Fitch Affirms Four SMHL Securitisation Trusts at 'AAAsf'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-August 21: Fitch Ratings has affirmed the ratings on six note tranches from four SMHL transactions at 'AAAsf'. The Outlook is Stable. The transactions are securitisations of Australian prime residential mortgage loans originated by Members Equity Bank Limited (ME Bank). The notes were issued by Perpetual Limited in its capacity as trustee. A full list of rating actions follows at the end of this ratings action commentary. KEY RATING DRIVERS Macroeconomic Factors: Fitch expects mortgage performance to remain stable, supported by sustained economic growth in Australia that is driven by steady forecast GDP growth of 2.7%, a tight labour market with unemployment falling to 5.3%, from 5.5%, and one 25bp cash rate increase in 2019. Asset Analysis: The asset model was not run for SMHL Securitisation Fund 2012-2, SMHL Securitisation Fund 2013-1 and SMHL Series Securitisation Fund 2014-1, as the outstanding ratings are only 'AAAsf', the transactions do not have revolving periods and a review of pre-determined performance triggers indicates that the transactions display stable asset performance. The 'AAAsf' weighted-average (WA) foreclosure frequency for SMHL Series 2008-1 Fund is 9.2%, driven by the WA unindexed loan/value ratio (LVR) of 61.9% and investment loans making up 30.1% of the pool. The 'AAAsf' lenders' mortgage insurance (LMI)-dependent WA loss severity of 36.9% is driven by the WA indexed scheduled LVR of 56.4% and LMI, which covers 43.1% of the pool. SMHL Series 2008-1's 30+ day arrears of 1.2% and 90+ day arrears of 0.5% are comparable with Fitch's 1Q18 Dinkum RMBS Indices of 1.1% and 0.5%, respectively. There have been 13 defaults since 2008, resulting in AUD640,000 of losses, which were covered by LMI and excess spread. The SMHL 2012-2, SMHL 2013-1 and SMHL 2014-1 transactions have 100% LMI cover. The lowest LMI pay-out ratio is 98.4% for SMHL Series 2014-1. There have been five losses totalling AUD523,000 for the three transactions to date, all of which were covered by LMI and excess spread; 30+ day arrears range from 1.3% for SMHL 2012-2 and 2.2% for SMHL Series 2013-1, while 90+ day arrears range from 0.7% for SMHL 2012-2 and 1.2% for SMHL Series 2013-1. The arrears ratios for the pools are above Fitch's 1Q18 Dinkum Indices (30+ days 1.1%; 90+ days 0.5%), but arrears balances for all transactions have fallen over the last 12 months. The arrears ratios increased marginally due to the transactions' low bond factors, which range from 26.4% for SMHL Series 2014-1 and 15.6% for SMHL Series 2012-2. Operational Risk: Fitch undertook an onsite operational review and found that the operations of the originator and servicer were comparable with other conforming lenders. Cash Flow Analysis: Cash flow analysis was not performed, as there have been no significant changes to the transaction structures or asset performance. 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. SMHL 2008-1 remains within its substitution period and Fitch conducted sensitivity analysis by stressing the transaction's base-case assumptions. The results of rating-sensitivity testing, using the asset model, are shown below. Fitch also undertook defined sensitivity testing to show the model-implied sensitivities the transaction faces when recovery-rate assumption stresses are increased to a level that is required to reduce note rating by one full category, to non-investment grade and to 'CCCsf'. The class A notes are LMI dependent and can withstand a three notch downgrade of the LMI providers. Notes: Class A Rating: AAAsf Rating sensitivity to increased defaults: Increase defaults by 15%: AAAsf Increase defaults by 30%: AA+sf Rating sensitivity to decreased recoveries: Reduce recoveries by 15%: AAAsf Reduce recoveries by 30%: AA+sf Rating sensitivity to multiple factors: Increase defaults by 15%, reduce recoveries by 15%: AA+sf Increase defaults by 30%, reduce recoveries by 30%: AAsf Decrease in recovery rate required to reduce note ratings: By one full category: 25% To non-investment grade: not even with 0% recoveries To 'CCCsf': not even with 0% recoveries 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. Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its rating analysis was adequately reliable. As part of its ongoing monitoring, Fitch reviewed a small targeted sample of ME Bank's origination files and found the information contained in the 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. There is one year remaining in SMHL 2008-1's substitution period. SOURCES OF INFORMATION The information below was used in the analysis: Loan-by-loan data for SMHL 2008-1 provided by ME Bank as at 8 June 2018 Transaction reporting data provided by ME Bank as at May 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: SMHL 2012-2 AUD27.4 million Class A1 (AU3FN0016598) notes affirmed at 'AAAsf'; Outlook Stable AUD80.0 million Class A2-R (AU3FN0038196) notes affirmed at 'AAAsf'; Outlook Stable AUD13.1 million Class AB (AU3FN0016606) notes affirmed at 'AAAsf'; Outlook Stable SMHL 2008-1 AUD2,401.2 million Class A (AU3FN0007605) notes affirmed at 'AAAsf'; Outlook Stable SMHL 2013-1 AUD220.7 million Class A (AU3FN0020665) notes affirmed at 'AAAsf'; Outlook Stable SMHL 2014-1 AUD315.7 million Class A (AU3FN0024055) notes affirmed at 'AAAsf'; Outlook Stable Contacts: Lead Surveillance Analyst Marija Buzevska Analyst +61 2 8256 0340 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Committee Chairperson Natasha Vojvodic Senior Director +61 2 8256 0350 Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234 , Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria APAC Residential Mortgage Rating Criteria (pub. 14 Jul 2017) https://www.fitchratings.com/site/re/901072 Global Structured Finance Rating Criteria (pub. 15 May 2018) https://www.fitchratings.com/site/re/10029600 RMBS Lenders' Mortgage Insurance Rating Criteria (pub. 03 Apr 2018) https://www.fitchratings.com/site/re/10025397 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 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10041727 Solicitation Status https://www.fitchratings.com/site/pr/10041727#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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