November 12, 2017 / 11:01 PM / a year ago

Fitch Assigns Expected Ratings to Medallion Trust Series 2017-2

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Medallion Trust Series 2017-2 here SYDNEY, November 12 (Fitch) Fitch Ratings has assigned expected ratings to Medallion Trust Series 2017-2's mortgage-backed floating-rate notes. The issuance consists of notes backed by Australian residential mortgages originated by Commonwealth Bank of Australia Limited (CBA). The ratings are as follows: AUD690.00 million Class A1 notes: 'AAA(EXP)sf'; Outlook Stable AUD30.00 million Class A2 notes: 'AAA(EXP)sf'; Outlook Stable AUD15.22 million Class B notes: 'NR(EXP)sf' AUD7.13 million Class C notes: 'NR(EXP)sf' AUD2.62 million Class D notes: 'NR(EXP)sf' AUD2.63 million Class E notes: 'NR(EXP)sf' AUD2.40 million Class F notes: 'NR(EXP)sf' The notes will be issued by Perpetual Trustee Company Limited in its capacity as trustee of Medallion Trust Series 2017-2. The total collateral pool consisted of 2,683 obligors, totalling AUD750 million, at the 28 August 2017 cut-off date. The loan pool will be finalised prior to the closing date and adjusted to match the final liability balance. KEY RATING DRIVERS Sufficient Credit Support: The class A1 and A2 notes have sufficient credit enhancement of 8.0% and 4.0%, respectively, provided by the subordinated notes and are independent of any credit provided by lenders' mortgage insurance (LMI). Pool Characteristics: The portfolio's weighted-average (WA) seasoning is 37 months, with a WA unindexed loan/value ratio (LVR) of 59.7% and WA indexed LVR of 56.1%. The average obligor current loan size is AUD279,536; investment loans represent 26.4% of the pool by balance and interest-only loans represent 19.6%. LMI is present on 20.3% of the pool. Sequential/Pro Rata Paydown: Interest is paid sequentially after expenses towards all note classes senior to loss reimbursement. Interest on class B, C, D, E and F notes is subordinated if the stated amount of the note is, or ever has been, reduced to zero. Principal is allocated pro rata towards class A1, A2, B, C, D, E and F notes if step-down requirements are met. Sufficient Liquidity Support: Liquidity support is provided via excess spread, principal draws and a liquidity facility initially sized at 0.75% of aggregate note balances as at closing, with a facility floor of 0.075%. The liquidity facility will amortise annually in line with the reduction of the outstanding pool balance, subject to the floor. Strong Record: CBA has experience in mortgage lending and servicing. It originates loans through its nationwide branch network, mobile sales force, online and telephone sales operations and third-party mortgage brokers. Arrears of securitised Medallion transactions have generally tracked in-line or below Fitch's Dinkum Index for prime RMBS. EXPECTED 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. Analysis of the foreclosure scenarios found that the expected ratings on the class A1 and A2 notes were not affected under Fitch's moderate or severe foreclosure stress (15% and 30% increase) scenarios. The analysis of the recovery scenarios found that the expected ratings on the class A1 and A2 notes were not affected under Fitch's moderate recovery (15% decrease in pre-LMI recoveries) scenario and the class A1 notes were not affected under Fitch's severe recovery (30% decrease in pre-LMI recoveries) scenario. However, the expected rating on the A2 notes decreased to 'AA+(EXP)sf' under the severe recovery scenario. The analysis of Fitch's moderate combination stress of 15% increase in foreclosures and 15% decrease in pre-LMI recoveries found that the expected ratings on the class A1 and A2 notes were unaffected. The class A1 notes were also unaffected under Fitch's severe combination stress of 30% increase in foreclosures and 30% decrease in pre-LMI recoveries, while the expected ratings on the class A2 notes decreased to 'AA(EXP)sf''. The analysis of the ratings to deterioration in the recovery rate found that the expected ratings on the class A1 and A2 notes will decrease by one full category if the pre-LMI recovery rate decreases by 91% and 28%, respectively. The class A1 and A2 notes will not decrease below investment grade even with a recovery rate of 0%. LMI is not required to support the ratings on the class A1 and A2 notes due to the level of credit support provided by the lower-ranking notes. Key rating drivers and expected rating sensitivities are further discussed in the corresponding presale report entitled "Medallion Trust Series 2017-2", published today. 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. REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) disclosed in the offering document that relate to the underlying asset pool is available by accessing the appendix referenced under "Related Research" below. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class, as detailed in the Special Report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," dated 31 May 2016. DATA ADEQUACY Fitch reviewed the results of a third-party assessment conducted on the asset portfolio information and concluded that there were no findings that affected the rating analysis. Fitch reviewed a small targeted sample of CBA'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 CBA as at 28 August 2017 Transaction documentation provided by King & Wood Mallesons, the issuer's counsel. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. RESI INVESTOR This transaction is included in Fitch's Resi Investor tool ( Resi Investor allows users to conduct their own scenario analysis. The tool allows investors to vary Fitch's rating assumptions to calculate their own expected losses and model-implied rating outcomes. It also allows investors to generate pivot table-type stratification tables, interactive charts and transaction comparisons. Contacts: Primary Analyst James Leung Director +612 8256 0322 Fitch Australia Pty Ltd Level 15, 77 King St, Sydney NSW 2000 Secondary Analyst Simon Sive Analyst +612 8256 0379 Committee Chairperson Natasha Vojvodic Senior Director +612 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 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 Related Research Medallion Trust Series 2017-2 - Appendix here Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions 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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