November 22, 2013 / 7:02 AM / 6 years ago

RPT-Fitch affirms 5 tranches of 3 Pepper non-conforming transactions

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Nov 22 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed the ratings of Pepper Residential Securities Trust No. 8 (PRS8), Pepper Residential Securities Trust No. 9 (PRS9) and Pepper Residential Securities Trust No. 10 (PRS10). The transactions are securitisations of Australian non-conforming residential mortgages originated by Pepper Australia Pty Limited (Pepper). The rating actions are as follows:

PRS8:

AUD 54.3m Class A-3 (ISIN AU3FN0012415) affirmed at ‘AAAsf’; Outlook Stable.

PRS9:

AUD110.8m Class A-2 (ISIN AU3FN0015400) affirmed at ‘AAAsf’; Outlook Stable; and

AUD38.4m Class A-3 (ISIN AU3FN0015418) affirmed at ‘AAAsf’; Outlook Stable.

PRS10:

AUD198.8m Class A-1 (ISIN AU3FN0018651) affirmed at ‘AAAsf’; Outlook Stable; and

AUD31.5m Class A-2 (ISIN AU3FN0018669) affirmed at ‘AAAsf’; Outlook Stable.

KEY RATING DRIVERS

The affirmations reflect Fitch’s view that, in line with its expectations of Australia’s economic conditions, available credit enhancement is sufficient to support the notes’ current ratings. The ratings also reflect Pepper’s mortgage underwriting and servicing capabilities, the quality of the collateral, and performance of the underlying loans, which have remained in line with the agency’s expectations.

The 30+ days arrears have remained below Fitch’s Dinkum non-conforming low-doc index of 10.07%. As at 30 September 2013, 30+ days arrears were 7.27% for PRS8, 6.24% for PRS9 and 2.65% for PRS 10. Recorded losses were 0.77%, 0.2% and 0.01% of the original pool balances for PRS8, PRS9 and PRS10, respectively. Losses in PRS9 and PRS10 were fully covered by excess spread, while PRS8 drew from the excess reserve account in April 2013 to cover losses for the month of AUD 556,977.

Of the mortgages in the PRS8, PRS9 and PRS10 portfolios, 70%, 56% and 41% were reduced documentation loans respectively, with investment loans making up 10%-14% of each pool.

The weighted average seasoning of the portfolios varies, with PRS8 and PRS9 relatively well seasoned at 76 months and 60 months respectively, compared with 19 months for PRS10. As a result, the Fitch-calculated weighted average loan to value ratio reduced to 62.7% after indexation from 69.5% before indexation for PRS8, to 65.4% from 70% for PRS9, and to 70.5% from 71.3% for the less seasoned PRS10.

The transactions are currently paying down sequentially. Pro-rata paydown has not occurred in PRS8 due to losses being greater than what the step-down criteria permit, but may begin from December 2013 provided losses remain below 0.85% of the original pool and 90+ days arrears remain below 6%. Pro-rata paydown is expected to commence from May 2014 and April 2015 for PRS9 and PRS10, respectively.

The PRS8 transaction includes the added feature of an excess reserve account, which traps a certain percentage of excess income to cover potential losses. The PRS9 and PRS10 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, while a retention ledger is 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

An unexpected increase in delinquencies, defaults and losses would be necessary before any negative rating action would be considered. The prospects for downgrades are remote given the levels of subordination available.

Fitch’s key rating drivers and rating sensitivities are further discussed in the new issue reports entitled “Pepper Residential Securities Trust No. 8”, “Pepper Residential Securities Trust No. 9”, and “Pepper Residential Securities Trust No. 10”, dated 23 December 2010, 10 May 2012 and 18 April 2013 respectively, available on www.fitchratings.com. Included as appendices to the PRS9 and PRS10 reports are descriptions of the representations, warranties, and enforcement mechanisms.

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