Fitch Upgrades Five SMART ABS Series Tranches, Affirms Seven; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-October 29: Fitch Ratings has upgraded five and affirmed seven classes of asset-backed floating-rate notes from six SMART ABS Series transactions. The transactions are securitisations of Australian automotive, equipment and consumer-finance receivables originated by Macquarie Leasing Pty Limited. The transactions are: SMART ABS Series 2014-4 Trust SMART ABS Series 2015-1US Trust SMART ABS Series 2015-2 Trust SMART ABS Series 2015-3US Trust SMART ABS Series 2015-4E Trust SMART O Warehouse Trust A full list of rating actions follows at the end of this ratings action commentary. KEY RATING DRIVERS Obligor Default Risk: Obligor default and recovery rates are a key assumption in Fitch's quantitative analysis. The performance of the underlying assets has been better than our base-case expectations and below the initially modelled scenarios, with minimal realised gross or net losses. SMART O Warehouse had the lowest level of 30+ day arrears at end-August 2018 at 0.7%, while SMART 2014-4 and SMART 2015-2 had the highest levels, both at 1.8%. Arrears across all trusts are in line with the 30+ day arrears of 1.7% in Fitch's Australian 2Q18 Dinkum ABS Index. Cumulative gross and net losses were also minimal across all trusts. Gross losses ranged between 0.4% for SMART O Warehouse and 2.0% for SMART 2015-2 at end-August 2018. Fitch applied revised base-case gross loss and recovery expectations for the SMART Series to reflect the strong historical performance and fine-tuned its default multiples setting to a more granular approach that better represents the distinct historical performance of each asset type. In the cash flow analysis of the transactions, Fitch applied revised expectations based on the defaults expected to occur over the remaining term to maturity of each transaction. Base case gross default expectations are as follows: SMART 2014-4: 1.00% SMART 2015-1US: 1.00% SMART 2015-2: 1.00% SMART 2015-3US: 1.05% SMART 2015-4E: 1.25% Recovery base-cases were also revised across the SMART Series, to 45%, from 40%, for non-novated cars and to 25%, from 30%, for consumer receivables. Recovery assumptions for the remaining asset classes were unchanged. AAAsf default multiples were introduced at an asset level: Novated leases: 7.20x Non-novated leases: 6.00x Consumer: 5.75x Trucks: 5.50x Equipment: 5.75x The base-case expectation for prepayments was also revised to 15%, from 10%, to reflect increased prepayment rates observed in more seasoned transactions. Fitch expects asset performance to remain stable, supported by sustained economic growth in Australia that is indicated in our stable forecast GDP growth of 2.8% in 2019 and an expected decrease in already low unemployment levels. Cash Flow Dynamics: The transactions are currently paying pro rata with a switch to sequential pay-down only after the call date, with the exception of SMART O Warehouse, which is still within its revolving period that we expect to be renewed in December 2018. The SMART O Warehouse was not modelled as there is no potential for an upgrade to the already outstanding 'AAAsf' notes from the revised base-case assumptions. Fitch completed full cash flow modelling for the remaining transactions, with full and timely payment of principal and interest made to the class A and B notes in all 'AAAsf' cash flow modelled scenarios. Structural Risk: Structural risk was evaluated in the initial transaction analysis through the review of transaction documentation, legal opinion and structural features. There have been no changes to any transaction since closing. Servicer, Operational Risk: All assets were originated by Macquarie Leasing, which demonstrates adequate capability as originator, underwriter and servicer, as evidenced by the historical delinquency and loss performance of existing securitised trusts. Macquarie Leasing is a wholly owned subsidiary of Macquarie Bank Limited (A/Stable/F1). Fitch undertook an onsite operational review and found that the operations of the originator and servicer were comparable with other auto and equipment lenders. Residual Value Risk: There are no residual value positions in the portfolio. There is refinance risk in the transactions, as in each trust over half of the remaining outstanding contract balances have balloon contracts. Refinance risk on loans with a balloon payment has been considered in the revised default multiples. RATING SENSITIVITIES Unanticipated increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than Fitch's base case, which is likely to result in a decline in credit enhancement and remaining loss-coverage levels available to the notes. Fitch has evaluated the sensitivity of the ratings assigned to the trusts to increased gross default levels and decreased recovery rates over the life of the transactions based on the most stressed portfolio modelled. SMART 2014-4 Impact upon the note rating of increased defaults: Current rating: AAAsf/AAAsf Increase defaults by 10%: AAAsf/AAAsf Increase defaults by 25%: AAAsf/AAAsf Increase defaults by 50%: AAAsf/AAAsf Impact upon the note rating of decreased recoveries: Current rating: AAAsf/AAAsf Reduce recoveries by 10%: AAAsf/AAAsf Reduce recoveries by 25%: AAAsf/AAAsf Reduce recoveries by 50%: AAAsf/AAAsf Impact upon the note rating of multiple factors: Current rating: AAAsf/AAAsf Increase defaults by 10%; reduce recoveries by 10%: AAAsf/AAAsf Increase defaults by 25%; reduce recoveries by 25%: AAAsf/AAAsf Increase defaults by 50%; reduce recoveries by 50%: AAAsf/ AAAsf SMART 2015-1US Impact upon the note rating of increased defaults: Current rating: AAAsf/AAAsf Increase defaults by 10%: AAAsf/AAAsf Increase defaults by 25%: AAAsf/AAAsf Increase defaults by 50%: AAAsf/AAAsf Impact upon the note rating of decreased recoveries: Current rating: AAAsf/AAAsf Reduce recoveries by 10%: AAAsf/AAAsf Reduce recoveries by 25%: AAAsf/AAAsf Reduce recoveries by 50%: AAAsf/AAAsf Impact upon the note rating of multiple factors: Current rating: AAAsf/AAAsf Increase defaults by 10%; reduce recoveries by 10%: AAAsf/AAAsf Increase defaults by 25%; reduce recoveries by 25%: AAAsf/AAAsf Increase defaults by 50%; reduce recoveries by 50%: AAAsf/ AAAsf SMART 2015-2 Impact upon the note rating of increased defaults: Current rating: AAAsf/AAAsf Increase defaults by 10%: AAAsf/AAAsf Increase defaults by 25%: AAAsf/AAAsf Increase defaults by 50%: AAAsf/AAAsf Impact upon the note rating of decreased recoveries: Current rating: AAAsf/AAAsf Reduce recoveries by 10%: AAAsf/AAAsf Reduce recoveries by 25%: AAAsf/AAAsf Reduce recoveries by 50%: AAAsf/AAAsf Impact upon the note rating of multiple factors: Current rating: AAAsf/AAAsf Increase defaults by 10%; reduce recoveries by 10%: AAAsf/AAAsf Increase defaults by 25%; reduce recoveries by 25%: AAAsf/AAAsf Increase defaults by 50%; reduce recoveries by 50%: AAAsf/ AAAsf SMART 2015-3US Impact upon the note rating of increased defaults: Current rating: AAAsf/AAAsf Increase defaults by 10%: AAAsf/AAAsf Increase defaults by 25%: AAAsf/AAAsf Increase defaults by 50%: AAAsf/AA+sf Impact upon the note rating of decreased recoveries: Current rating: AAAsf/AAAsf Reduce recoveries by 10%: AAAsf/AAAsf Reduce recoveries by 25%: AAAsf/AAAsf Reduce recoveries by 50%: AAAsf/AAAsf Impact upon the note rating of multiple factors: Current rating: AAAsf/AAAsf Increase defaults by 10%; reduce recoveries by 10%: AAAsf/AAAsf Increase defaults by 25%; reduce recoveries by 25%: AAAsf/AA+sf Increase defaults by 50%; reduce recoveries by 50%: AAAsf/ AA-sf SMART 2015-4E Impact upon the note rating of increased defaults: Current rating: AAAsf/AAAsf/AAAsf Increase defaults by 10%: AAAsf/AAAsf/AAAsf Increase defaults by 25%: AAAsf/AAAsf/AA+sf Increase defaults by 50%: AA+sf/AA+sf/AA-sf Impact upon the note rating of decreased recoveries: Current rating: AAAsf/AAAsf/AAAsf Reduce recoveries by 10%: AAAsf/AAAsf/AAAsf Reduce recoveries by 25%: AAAsf/AAAsf/AAAsf Reduce recoveries by 50%: AAAsf/AAAsf/AA+sf Impact upon the note rating of multiple factors: Current rating: AAAsf/AAAsf Increase defaults by 10%; reduce recoveries by 10%: AAAsf/AAAsf/AA+sf Increase defaults by 25%; reduce recoveries by 25%: AAAsf/AAAsf/AA+sf Increase defaults by 50%; reduce recoveries by 50%: AAsf/ AAsf/Asf 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 as part of its ongoing monitoring. Prior to the transactions closing, Fitch did not review the results of a third-party assessment conducted on the asset portfolio information. As part of its ongoing monitoring, Fitch reviewed a small targeted sample of Macquarie Leasing'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. VARIATIONS FROM CRITERIA Fitch's Consumer ABS Rating Criteria limits recovery stress haircuts to 60% at the 'AAAsf' rating level. Macquarie Leasing's observed equipment recoveries have been low and we expected them to be lower in a high-stress environment. We have applied a recovery haircut of 100% to equipment leases in the rating analysis. This is consistent with previous analysis of the SMART series transactions and there is no impact on the rating. SOURCES OF INFORMATION The information below was used in the analysis: Transaction reporting data provided by Macquarie Leasing as at end-August 2018 Loan-by-loan data provided by Macquarie Leasing as at end-August 2018 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: SMART ABS Series 2014-4 Trust AUD113.8 million Class A notes affirmed at 'AAAsf'; Outlook Stable AUD5.0 million Class B notes upgraded to 'AAAsf' from 'AAsf'; Outlook Stable SMART ABS Series 2015-1US Trust AUD104.6 million Class A-4 notes affirmed at 'AAAsf'; Outlook Stable AUD3.7 million Class B notes upgraded to 'AAAsf' from 'AAsf'; Outlook Stable SMART ABS Series 2015-2 Trust AUD139.8 million Class A notes affirmed at 'AAAsf'; Outlook Stable AUD6.2 million Class B notes upgraded to 'AAAsf' from 'AAsf'; Outlook Stable SMART ABS Series 2015-3US Trust AUD165.7 million Class A-4 notes affirmed at 'AAAsf'; Outlook Stable AUD5.9 million Class B notes upgraded to 'AAAsf' from 'AAsf'; Outlook Stable SMART ABS Series 2015-4E Trust AUD151.6 million Class A-A notes affirmed at 'AAAsf'; Outlook Stable AUD31.6 million Class A-E notes affirmed at 'AAAsf'; Outlook Stable AUD8.8 million Class B notes upgraded to 'AAAsf' from 'AAsf'; Outlook Stable SMART O Warehouse Trust AUD500 million Class A notes affirmed at 'AAAsf'; Outlook Stable Contacts: Lead Surveillance Analyst Marija Buzevska Analyst +612 8256 0340 Fitch Australia Pty Ltd Level 15, 77 King Street Sydney NSW 2000 Committee Chairperson Natasha Vojvodic Senior Director +612 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@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Consumer ABS Rating Criteria (pub. 11 Dec 2017) https://www.fitchratings.com/site/re/907089 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 Counterparty Rating Criteria: Derivative Addendum (pub. 01 Aug 2018) https://www.fitchratings.com/site/re/10039505 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/10050237 Solicitation Status https://www.fitchratings.com/site/pr/10050237#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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