Ratings Raised On 23 Tranches Of Australian RMBS; Ratings Lowered On Six Tranches; 138 Affirmed

MELBOURNE (S&P Global Ratings) Dec. 20, 2018--S&P Global Ratings today raised 
its ratings on 23 tranches of Australian residential mortgage-backed 
securitization (RMBS) issued by transactions sponsored by a range of bank 
lenders. At the same time, we lowered our ratings on six tranches and affirmed 
our ratings on 138 tranches (see list).

The rating actions follow our periodic surveillance review of 50 
securitization transactions sponsored by other banks, a group of diverse 
lenders that falls outside the major banks and regional banks categories. Key 
observations in relation to these transactions are:
  • Portfolio collateral quality for the other banks sector is solid, as evidenced by modest loan-to-value (LTV) ratios of around 58% on average, based on the valuation at origination. The weighted-average seasoning for this group of transactions is more than six years. In our opinion, the combination of significant seasoning and the buildup of equity buffers over time means that this group of loans is relatively well placed to manage a period of house price declines, in accordance with our expectations during the coming 12 to 18 months.
  • Arrears performance for this sector is relatively stable, with 0.87% of loans being more than 30 days in arrears. This is below the RMBS sector as a whole, as measured by our Standard & Poor's Index (SPIN) for Australian prime mortgages. The SPIN is 1.35% as of Oct. 31, 2018. Arrears performance is more sensitive to interest-rate movements because more than 91% of underlying mortgages are variable rate. Most of these transactions have significant seasoning, however, and most borrowers have a demonstrated repayment history.
  • The average pool factor of the included transactions is 35%. Prepayment rates of around 20% have contributed to a strong buildup in credit support. The included 'AAA (sf)' rated tranches have credit enhancement available to them, which is on average five times the credit support requirements after lenders' mortgage insurance (LMI).
  • Interest-only exposure in the other banks' loan portfolios is around 14%. We believe the risk of repayment shock is offset by most borrowers' strong repayment history.
Falling house prices and tighter lending conditions are currently dominating 
market headlines, but relatively stable economic growth and employment levels 
suggest the performance of our ratings should remain stable in the medium term 
for this sector (see "An Overview Of Australia's Housing Market And 
Residential Mortgage-Backed Securities," published on Nov. 22, 2018).

We have lowered our ratings on six subordinated tranches of earlier vintages, 
which are largely reliant on LMI and, to a lesser extent, excess spread to 
cover any losses in the event of a borrower default. The Australian RMBS 
sector has a relatively high LMI claims-payout record, with claims adjustments 
historically around 10%.

Transactions in which we have lowered our ratings on notes have comparatively 
weaker cash-flow profiles, and as they decrease in size are more exposed to 
event risk as pools shrink and become more concentrated, and excess spread 
becomes more volatile. For cases in which transactions have insufficient 
mechanical features to support higher ratings, we have brought our ratings on 
these tranches in line with our long-term ratings on the supporting LMI 
providers.

We have raised our ratings on 15 tranches from 2017 vintage transactions as 
part of this review. Although these transactions have only been outstanding 
for between 18 and 24 months, the underlying loans in the portfolios have 
relatively high weighted-average seasoning of 4.2 years, and an average 
exposure of 3.0% to loans with less than two years of seasoning. The 
weighted-average LTV ratio of these transactions is 60.2%, based on the 
valuations at origination. We believe these loans are well positioned to 
weather home price declines, in accordance with our expectations for the next 
one to two years. The asset performance of these transactions has been in line 
with our expectations, and the upgraded tranches have universally benefitted 
from increased credit support in the form of subordination since closing, due 
to sequential pay-down structures, allowing them to cover losses and pass our 
cash-flow stresses at the respective higher rating levels.

Factors such as asset performance, collateral characteristics, and transaction 
structure in some instances constrain our rating below that which is supported 
by the credit and cash-flow outcome.

Our analytical review considers the credit quality and cash-flow mechanics of 
each of the transactions. In our assessment of the expected loss/required 
credit support, we have considered each tranche in light of the collateral 
pool performance as of Aug. 31, 2018, with credit given to LMI at their 
current rating levels. All originators in this review have been categorized 
within "CA1", in line with our "Methodology For Assessing Mortgage Insurance 
And Similar Guarantees And Supports In Structured And Public Sector Finance 
And Covered Bonds" criteria, published Dec. 7, 2014.

Our cash-flow analysis demonstrates the timely payment of interest and 
ultimate payment of principal for the rated notes at their respective rating 
levels after the application of the appropriate rating stresses outlined in 
the criteria. We have taken into consideration the level of subordination and 
other credit support available, excess spread, liquidity, and other support 
mechanisms in each transaction, as well as the current level of credit support 
required at their respective rating levels, after giving credit to the current 
LMI insurance providers. The cash-flow analysis takes into consideration 
various variables that could affect future cash flow, the portfolio 
performance of the transaction, and outlook, as well as the current and 
potential future payment mechanism.

We will continue to monitor these variables as part of our surveillance and 
future rating review.
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