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S&P lowers rating for class B notes on trusts

Last week S&P Global Ratings announced that it lowered its ratings on class B notes in Interstar Millennium Series residential mortgage-backed securities (RMBS) transactions, while as many as 18 note classes were affirmed.

These actions follow a review of transactions with a pool factor below 10 per cent as well as the potential tail-end risk on some of the smaller pools.

The report analysis factored in the credit quality of the pools, and assumed that those loans in arrears for more than 90 days had defaulted, in line with S&P’s ‘Australian RMBS Rating Methodology and Assumptions’ criteria, published in 2011.

The findings also suggested that “current weighted-average seasoning across all the transactions was found to be greater than 11 years and that it had a weighted-average current loan-to-value ratio no higher than 59 per cent”, with most properties situated in metropolitan areas like New South Wales and Victoria.

While some of the pools have higher arrears, lenders’ mortgage insurance has covered all losses on the pools to date.

The report noted that as of June 2016, Interstar Millennium 2004-1E Trust’s pool balance is $50.6 million with 490 consolidated loans, Interstar Millennium 2004-4E Trust’s balance is $87.2 million with 657 consolidated loans, and Interstar Millennium 2005-2L Trust’s pool balance is sitting at $88.3 million with a total of 582 consolidated loans.

While the firm has affirmed ratings on these trusts for classes A and AB, due to their sensitivity to tail-end risk as the pool approaches a small and concentrated environment, the firm lowered their ratings on class B notes as “a lack of hard credit support magnifies the emerging risks for the class B notes”, which are more sensitive and “rely on LMI and excess spread to cover losses”, the amount and timing of which are variable.

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“The sensitivity and variability of losses therefore might differ from those historically observed for an archetypal asset pool”, suggests the report.

The firm also affirmed ratings on all of the Interstar Millennium Series 2005-3E note classes as their “class B note subordination provides ample credit support to the class B notes,” but that after considering the lack of hard credit support to sensitivity of these notes, S&P “believe the potential tail-end risk is not an emerging risk in the near term [and] [a]lthough the transaction has a pool factor of less than 10 per cent, the pool as of June 2016 remains sizable, at $140 million, with 1,116 consolidated loans”.  

[Related: Regional bank prices $700m RMBS transaction]

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