Fitch Ratings has assigned expected ratings to
The notes are backed by a pool of first-ranking Australian automotive and equipment lease and loan receivables originated by
RATING ACTIONS
Entity / Debt
Rating
Pepper SPARKZ Trust No.6
A1-a
LT
Expected Rating
A1-x
LT
Expected Rating
B
LT
AA(EXP)sf
Expected Rating
C
LT
A(EXP)sf
Expected Rating
D
LT
BBB(EXP)sf
Expected Rating
E
LT
BB(EXP)sf
Expected Rating
F
LT
B(EXP)sf
Expected Rating
G
LT
NR(EXP)sf
Expected Rating
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VIEW ADDITIONAL RATING DETAILS
Transaction Summary
The total collateral pool at the
KEY RATING DRIVERS
Stress Commensurate with Ratings: We have assigned base-case default expectations and 'AAAsf' default multiples for each risk tier classification A, B & C.
Our base-case gross-loss expectations and 'AAAsf' default multiples are as follows:
Risk Tier A: 2.25% (6.0x)
Risk Tier B: 6.00% (5.3x)
Risk Tier C: 12.00% (4.5x)
The recovery base case is 30.0%, with a 'AAAsf' recovery haircut of 50.0% across all risk grades. The WA base-case default assumption was 4.4% and the 'AAAsf' default multiple was 5.3x.
Portfolio performance is supported by
Excess Spread Supports A1-x Note Repayment: The transaction includes a class A1-x note to fund the purchase-price component related to the unamortised commission paid to introducers for the origination of the receivables. The note will not be collateralised, but will amortise in line with an amortisation schedule. The note's repayment limits the availability of excess spread to cover losses, as it ranks senior in the interest waterfall; above the class B to F notes. However, the rated notes still pass the cash flow analysis at their respective rating levels.
Class A to F notes will receive principal repayments pro rata upon satisfaction of pro rata conditions. The percentage of credit enhancement (CE) provided from the G note will thus increase as the A to F notes amortise.
Fitch's cash flow analysis incorporates the transaction's structural features and tests each note's robustness by stressing default and recovery rates, prepayments, interest-rate movements and default timing.
Counterparty Risks Addressed: Counterparty risk is mitigated by documented structural mechanisms that ensure remedial action takes place should the ratings of the swap providers or transaction account bank fall below a certain level. The transaction includes interest-rate swaps with a fixed schedule, which allows for future over- or under-hedging, depending on the level of prepayments and defaults. Fitch conducted additional sensitivity analysis for these hedging scenarios.
Low Operational and Servicing Risk: All receivables were originated by Pepper Asset Finance, which demonstrated adequate capability as originator, underwriter and servicer. Pepper is not rated by Fitch. Servicer disruption risk is mitigated by backup servicing arrangements. The nominated backup servicer is
No Residual Value Risk: There is no residual value exposure in this transaction. However, 27.6% of the portfolio by loan value has balloon amounts payable at maturity.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Transaction performance may be affected by changes in market conditions and the economic environment. Weakening asset performance is strongly correlated with increasing levels of delinquencies and defaults that could reduce CE available to the notes.
Unanticipated increases in the frequency of defaults could produce loss levels higher than Fitch's base case and are likely to result in a decline in CE and remaining loss-coverage levels available to the notes. Decreased CE may make certain note ratings susceptible to negative rating action, depending on the extent of coverage decline. Hence, Fitch conducts sensitivity analysis by stressing a transaction's initial base-case assumptions. Fitch stresses the recovery rate to isolate the effect of a change in recovery proceeds at the borrower level.
Downgrade Sensitivity
Note: A1-a / A1-x / B / C / D / E / F
Rating: AAAsf / AAAsf / AAsf / Asf / BBBsf / BBsf / Bsf
Rating Sensitivity to Increased Default Rates
Defaults increase 10%: AAAsf / AA+sf / A+sf / A-sf / BBB-sf / BB-sf / less than Bsf
Defaults increase 25%: AA+sf / AA+sf / Asf / BBB+sf / BB+sf / Bsf / less than Bsf
Defaults increase 50%: AA-sf / AA-sf / A-sf / BBB-sf / BBsf / less than Bsf / less than Bsf
Rating Sensitivity to Decreased Recovery Rates
Recoveries decrease 10%: AAAsf / AAAsf / AA-sf / A-sf / BBB-sf / BB-sf / less than Bsf
Recoveries decrease 25%: AAAsf / AAAsf / AA-sf / A-sf / BBB-sf / BB-sf / less than Bsf
Recoveries decrease 50%: AAAsf / AAAsf / A+sf / A-sf / BBB-sf / B+sf / less than Bsf
Rating Sensitivity to Combined Stresses
Defaults increase 10% and recoveries decrease 10%: AAAsf / AA+sf / A+sf / BBB+sf / BBB-sf / B+sf / less than Bsf
Defaults increase 25% and recoveries decrease 25%: AA+sf / AA+sf / Asf / BBBsf / BBsf / Bsf / less than Bsf
Defaults increase 50% and recoveries decrease 50%: A+sf / AA-sf / BBB+sf / BB+f / B+sf / less than Bsf / less than Bsf
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Macroeconomic conditions, collateral performance and credit losses that are better than Fitch's baseline scenario or sufficient build-up of CE that would fully compensate for the credit losses and cash flow stresses commensurate with higher rating scenarios, all else being equal
The class A notes are at 'AAAsf', which is the highest level on Fitch's scale cannot be upgraded. For these notes that are at 'AAAsf', upgrade sensitivity stresses are not relevant. However, results for the remaining rated notes are as follows:
Upgrade Sensitivity
Expected Rating Sensitivity to Reduced Defaults and Increased Recoveries
Note: B / C / D / E / F
Rating: AAsf / Asf / BBBsf / BBsf / Bsf
Defaults decrease 10%/recoveries increase 10%: AA+sf / A+sf / BBB+sf / BB+sf / B+sf
Best/Worst Case Rating Scenario
International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
DATA ADEQUACY
Fitch sought to receive a third-party assessment conducted on the asset portfolio information, but none was made available to Fitch for this transaction.
As part of its ongoing monitoring, Fitch reviewed a small targeted sample of the originator'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, and together with any assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis, according to its applicable rating methodologies, indicates that it is adequately reliable.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. 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 titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. 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 titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of environmental, social and governance (ESG) credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Additional information is available on www.fitchratings.com
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