RedZed Trust Series 2021-1 -- Moody's assigns definitive ratings to RedZed's first RMBS for 2021

Rating Action: Moody's assigns definitive ratings to RedZed's first RMBS for 2021Global Credit Research - 31 Mar 2021RedZed Trust Series 2021-1 -- AUD543.4 million of debt securities ratedSydney, March 31, 2021 -- Moody's Investors Service has assigned the following definitive ratings to the notes issued by Perpetual Trustee Company Limited as trustee of RedZed Trust Series 2021-1."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: Perpetual Trustee Company Limited as trustee of RedZed Trust Series 2021-1....AUD412.5 million Class A-1 Notes, Assigned Aaa (sf)....AUD64.9 million Class A-2 Notes, Assigned Aaa (sf)....AUD40.7 million Class B Notes, Assigned Aa2 (sf)....AUD5.5 million Class C Notes, Assigned A2 (sf)....AUD9.9 million Class D Notes, Assigned Baa1 (sf)....AUD6.6 million Class E Notes, Assigned Ba1 (sf)....AUD3.3 million Class F Notes, Assigned Ba3 (sf)The AUD6.6 million of Class G1 and Class G2 Notes (together, the Class G Notes) are not rated by Moody's.The transaction is a securitisation of first-ranking mortgage loans secured over residential properties located in Australia. The loans were originated and are serviced by RedZed Lending Solutions Pty Limited (RedZed, unrated).The portfolio includes 96.5% of loans to self-employed borrowers. 91.4% were extended on alternative income documentation verification ('alt doc') basis; and, based on our classifications, 5.1% are to borrowers with adverse credit histories.RATINGS RATIONALEThe definitive ratings take into account, among other factors, an evaluation of the underlying receivables and their expected performance, evaluation of the capital structure and credit enhancement provided to the notes, availability of excess spread over the life of the transaction, the liquidity facility in the amount of 1.5% of the notes balance, the legal structure, and the experience of RedZed as servicer.Moody's MILAN CE -- representing the loss that Moody's expects the portfolio to suffer in the event of a severe recession scenario -- is 13.2%. Moody's expected loss for this transaction is 2.0%.The coronavirus pandemic has had a significant impact on economic activity. Although global economies have shown a remarkable degree of resilience to date and are returning to growth, the uneven effects on individual businesses, sectors and regions will continue throughout 2021 and will endure as a challenge to the world's economies well beyond the end of the year. While persistent virus fears remain the main risk for a recovery in demand, the economy will recover faster if vaccines and further fiscal and monetary policy responses bring forward a normalization of activity. As a result, there is a heightened degree of uncertainty around our forecasts. Our analysis has considered the effect on the performance of consumer assets from a gradual and unbalanced recovery in Australian economic activity.We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.Key transactional features are as follows:- While the Class A-2 Notes are subordinate to Class A-1 Notes in relation to charge-offs, Class A-2 and Class A-1 Notes rank pari passu in relation to principal payments, on the basis of their stated amounts, before the call option date. This feature reduces the absolute amount of credit enhancement available to the Class A-1 Notes.- The servicer is required to maintain the weighted average interest rates on the mortgage loans at least at 4.0% above one month BBSW, which is within the current portfolio yield of 4.7% as at cut off date. This generates a high level of excess spread available to cover losses in the pool.- Under the retention mechanism, excess spread is used to repay principal on the Class F Notes, up to AUD750,000, thereby limiting their exposure to losses. At the same time, the retention amount ledger ensures that the level of credit enhancement available to the more senior ranking notes is preserved.- The Class B to Class F Notes will start receiving their pro-rata share of principal if certain step-down conditions are met. Pro-rata allocation is effectively limited to a maximum of one years.- While the Class G Notes do not receive principal payments until the other notes are repaid, once step-down conditions are met, their pro-rata share of principal will be allocated in a reverse sequential order, starting from the Class F Notes.Key pool features are as follows:- The pool has a weighted-average scheduled loan-to-value (LTV) of 69.9%, and 14.5% of the loans have scheduled LTVs over 80%. There are no loans with a scheduled LTV over 85%.- Around 96.5% of the borrowers are self-employed. This is in line with RedZed's business model and strategy to focus on the self-employed market. The income of these borrowers is subject to higher volatility than employed borrowers, and they may experience higher default rates.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 December 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1248130. 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:Factors that could lead to an upgrade of the notes include a rapid build-up of credit enhancement, due to sequential amortization, or better-than-expected collateral performance. The Australian jobs 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 that could lead to a downgrade include poor servicing, error on the part of transaction parties, a deterioration in the credit quality of transaction counterparties, or lack of transactional governance, and fraud.REGULATORY DISCLOSURESFor 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.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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. 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