Fitch Assigns Expected Ratings to SMART ABS Series 2016-2US Trust
USD100.00m Class A-1 notes: 'F1+(EXP)sf'
USD175.00m Class A-2 (a & b) notes: 'AAA(EXP)sf'; Outlook Stable
USD140.00m Class A-3 (a & b) notes: 'AAA(EXP)sf'; Outlook Stable
USD85.00m Class A-4 (a & b) notes: 'AAA(EXP)sf'; Outlook Stable
AUD15.12m Class B notes: 'AA(EXP)sf'; Outlook Stable
AUD83.18m Seller notes: 'NR(EXP)sf'
The notes will be issued by Perpetual Trustee Company Limited in its capacity as trustee of SMART ABS Series 2016-2US Trust. The latter is a legally distinct trust established pursuant to a master trust and security deed.
The collateral backing the SMART ABS Series 2016-2US Trust transaction is of similar credit quality to prior pools securitised under the SMART programme. The pool has weighted-average seasoning of 7.5 months and an average receivable size of AUD33,317. Novated contracts contributed to the relatively low arrears levels on prior SMART transactions and make up 50.5% of the current transaction pool.
KEY RATING DRIVERS
High Quality Receivables: Historical gross losses by quarterly vintage for novated leases (cars) range from 0.3% to 1.5%; non-novated leases (cars) from 1.0% to 3.2%; trucks 0.5%-5.0%; and consumer 0.8%-4.0%. The gross loss base-case for consumer loans has been reduced from 5.0% to 4.0%. Macquarie Leasing has originated consumer loans directly to individual retail consumers since 2008. Delinquencies more than 30 days have traditionally tracked below 1.0% for Macquarie Leasing's book.
Sufficient Enhancement: The SMART ABS Series 2016-2US Trust transaction incorporates a sequential pay/pro-rata pay structure, consistent with prior transactions. Initial hard credit enhancement (CE) to the 'AAAsf' notes totals 13.0%. Pro-rata paydown will commence when hard CE reaches 18.9%. Overall, CE is sufficient to cover Fitch's 'AAAsf' and 'AAsf' stressed cumulative net loss assumptions in all Fitch scenarios.
Adequate Liquidity: Liquidity support is provided by the liquidity reserve and will ensure stable cash flows for the required payments. The reserve will initially be funded by Macquarie Bank Limited (A/Stable/F1) at AUD7.6m on the closing date and subsequently the greater of: 1) 1.0% of the aggregate invested amount of the notes for that payment date; and 2) AUD300,000.
Balloon Loans in Portfolio: The pool comprises amortising principal and interest lease and loan receivables, with varying balloon amounts payable at maturity. The weighted average balloon by original balance is 20.7%.
EXPECTED RATING SENSITIVITIES
Unexpected increases in the frequency of defaults and loss severity on defaulted loans could produce loss levels higher than Fitch's base-case, which could result in negative rating action on the notes. Fitch has evaluated the sensitivity of the ratings assigned to SMART ABS Series 2016-2US Trust to increased gross default levels and decreased recovery rates over the life of the transaction.
Its analysis found the Class A-4 notes displayed sensitivity to increased defaults, showing downgrades of one notch under Fitch's moderate (25% increase) and two notches (AA-sf) under Fitch's severe default (50% increase) scenario. The Class B notes ratings' were also sensitive to increased defaults, with the rating declining by one notch under the severe scenarios.
When subject to reduced recovery rates, all rated notes remain stable under mild (10% decrease), moderate (25% decrease) and severe (50% decrease) scenarios.
The analysis also showed that under a combination of moderate and severe default and recovery scenarios, the Class A-4 notes would be downgraded to AA+sf and AA-sf, respectively. The Class B notes' rating declined to Asf under the moderate combination scenario and declined to Asf under the severe combination scenario.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Fitch was provided with Form ABS Due Diligence-15E (Form 15E) as prepared by PricewaterhouseCoopers LLP. The third-party due diligence described in Form 15E focused on agreeing data fields provided in the pool data to source documents. Fitch considered this information in its analysis and it did not have an effect on Fitch's analysis or conclusions.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) disclosed in the offering document that relate to the underlying asset pool is available by accessing the appendix referenced under "Related Research" below. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report, Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions, dated 31 May 2016.
Prior to the transaction closing, Fitch reviewed the results of a third party assessment conducted on the asset portfolio information and concluded that there were no findings that affected the rating analysis.
As part of its ongoing monitoring, Fitch conducted a review of a small targeted sample of Macquarie Leasing's origination files and found the information contained in the reviewed 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 it is adequately reliable.
Key Rating Drivers and Expected Rating Sensitivities are further discussed in the corresponding presale report, SMART ABS Series 2016-2US Trust, published today.
VARIATIONS FROM CRITERIA
The class B notes have 11% subordination in the form of the Seller notes; the breakeven net-loss for a AAAsf rated note is 10.9%. The class B notes pass the AAAsf stresses within the cash flow model, however, Fitch has not assigned a rating higher than AAsf to the class B notes due to the transaction's inability to switch off the pro-rata paydown other than at call. The level of structural credit enhancement will not increase above 18.9% for the class A notes and 16.0% for the class B notes during the pro-rata paydown period. The class B note is also sensitive to increases in defaults and decreases in recovery rates with a AAAsf rating. This is a variation from the Global Consumer ABS Rating Criteria, as the difference between the assigned and model indicated ratings in greater than one notch.
SOURCES OF INFORMATION
The information below was used in the analysis:
-loan-by-loan data provided by Macquarie Leasing as at 1 September 2016
-loss and recovery data provided by Macquarie Leasing as at 1 September 2016
-transaction documentation provided by Allen & Overy, the issuer's counsel.
The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public.