Fitch Upgrades Two Classes, Affirms 11 from Two Five Star Transactions; Removes RWN

(The following statement was released by the rating agency) Fitch Ratings-Sydney-23 October 2020: Fitch Ratings has upgraded two and affirmed another 11 classes of notes from two Five Star transactions. The transactions consist of notes backed by pools of first-ranking Australian residential full-documentation mortgage loans. All mortgages were originated by Victorian Mortgage Group (VMG) and the notes were issued by Perpetual Trustee Company Limited in its capacity as trustee of the series. The upgrades to classes B and C of Five Star 2019-1 Trust were due to the build-up of credit enhancement. At the same time, Fitch has removed the Rating Watch Negative (RWN) from Five Star 2019-1's E and F notes due to the portfolio's resilience amid the coronavirus pandemic. The social and market disruption caused by the pandemic and related containment measures did not negatively affect the ratings because there was sufficient credit enhancement to cover our expectation of higher defaults and reduced recoveries. In addition, we regard liquidity protection as sufficient to support the current ratings. The rating sensitivity for more severe scenarios than we expect is provided in the Rating Sensitivities section below. The Stable Outlook reflects liquidity support and the notes' ability to withstand higher defaults and lower recoveries stemming from the pandemic. Five Star 2017-1 Trust ----A1 AU3FN0038121; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----A2 AU3FN0038139; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----B AU3FN0038147; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----C AU3FN0038154; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----D AU3FN0038162; Long Term Rating; Affirmed; AA-sf; Rating Outlook Stable ----E AU3FN0038170; Long Term Rating; Affirmed; AA-sf; Rating Outlook Stable Five Star 2019-1 Trust ----A1 AU3FN0052254; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----A2 AU3FN0052262; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----B AU3FN0052270; Long Term Rating; Upgrade; AA+sf; Rating Outlook Stable ----C AU3FN0052288; Long Term Rating; Upgrade; AA-sf; Rating Outlook Stable ----D AU3FN0052296; Long Term Rating; Affirmed; BBB+sf; Rating Outlook Stable ----E AU3FN0052304; Long Term Rating; Affirmed; BBB-sf; Rating Outlook Stable ----F AU3FN0052312; Long Term Rating; Affirmed; BB+sf; Rating Outlook Stable KEY RATING DRIVERS Pandemic-Related Economic Shock: Fitch has made assumptions about the spread of the coronavirus and the economic impact of containment measures. In a base-case (most likely) scenario, Fitch assumes economic activity will jump in 3Q20, to be followed by a slower recovery trajectory from 4Q20 amid high unemployment and a further pullback in private-sector investment. In a downside (sensitivity) scenario, Fitch assesses a more severe and prolonged period of stress, with recovery to pre-crisis GDP levels delayed until around the middle of the decade. Pandemic-Related Impact: Measures put in place to limit the spread of the virus are affecting Australia's economy, with many businesses continuing to experience a decline in income. We expect these measures to affect the performance of mortgages, but there should be no rating impact on the notes, as the ratings can absorb Fitch's base-case scenario of the pandemic. See the following links for Fitch's pandemic-related credit views and analytical approach: - "Global Economic Outlook: September 2020", published on 7 September 2020, available at www.fitchratings.com/site/re/10135033; - "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update", published on 8 September 2020, available at www.fitchratings.com/site/re/10135320; and - "Global SF Rating Assumptions Updated to Reflect Coronavirus Risk", published on 3 April 2020, available at www.fitchratings.com/site/pr/10117224. In addition, analytical notes relevant for Australian and New Zealand RMBS transactions are discussed in the following commentaries: - "Fitch Ratings' Approach to Addressing Coronavirus-Related Risks for Australian, NZ RMBS", published on 5 May 2020, available at www.fitchratings.com/site/pr/10120792; and - "Fitch Ratings Updates Australia, NZ RMBS Criteria Assumptions on Coronavirus Effects", published on 28 July 2020, available at www.fitchratings.com/site/pr/10130287. Liquidity Risk from Payment Holidays: We have reviewed the ability of the transactions to survive a significant proportion of borrowers taking a payment holiday. Both transactions benefit from liquidity facilities sized at 2.0% of the note balances. Both transactions can withstand 50% of the portfolio being granted a payment holiday before needing to draw on principal and the liquidity facility, which is significantly above the proportion of receivables under covid-hardship arrangements which were 15.7% for Five Star 2017-1 and 12.0% for Five Star 2019-1 at end-September 2020. Operational Risk: VMG is a lender with headquarters in Melbourne, Victoria and a history dating back to 1946. Fitch undertook an onsite operational review and found that the operations of the servicer were comparable with market standards and that there were no material changes that may affect VMG's ongoing ability to undertake administration and collection activities. VMG's collection timelines, policies and procedures are in line with other conforming and non-conforming lenders in Australia. Collection and servicing activities have not been disrupted by the pandemic, as staff are able to work remotely and have access to the office, if needed. Asset Analysis: Five Star 2019-1's 'AAAsf' weighted-average foreclosure frequency (WAFF) of 17.0% is driven by the weighted-average (WA) unindexed loan/value ratio (LVR) of 65.8% and, under Fitch's methodology, investment loans of 47.6%. The 'AAAsf' weighted-average recovery rate (WARR) of 50.2% is driven by the portfolio's WA indexed scheduled LVR of 66.3% and the portfolio 'AAAsf' WA market value decline of 59.9%. Five Star 2017-1 Trust's 'AAAsf' WAFF of 15.4% is driven by the WA unindexed LVR of 59.0% and, under Fitch's methodology, investment loans of 25.5%. The 'AAAsf' WARR of 57.6% is driven by the portfolio's WA indexed scheduled LVR of 54.9% and the portfolio 'AAAsf' WA market value decline of 61.3%. The Five Star 2017-1 and Five Star 2019-1 transactions had 30+ day arrears at 0.0% and 1.7%, respectively, as of end-September, lower than Fitch's 2Q20 Non-Conforming Index of 3.21%. Cumulative losses were AUD127,700 for Five Star 2017-1 and were covered by excess spread. Five Star 2019-1 has had no losses. Liability Analysis: Five Star 2017-1's class A1, A2, B, C, D and E notes benefit from current credit enhancement of 43.3%, 31.5%, 23.3%, 16.2%, 10.1% and 6.8%, respectively. The class A1, A2, B and C notes can withstand all relevant Fitch 'AAAsf' stresses applied in our cash-flow analysis, and the class D and E notes can withstand all 'AA-sf' stresses. Further upgrades to the class D and E notes are constrained by large loan and tail-risk concentration. Five Star 2019-1's class A1, A2, B, C, D, E and F notes benefit from current credit enhancement of 38.9%, 13.0%, 9.6%, 6.5%, 4.6%, 3.3% and 2.1%, respectively. The class A1, A2, B, C, D, E and F notes can withstand all relevant Fitch stresses applied in our cash-flow modelling. Further upgrades to the class D notes are constrained by tail-risk concentration. Macroeconomic Factors: Fitch expects loan performance to deteriorate in the near term, but to continue to support the Stable Outlook on the rated notes. Fitch forecasts Australia's GDP to contract by 3.6% in 2020, with the unemployment rate at 7.1%. This is to be partially offset by a low Official Cash Rate of 0.25% and the application of both central bank and government stimulus measures. Fitch expects GDP growth to bounce back to 3.9% in 2021, with the unemployment rate falling to 6.7%. The Stable Outlook on the notes reflects their liquidity support and ability to withstand the sensitivity to higher defaults stemming from the pandemic. Five Star 2017-1 and Five Star 2019-1 have an ESG Relevance Score of '5' for Transaction and Collateral Structure due to tail-risk concentration, which has a negative effect on the credit profile, and is highly relevant to the ratings, resulting in a change to the ratings. 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 and are likely to result in a decline in credit enhancement and remaining loss-coverage levels available to the notes. Decreased credit enhancement may make certain note ratings susceptible to negative rating action, depending on the extent of the coverage decline. Hence, Fitch conducts sensitivity analysis of the ratings by stressing the transaction's initial base-case assumptions. Five Star 2017-1: Notes class: A1/ A2 / B / C / D / E Current Rating: AAAsf / AAAsf / AAAsf / AAAsf / AA-sf / AA-sf Downside Sensitivity: Expected impact on note ratings of increased defaults: Increase defaults by 15%: AAAsf / AAAsf / AAAsf / AAAsf / AA-sf / AA-sf Increase defaults by 30%: AAAsf / AAAsf / AAAsf / AAAsf / AA-sf / A+sf Expected impact on note ratings of decreased recoveries: Reduce recoveries by 15%: AAAsf / AAAsf / AAAsf / AAAsf / AA-sf / A+sf Reduce recoveries by 30%: AAAsf / AAAsf / AAAsf / AAAsf / AA-sf / BBB+sf Expected impact on note ratings of multiple factors: Increase defaults by 15% and reduce recoveries by 15%: AAAsf / AAAsf / AAAsf / AAAsf / AA-sf / A-sf Increase defaults by 30% and reduce recoveries by 30%: AAAsf / AAAsf / AAAsf / AA+sf / A-sf / BBsf Up Sensitivity: Decrease defaults by 15% and increase recoveries by 15%: AAAsf / AAAsf / AAAsf / AAAsf / AA-sf / AA-sf The ratings for class D and E are constrained due to large loan and tail-risk concentration. Coronavirus Downside Scenario Sensitivity: Under Fitch's downside scenario, re-emergence of infections in major economies prolongs the health crisis and confidence shock, prompts extensions or renewals of lockdown measures and prevents a financial-market recovery. Fitch tested this scenario by increasing defaults by 15% and decreasing recoveries by 15%. Expected coronavirus downside impact on note ratings of multiple factors: AAAsf / AAAsf / AAAsf / AAAsf / AA-sf / A-sf Factors that could, individually or collectively, lead to positive rating action/upgrade: The class A1, A2, B and C notes' ratings are at 'AAAsf', which is the highest level on Fitch's scale while the class D and E are constrained due to large loan and tail-risk concentration. The ratings cannot be upgraded. Factors that could, individually or collectively, lead to negative rating action/downgrade: A longer pandemic than Fitch expects that leads to deterioration in macroeconomic fundamentals and consumers' financial position in Australia beyond Fitch's baseline scenario. Available credit enhancement cannot compensate for higher credit losses and cash flow stresses, all else being equal. Fitch conducted sensitivity analysis by increasing gross default levels and decreasing recovery rates over the life of the transactions. Five Star 2019-1: Notes class: A1/ A2 / B / C / D / E / F Current Rating: AAAsf / AAAsf / AA+sf / AA-sf / BBB+sf / BBB-sf / BB+sf Downside Sensitivity: Expected impact on note ratings of increased defaults: Increase defaults by 15%: AAAsf / AAAsf / AAsf / Asf / BBB+sf / BB+sf / BBsf Increase defaults by 30%: AAAsf / AAAsf / AAsf / A-sf / BBBsf / BBsf / BB-sf Expected impact on note ratings of decreased recoveries: Reduce recoveries by 15%: AAAsf / AAAsf / AAsf / A-sf / BBB-sf / BB-sf / B+sf Reduce recoveries by 30%: AAAsf / AAAsf / AA-sf / BBBsf / BB-sf / Expected impact on note ratings of multiple factors: Increase defaults by 15% and reduce recoveries by 15%: AAAsf / AAAsf / AA-sf / BBB+sf / BB-sf / B+sf / Bsf Increase defaults by 30% and reduce recoveries by 30%: AAAsf / AAsf / A-sf / BBsf / Upgrade Sensitivity: Decrease defaults by 15% and increase recoveries by 15%: AAAsf / AAAsf / AAAsf / AA+sf / A-sf / A-sf / A-sf The ratings for class D and E are constrained from further upgrades due to tail-risk concentration. Coronavirus Downside Scenario Sensitivity: Under Fitch's downside scenario, re-emergence of infections in major economies prolongs the health crisis and confidence shock, prompts extensions or renewals of lockdown measures and prevents a financial-market recovery. Fitch tested this scenario by increasing defaults by 15% and decreasing recoveries by 15%. Expected coronavirus downside impact on note ratings of multiple factors: AAAsf / AAAsf / AA-sf / BBB+sf / BB-sf / B+sf / Bsf Factors that could, individually or collectively, lead to positive rating action/upgrade: Increased credit enhancement ratios that are able to fully compensate the credit losses and cash flow stresses commensurate with higher rating scenarios, all else being equal. The class A1 and A2 notes' ratings are at 'AAAsf', which is the highest level on Fitch's scale. The ratings cannot be upgraded. Factors that could, individually or collectively, lead to negative rating action/downgrade: A longer pandemic than Fitch expects that leads to deterioration in macroeconomic fundamentals and consumers' financial position in Australia beyond Fitch's baseline scenario. Available credit enhancement cannot compensate for higher credit losses and cash flow stresses, all else being equal. Fitch conducted sensitivity analysis by increasing gross default levels and decreasing recovery rates over the life of the transactions. Best/Worst Case Rating Scenario International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. 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 portfolios as part of its ongoing monitoring. As part of its ongoing monitoring, Fitch reviewed a small targeted sample of VMG'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 portfolios. Overall, Fitch's assessment of the information on the asset pools relied upon for the agency's rating analysis, according to its applicable rating methodologies, indicates that it is adequately reliable. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. ESG Considerations Five Star 2017-1 Trust: Transaction & Collateral Structure: '5' Five Star 2019-1 Trust: Transaction & Collateral Structure: '5' Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Contacts: Surveillance Rating Analyst Sambit Agasti, Associate Director +61 2 8256 0337 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 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. 27 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10123329) 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. 17 Jun 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10126475) 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) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Multi-Asset Cash Flow Model, v2.9.0 (1 (https://www.fitchratings.com/site/re/974535)) ResiGlobal Model: Australia, v1.59.4 (1 (https://www.fitchratings.com/site/re/974535)) Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10140426) Solicitation Status (https://www.fitchratings.com/site/pr/10140426#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10140426#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10140426#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS (HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS). IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT (https://www.fitchratings.com/rating-definitions-document) DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY (https://www.fitchratings.com/site/regulatory). 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 RATINGS WEBSITE. Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.