trust. The transaction consists of notes backed by pools 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 full list of rating actions is shown below (note balances as at the January 2019 payment date): AUD41.9 million Class A1 notes affirmed at 'AAAsf'; Outlook Stable AUD6.6 million Class A2 notes affirmed at 'AAAsf'; Outlook Stable AUD6.8 million Class B notes upgraded to 'AAAsf', from 'AA'; Outlook Stable AUD9.1 million Class C notes upgraded to 'AA-sf', from 'Asf'; Outlook Stable AUD7.0 million Class D notes upgraded to 'BBB+sf', from 'BBBsf'; Outlook Stable AUD2.6 million Class E notes upgraded to 'BBB-sf', from 'BBsf'; Outlook Stable AUD2.6 million Class F notes upgraded to 'BBsf', from 'Bsf'; Outlook Stable 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 the operations of the originator and servicer were comparable with market standards and that there were no material changes that may affect Bluestone's ongoing ability to undertake administration and collection activities. Bluestone's collection timelines, policies, procedures and origination practices are largely in line with those of other lenders in Australia after taking into account the majority non-conforming nature of the borrower, as evident from the transaction's historical performance. Asset Analysis: Improved asset characteristics, including a lower weighted-average (WA) unindexed loan/value ratio, and changes to the treatment of Bluestone's Crystal Blue loan product drove the 'AAAsf' WA foreclosure frequency fall to 33.6%, from 35.6%. The 'AAAsf' WA recovery rate (WARR) improved to 59.8%, from 59.2%. Fitch has reviewed its treatment of Bluestone's Crystal Blue loan product as a conforming product due to its comparable asset performance and underwriting policies with similar products by other conforming issuers. This results in the underlying pool consisting of 88.0% non-conforming loans and 12.0% conforming loans. As at end-2018, 30+ day arrears of 15.37% tracked above Fitch's 3Q18 non-conforming Dinkum RMBS index of 5.04%, which includes many transactions with a lower proportion of non-conforming loans. The transactions' arrears ranged between 10.92% and 16.08% over the past year, which was comparable with the range of Sapphire XIV Series 2016-1 Trust and Sapphire XVI Series 2017-1 Trust of between 9.84% and 15.02%. The higher arrears have been incorporated in our asset analysis and have not translated into an equivalent level of realised losses. Cumulative realised losses were 0.11% of the original portfolio balance. All losses have been covered by excess spread and there are no outstanding charge-offs. Fitch considers the level of obligor concentration in the transactions' mortgage portfolios to be a key factor in assessing tail risk. Concentration and tail risk are mitigated by the subordination provided by the non-amortising class G and H notes and by documented tranche balance floors. Liability Analysis: Sapphire 2016-2 is amortising pro rata, but has switched to paying sequentially during the pro rata period due to performance triggers being breached, leading to additional build-up of credit enhancement (CE). Class G and H notes do not amortise during the pro rata period, which improves the CE 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 1.0x its WA 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 margin. The notes passed all relevant Fitch stresses applied in our cash flow analysis at their respective ratings. Fitch conducted additional sensitivity analysis by stressing the transactions' base-case assumptions. The ratings of the class C, D, E and F notes were constrained given the sensitivity to decreases in WARR. Macroeconomic Factors: Fitch expects steady mortgage performance, supported by sustained economic growth in Australia that is driven by stable forecast GDP growth of 2.7% and one 25bp cash rate increase in 2019. 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 transactions' 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/BBB+sf/BBB-sf/BBsf Rating sensitivity to increased defaults: Increase defaults by 15%: AAAsf/AAAsf/AAAsf/AA-sf/BBB+sf/BBB-sf/BBsf Increase defaults by 30%: AAAsf/AAAsf/AA+sf/A+sf/BBBsf/BB+sf/BB-sf Rating sensitivity to decreased recoveries: Reduce recoveries by 15%: AAAsf/AAAsf/AA+sf/A+sf/BBB-sf/BB-sf/less than Bsf Reduce recoveries by 30%: AAAsf/AAAsf/AAsf/BBB+sf/Bsf/ less than Bsf/less than Bsf Rating sensitivity to multiple factors: Increase defaults by 15%, reduce recoveries by 15%: AAAsf/AAAsf/AAsf/Asf/BBsf/Bsf/less than Bsf Increase defaults by 30%, reduce recoveries by 30%: AAsf/AAsf/Asf/BB+sf/less than Bsf/less than Bsf/less than Bsf The class C, D, E and F notes may be upgraded on sustained increases in CE and ongoing stable asset performance. 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 Group'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 at December 2018 Transaction reporting data provided by Bluestone as at December 2018 Loan enforcement details provided by Bluestone as at December 2018
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 Eugene Wang Analyst +61 2 8256 0373 Fitch Australia Pty Ltd Level 15, 77 King St, 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. 11 Jan 2019) https://www.fitchratings.com/site/re/10057538 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. 01 Aug 2018) https://www.fitchratings.com/site/re/10039504 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/10062170 Solicitation Status https://www.fitchratings.com/site/pr/10062170#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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