Rating Action: Moody's assigns provisional ratings to Pepper's second RMBS transaction for 2020
Global Credit Research - 10 Aug 2020
Pepper Residential Securities Trust No. 27 -- AUD427.5 million of debt securities rated
Sydney, August 10, 2020 -- Moody's Investors Service has assigned the following provisional ratings to notes to be issued by Permanent Custodians Limited (Trustee) as trustee of Pepper Residential Securities Trust No. 27.
"IMPORTANT NOTICE: MOODY'S RATINGS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS. SUCH USE WOULD BE RECKLESS AND INAPPROPRIATE. SEE FULL DISCLAIMERS BELOW."
Issuer: Pepper Residential Securities Trust No. 27
....AUD148.55 million Class A1-s Notes, Assigned (P)Aaa (sf)
....AUD201.45 million Class A1-a Notes, Assigned (P)Aaa (sf)
....AUD77.5 million Class A2 Notes, Assigned (P)Aaa (sf)
The AUD27.5 million Class B, AUD15.0 million Class C, AUD11.0 million Class D, AUD6.5 million Class E, AUD4.55 million Class F and AUD7.95 million Class G Notes are not rated by Moody's.
The transaction is a securitisation of residential mortgage loans originated and serviced by Pepper Group Pty Limited (Pepper). The portfolio includes loans extended to borrowers with prior credit impairment (24.4%) and loans underwritten on an alternative or low documentation basis (39.8%).
RATINGS RATIONALE
The provisional ratings take into account, among other factors:
- Evaluation of the underlying receivables and their expected performance;
- Evaluation of the capital structure and credit enhancement provided to the notes;
- The availability of excess spread over the life of the transaction;
- The liquidity facility in the amount of 2.5% of the notes balance; and
- The experience of Pepper as the servicer.
Moody's MILAN CE -- representing the loss that Moody's expects the portfolio to suffer in the event of a severe recession scenario -- is 13.5%. Moody's expected loss for this transaction is 1.8%.
The key transactional features are as follows:
- Principal collections will be distributed on a sequential basis at first. Starting from the second anniversary since closing, all notes may participate in proportional principal collections distribution, subject to the step-down criteria being met. The step-down criteria include, among others, no charge-offs on any of the notes and Class A2 Notes subordination of at least 27.5%. The Class G Notes' share of principal will be allocated in reverse sequential order starting from the Class F Notes.
- The principal pay-down switches back to sequential among all classes of notes, on the first call option date, i.e. when the aggregate note balance falls below 15% of the aggregate note balance at closing, or the payment date occurring in August 2025.
- A yield enhancement reserve account will be funded by trapping excess spread at an annual rate of 0.45% p.a. of the outstanding principal balance of the portfolio, subject to a maximum balance of AUD1,800,000. Whilst Class A Notes are outstanding, the reserve is available to meet interest shortfalls on senior fees and interest on any rated note.
The portfolio features are as follows:
- The portfolio has a relatively high weighted-average scheduled loan-to-value (LTV) ratio of 72.1%, with 32.4% of the loans with a scheduled LTV ratio above 80%.
- Around 24.4% of the mortgage loans in the portfolio were granted to borrowers with prior credit impairment (default, judgment or bankruptcy).
- Around 39.8% of the loans were extended on an alternative documentation or low documentation basis.
- The portfolio has a low weighted-average seasoning of 16.2 months, with 47.6% of loans originated in the last six months.
The rapid spread of the coronavirus outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the performance of consumer assets from the collapse in Australian economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
Methodology Underlying the Rating Action:
The principal methodology used in these ratings was "Moody's Approach to Rating RMBS Using the MILAN Framework" published in May 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1228742. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Factors that would lead to a downgrade of the ratings:
A factor that could lead to a downgrade of the notes is worse-than-expected collateral performance. The Australian jobs market and housing market are major drivers of performance.
Other reasons for performance which is worse than Moody's expects include poor servicing, error on the part of transaction parties, deterioration in credit quality of transaction counterparties, fraud and lack of transactional governance.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Christopher Chambers Asst Vice President - Analyst Structured Finance Group Moody's Investors Service Pty. Ltd. Level 10 1 O'Connell Street Sydney NSW 2000 Australia JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077 Ilya Serov Associate Managing Director Structured Finance Group JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Pty. Ltd. Level 10 1 O'Connell Street Sydney NSW 2000 Australia JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077
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