OREANDA-NEWS. Fitch Ratings has affirmed and withdrawn the current ratings of Bluestone Mortgage Warehouse Trust's mortgage-backed floating-rate notes, due to a restructure of the facility. The restructure is not a distressed debt exchange. At the same time Fitch is assigning final ratings to the restructured transaction. The rating actions are listed at the end of this commentary.

The issuance consists of notes backed by Australian residential mortgages originated by Bluestone Mortgages Pty Limited.

At the pool cut-off date, the total collateral pool consisted of 370 loans with a total portfolio balance of AUD116.3m and an average size of AUD314,246. The weighted average (WA) current indexed loan/value ratio was 64.8%, and the WA seasoning was 21 months. Credit-impaired mortgages comprise 50.3% of the pool. Reduced documentation loans make up 54.3% of the portfolio. The agency has incorporated all the above-mentioned factors into its credit analysis of the transaction. The current facility limit is AUD200m.

The notes were issued by Permanent Custodians Limited in its capacity as trustee of Bluestone Mortgages Warehouse Trust.

KEY RATING DRIVERS
The affirmations of the notes of the original structure reflect Fitch's view that available credit enhancement was sufficient to support the notes' ratings, and the agency's expectations of Australia's economic conditions. The credit quality and performance of the loans in the collateral pools have remained in line with expectations.

The assignment of the Long-Term 'AAAsf' ratings on the Class A notes are based on: the rating and performance triggers to mitigate against potential portfolio deterioration during the revolving period; minimum dollar subordination amounts that must be maintained; 20.8% credit enhancement provided by the subordinate Class B, C, D, E, F and First Loss notes; excess spread; a liquidity reserve account of 2.3% of outstanding notes, funded by issue proceeds; and Bluestone Mortgages Pty Limited's underwriting and servicing capabilities.

The ratings assigned to the Class B, C, D and E notes are based on all the strengths supporting the Class A notes except their credit enhancement levels.

Fitch modelled various loss distributions, recovery profiles, and interest rate scenarios in its analysis. In running the scenarios, Fitch observed that most had passed; however, the model did observe two minor (less than 1.5%) scenario failures. Fitch determined that the small amounts of discrepancy caused by severe stress on a number of variables simultaneously in a short period of time are within the tolerance level of the ratings assigned.

RATING SENSITIVITIES
Unexpected decreases in the value of residential property or increases in the frequency of foreclosures and loss severity on defaulted mortgages could produce loss levels higher than Fitch's base case, resulting in negative rating actions on the notes.

Fitch evaluated the sensitivity of the new ratings assigned to Bluestone Mortgage Warehouse Trust to increased defaults and reduced recovery rates over the life of the transaction. Its analysis found that all rated notes displayed sensitivity to increased defaults, each class showing downgrades of two notches under Fitch's moderate (15% increase) scenario, other than the Class A notes which showed a three notch downgrade. Under Fitch's severe (30% increase) scenario, the notes showed downgrades of at least two notches, with the Class A note showing a four notch downgrade.

When subject to reduced recovery rates, Fitch's moderate (15% reduction) scenario resulted in a three notch downgrade to the Class A notes, two notches for Class B and C notes, and four notches for Class D and Class E.

The transaction shows more sensitivity to a combination of increased defaults and reduced recovery rates, with each class of notes showing at least a three notch downgrade in Fitch's moderate (15% increased defaults, 15% decreased recoveries) scenario. Under Fitch's severe (30% increased defaults, 30% decreased recoveries) combination scenario, each note suffered at least a three category downgrade.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY
Fitch conducted a file review of 10 sample loan files focusing on the underwriting procedures conducted by Bluestone Mortgages Limited compared to Bluestone Mortgages Limited's credit policy at the time of underwriting. Fitch has checked the consistency and plausibility of the information and no material discrepancies were noted that would impact Fitch's rating analysis.

The following ratings have been affirmed and withdrawn:

AUD163.4m Class A notes: 'AAAsf'; Outlook Stable;
AUD8.0m Class B notes: 'AAsf'; Outlook Stable;
AUD9.6m Class C notes: 'Asf'; Outlook Stable;
AUD6.6m Class D notes: 'BBBsf'; Outlook Stable;
AUD0m Class E notes: 'BBBsf'; Outlook Stable; and
AUD4.6m Class F notes: 'BB-sf'; Outlook Stable.

The following ratings have been assigned to the notes of the restructured transaction:

AUD158.4m Class A notes: 'AAAsf'; Outlook Stable;
AUD9.0m Class B notes: 'AAsf'; Outlook Stable;
AUD10.8m Class C notes: 'Asf'; Outlook Stable;
AUD7.6m Class D notes: 'BBBsf'; Outlook Stable;
AUD5.2m Class E notes: 'BB-sf'; Outlook Stable;
AUD3.0m Class F notes: not rated; and
AUD6.0m First Loss notes: not rated.