November 20, 2017 / 4:43 AM / a year ago

Fitch Affirms Four Illawarra Series Transactions; Outlook Stable

(The following statement was released by the rating agency) SYDNEY, November 19 (Fitch) Fitch Ratings has affirmed nine classes of notes from four Illawarra series transactions. One transaction consists of notes backed by a pool of first-ranking Australian small-balance commercial full-documentation mortgage loans and three transactions consist of notes backed by a pool of first-ranking Australian residential full-documentation mortgage loans. All mortgages were originated by IMB Ltd, trading as IMB Bank, and the notes were issued by BNY Trust Company of Australia Limited in its capacity as trustee. The four transactions are: Illawarra Series 2011-1 CMBS Trust Illawarra Series 2013-1 RMBS Trust Illawarra Series IS Trust Illawarra Series 2017-1 RMBS Trust A full list of rating actions follows at the end of this ratings action commentary. KEY RATING DRIVERS The affirmations reflect Fitch's view that available credit enhancement is sufficient to support the notes' current ratings and the agency's expectations of Australia's economic conditions. Credit quality and performance of the underlying loans have remained strong since closing. As of end-September 2017, 30+ days arrears for Illawarra 2013-1, Illawarra IS and Illawarra 2017-1 were low at 0.18%, 0.10% and 0.11%, respectively which is substantially lower than the 3Q17 Fitch Dinkum RMBS Index 30+ day arrears of 1.02%. The Illawarra 2011-1 CMBS has no loans in arrears. The transactions' performance has been strong, with Illawarra 2013-1 and Illawarra 2017-1, not experiencing any defaults or losses since issuance, Illawarra IS having one loss that was covered by lenders' mortgage insurance (LMI) and Illawarra 2011-1 CMBS having one loss that was covered by excess spread. LMI for the RMBS transactions is provided by Genworth Financial Mortgage Insurance Pty Limited (Insurer Financial Strength (IFS) Rating: A+/Stable) and QBE Lenders' Mortgage Insurance Limited (IFS Rating: AA-/Stable). As per the APAC Residential Mortgage Rating Criteria, the default model was not re-run for Illawarra 2013-1 or Illawarra 2017-1, as they are conforming transactions where the outstanding ratings are 'AAAsf'; do not have revolving periods; and a review of pre-determined performance triggers on measures such as arrears, losses, LMI, payment ratios, credit enhancement build-up and draws on liquidity support facilities indicates that the transactions display stable asset performance. The asset model was run for Illawarra IS Trust. The portfolio credit model and cash-flow model were run for Illawarra 2011-1 CMBS. For Illawarra 2011-1 CMBS, Fitch applied the highest observed two-year moving average (MA) prepayment rate of 23.6% to our high prepayment assumptions across all rating stress scenarios. This was due to the highest five-year MA prepayment rate observed being marginally lower than the highest two-year MA prepayment rate since closing. The portfolios have a weighted-average loan/value ratio of between 50.6% (Illawarra 2013-1) and 63.8% (Illawarra 2017-1). Each pool is geographically concentrated in New South Wales, with a regional concentration in the Illawarra region, which has been taken into account in our analysis. Illawarra IS has a 10-year revolving period of which seven years remain. Fitch is of the view that the risks associated with the long revolving period are commensurate with the ratings because; IMB Bank has a stable product history, portfolio stratifications have not changed significantly since initial issue and the portfolio is performing in line with Fitch's expectations. RATING SENSITIVITIES Fitch does not expect the ratings to be affected by any foreseeable change in performance. The prospect of downgrade is remote, given the level of subordination to all rated notes, pool performance and adequate excess spread. The rating of the class A notes of Illawarra 2013-1, Illawarra IS and Illawarra 2017-1 are LMI independent and therefore not sensitive to downgrades of the LMI providers' ratings. The ratings of the class AB notes of Illawarra 2017-1 are LMI dependent and therefore sensitive to downgrades of the LMI providers' ratings. Impact on note ratings of increased defaults for Illawarra 2011-1 CMBS: Notes: A / B / C / D / E Rating: AAAsf / AAsf / Asf / BBBsf / BBsf Increase defaults by 25%: A+sf / Asf / BBB+sf / BBBsf / BBsf Increase defaults by 50%: Asf / A-sf / BBB+sf / BBB-sf / BBsf Impact on note ratings of decreased recoveries for Illawarra 2011-1 CMBS: Notes: A / B / C / D / E Rating: AAAsf / AAsf / Asf / BBBsf / BBsf Reduce recoveries by 25%: A+sf / Asf / BBB+sf / BBB-sf / BBsf Reduce recoveries by 50%: Asf / A-sf / BBBsf / BB+sf / BBsf Impact on note ratings of multiple factors for Illawarra 2011-1 CMBS: Notes: A / B / C / D / E Rating: AAAsf / AAsf / Asf / BBBsf / BBsf Increase defaults by 25%, reduce recoveries by 25%: Asf / A-sf / BBBsf / BBB-sf / BBsf 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. As part of its ongoing monitoring, Fitch reviewed a small targeted sample of IMB Bank'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 has applied three variations from its 'SME Balance Sheet Securitisation Rating Criteria', dated 3 March 2017. Fitch has assumed a minimum one-year default probability of 0.5% in its obligor concentration stresses, which is below the minimum one-year default probability of 1.0% assumed in the criteria. However, Fitch is comfortable with this assumption, given the agency's expectations for the next five years, quarter-end June 2017 impairment rates and insolvency statistics of commercial exposures provided by central banks and prudential bank regulators. IMB Bank-rated transactions have historically shown lower levels of defaults than experienced by commercial loan portfolios in Australia. Fitch decided not to apply a margin compression, as the transaction features a threshold rate mechanism that enables the underlying variable mortgage interest rates to be set at a level that ensures sufficient collections are available to meet the required payments for subsequent distribution dates. Fitch has set annualised senior expenses at 46bp of the collateral balance, capturing the primary and special-service fee, as the servicing process and costs for the underlying collateral are more in line with a pool of residential mortgages compared with SME loans. The criteria assumes a primary servicing fee of 15bp, special-servicing fees of 70bp and recovery incentive fees that are imbedded in Fitch's recovery assumptions for the portfolio. There was no impact to the ratings as a result of these variations to criteria. SOURCES OF INFORMATION The information below was used in the analysis: Loan-by-loan data provided by IMB Bank as at 30 September 2017 Transaction reporting data provided by IMB Bank as at 30 September 2017 Statistics - Quarterly Authorised Deposit-taking Property Exposures released by Australian Prudential Regulation Authority on 29 August 2017 The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. Full list of rating actions; note balances as at September 2017 reporting: Illawarra Series 2011-1 CMBS Trust: AUD22.8 million Class A (AU3FN0014007) notes affirmed at 'AAAsf'; Outlook Stable AUD1.8 million Class B (AU3FN0014015) notes affirmed at 'AAsf'; Outlook Stable AUD3.0 million Class C (AU3FN0014023) notes affirmed at 'Asf'; Outlook Stable AUD3.4 million Class D (AU3FN0014031) notes affirmed at 'BBBsf'; Outlook Stable AUD0.7 million Class E (AU3FN0014049) notes affirmed at 'BBsf'; Outlook Stable Illawarra Series 2013-1 RMBS Trust: AUD71.2 million Class A (AU3FN0018784) notes affirmed at 'AAAsf'; Outlook Stable Illawarra Series IS Trust: AUD441.0 million Class A (AU3FN0022927) notes affirmed at 'AAAsf'; Outlook Stable Illawarra Series 2017-1 RMBS Trust: AUD254.0 million Class A (AU3FN0035879) notes affirmed at 'AAAsf'; Outlook Stable AUD12.0 million Class AB (AU3FN0035887) notes affirmed at 'AAAsf'; Outlook Stable Contacts: Lead Surveillance Analyst Steve Jun Analyst +61 2 8256 0364 Fitch Australia Pty Ltd Level 15, 77 King St, Sydney, NSW 2000 Australia Committee Chairperson Natasha Vojvodic Senior Director + 61 2 8256 0350 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria APAC Residential Mortgage Rating Criteria (pub. 14 Jul 2017) here Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 17 Feb 2017) here Global Structured Finance Rating Criteria (pub. 03 May 2017) here RMBS Lenders’ Mortgage Insurance Rating Criteria (pub. 09 Jun 2017) here SME Balance Sheet Securitisation Rating Criteria (pub. 03 Mar 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 23 May 2017) here Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 17 Feb 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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