OREANDA-NEWS. S&P Global Ratings today lowered its ratings on four classes of notes in four Interstar Millennium Series residential mortgage-backed securities (RMBS) transactions. At the same time, we affirmed our ratings on 18 note classes in seven Interstar Millennium Series RMBS transactions (see list).

The rating actions follow a review of the transactions with a pool factor below 10% and the potential tail-end risk on some of the smaller pools.

Our rating analysis factors in the credit quality of the pools. The current weighted-average seasoning across all the transactions is greater than 11 years and has a weighted-average current loan-to-value ratio no higher than 59%. Most of the properties are in metropolitan areas in New South Wales and Victoria. Some of the pools have higher arrears. We have assumed that loans in arrears for more than 90 days have defaulted, in line with our "Australian RMBS Rating Methodology And Assumptions" criteria, published Sept. 1, 2011. Lenders' mortgage insurance (LMI) has covered all losses on the pools to date.

We lowered our ratings on the Interstar Millennium 2004-1E Trust, Interstar Millennium 2004-4E Trust, and Interstar Millennium 2005-2L Trust class B notes because of their sensitivity to tail-end risk as the pool approaches a small and concentrated environment. A lack of hard credit support magnifies the emerging risks for the class B notes. The class B notes rely on LMI and excess spread to cover losses, and the amount and timing are variable.

As of June 2016, Interstar Millennium 2004-1E Trust's pool balance is A$50.6 million and there are 490 consolidated loans, Interstar Millennium 2004-4E Trust's pool balance is A$87.2 million and there are 657 consolidated loans, and Interstar Millennium 2005-2L Trust's pool balance is A$88.3 million and there are 582 consolidated loans.

We have affirmed our ratings on the Interstar Millennium 2004-1E Trust, Interstar Millennium 2004-4E Trust, and Interstar Millennium 2005-2L Trust class A and class AB notes. The Interstar Millennium 2004-4E Trust and Interstar Millennium 2005-2L Trust senior and mezzanine notes are capped at one notch above our rating on the currency-swap counterparty, Westpac Banking Corp. This is because the currency-swap documents reflect our previous counterparty criteria, not our current counterparty criteria.

We lowered our rating on the Interstar Millennium 2004-5 Trust class B notes because the pool is small and concentrated. The class B notes are more sensitive to tail-end risks than comparable larger pools. A lack of hard credit support magnifies the risk for the class B notes, leaving them reliant on LMI and excess spread. The sensitivity and variability of losses therefore might differ from those historically observed for an archetypical asset pool. As of June 2016, Interstar Millennium 2004-5 Trust's pool balance is A$30.7 million and there are 278 consolidated loans. The top 10 borrower concentration is almost 15% of the pool balance. We expect this to increase as the pool shrinks.

We have affirmed our ratings on the Interstar Millennium 2004-5 Trust class AB notes. Note subordination provides ample credit support to the tranche.

We have affirmed our ratings on all of the Interstar Millennium Series 2004-2G Trust and Interstar Millennium Series 2005-1G Trust note classes. The ratings are capped at one notch above our rating on the currency-swap counterparty, Barclays Bank PLC. This is because the currency-swap documents reflect our previous counterparty criteria, not our current counterparty criteria.

We also considered the lack of hard credit support to the Interstar Millennium Series 2004-2G Trust and Interstar Millennium Series 2005-1G Trust class B notes and the notes' sensitivity to tail-end risk as the pool amortizes. We believe our current rating captures the emerging tail-end risks. As of June 2016, Interstar Millennium Series 2004-2G Trust's pool balance is A$53.4 million and there are 454 consolidated loans, and Interstar Millennium Series 2005-1G Trust's pool balance is A$72.9 million and there are 528 consolidated loans.

We have affirmed our ratings on all of the Interstar Millennium Series 2005-3E note classes. Class B note subordination provides ample credit support to the class A2 and class AB notes. We considered the lack of hard credit support to the class B notes, but we believe the potential tail-end risk is not an emerging risk in the near term. Although the transaction has a pool factor of less than 10%, the pool as of June 2016 remains sizable, at A$140 million, with 1,116 consolidated loans.

Interstar Millennium Series 2004-2G Trust and Interstar Millennium Series 2004-5 Trust have borrower concentrations at or above 10% of the pool balance. We have assessed their pool concentrations by sizing an alternate loss scenario for the pools. Under the scenario, the top 10 loans in the 'AAA' rating category and the top six loans in the 'A' rating category default and are recovered upon. The loss severity for each loan is the higher of 50%, the loan's loss severity, and the pool's weighted-average loss severity. The expected loss for the pool is the higher of that number, and we size the number by applying our "Australian RMBS Rating Methodology And Assumptions" criteria, published Sept. 1, 2011. This approach is consistent with the "U. S. RMBS Surveillance Credit And Cash Flow Analysis For Pre-2009 Originations" criteria, published March 2, 2016.