Rating Action: Moody's assigns provisional ratings to Liberty's fourth RMBS transaction for 2020
Global Credit Research - 22 Dec 2020
Liberty Series 2020-4 -- AUD390.8 million of debt securities rated
Sydney, December 22, 2020 -- Moody's Investors Service has assigned the following provisional ratings to the notes to be issued by Liberty Funding Pty Limited in respect of Liberty Series 2020-4.
"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: Liberty Funding Pty Limited in respect of Liberty Series 2020-4
....AUD300.0 million Class A1 Notes, Assigned (P)Aaa (sf)
....AUD57.2 million Class A2 Notes, Assigned (P)Aaa (sf)
....AUD8.0 million Class B Notes, Assigned (P)Aa1 (sf)
....AUD14.0 million Class C Notes, Assigned (P)A2 (sf)
....AUD3.6 million Class D Notes, Assigned (P)Baa2 (sf)
....AUD6.0 million Class E Notes, Assigned (P)Ba2 (sf)
....AUD2.0 million Class F Notes, Assigned (P)B2 (sf)
The AUD9.2 million Class G Notes are not rated by Moody's.
The transaction is a securitisation of Australian residential mortgages loans. All mortgages were originated and are serviced by Liberty Financial Pty Limited (Liberty, unrated). The transaction features a two-year substitution period, whereby additional loans can be sold into the portfolio on a monthly basis, subject to substitution parameters and portfolio performance triggers being met.
Liberty is an Australian non-bank lender. It started originating non-conforming residential mortgages in 1997. It subsequently expanded into prime residential mortgage origination, as well as, among others, auto loans, small commercial mortgage loans and personal loans. Residential mortgages remain Liberty's predominant business. As of November 2020, it had a portfolio of Australian mortgage assets over AUD8.4 billion.
The provisional ratings take into account, among other factors, evaluation of the underlying receivables, the two-year substitution period together with the substitution parameters, the 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 reserve in the amount of 2.00% of the notes balance, the legal structure, and the credit strength and experience of Liberty as Servicer.
Moody's MILAN credit enhancement (MILAN CE) for the collateral pool is 9.0%, while the expected loss is 1.50%.
MILAN CE represents the loss we expect the portfolio to suffer in a severe recessionary scenario, and does not take into account structural features of the transaction. The expected loss represents a stressed, through-the-cycle loss relative to Australian historical data.
Substitution parameters in this deal significantly reduce the risk of material deterioration in the collateral quality due to addition of new loans to the pool during the two-year substitution period. This is because these parameters, applicable to monthly substitutions, are closely aligned with the parameters of the pool as of closing date. Substitution parameters limit, among other, proportions of loans with adverse credit, alt-doc verification, and scheduled loan-to-value (LTV) ratios above 80% and 90%.
We have considered the limited risk posed by the substitutions at the MILAN CE and expected loss levels.
Furthermore, substitution of new loans will stop while there are any unreimbursed carryover charge-offs or if proportion of loans in arrears greater than 60 days - on a three-month average basis - exceeds 4%.
The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of consumer assets from the current weak Australian economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. 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.
The key transactional features are as follows:
- Class A1 Notes and Class A2 Notes benefit from 25.0% and 10.7% note subordination respectively.
- Following the end of the substitution period, the notes will initially be repaid sequentially. Once stepdown conditions are met, all Notes, excluding Class G Notes, will receive a pro-rata share of principal payments. The stepdown conditions which include, among others, the payment date falling at least one year after the most recent mortgage acquisition and absence of charge offs. Principal pay-down will revert to sequential once the aggregate loan amount is at 20% or less of the aggregate loan amount at closing, or on or following the payment date in November 2025.
- The guarantee fee reserve account, which is unfunded at closing and will build up to a limit of 0.30% of the issued notional from the bottom of the interest waterfall prior to interest paid to the Class G Notes noteholders. The reserve account will firstly be available to meet losses on the loans and charge-offs against the notes. Secondly, it can be used to cover any required payment shortfalls that remain after drawing on principal and the liquidity facility. Any reserve account balance used can be reimbursed to its limit from future excess income.
The key features of the mortgage loan pool are as follows:
- The portfolio has a scheduled LTV ratio of 68.4%, with a relatively high proportion of loans with a scheduled LTV ratio above 80.0% (16.3%) and above 90% (7.7%).
- Around 24.0% of the loans in the portfolio were extended to self-employed borrowers.
- 6.8% of the loans in the portfolio were extended on an alternative documentation basis.
- The portfolio contains 2.7% exposure with respect to borrowers with prior credit impairment (default, judgment or bankruptcy). Moody's assesses these borrowers as having a significantly higher default probability.
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 an upgrade or downgrade of the ratings:
Levels of credit protection that are greater than necessary to protect investors against current expectations of loss could lead to an upgrade of the ratings. Moody's current expectations of loss could be better than its original expectations because of fewer defaults by underlying obligors or higher recoveries on defaulted loans. The Australian job market and the housing market are primary drivers of performance.
A factor that could lead to a downgrade of the notes is worse-than-expected collateral performance. Other reasons for performance worse than Moody's expects include poor servicing, error on the part of transaction parties, a deterioration in credit quality of transaction counterparties, fraud and lack of transactional governance.
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_1243406.
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.
Irene Kleyman VP - Senior Credit Officer 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 Kei Kitayama MD - Asia-Pac Structured Fin Structured Finance Group JOURNALISTS: 81 3 5408 4110 Client Service: 81 3 5408 4100 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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