PEPPER MONEY LIMITED Fitch Ratings has assigned final ratings to Pepper Asset Securities No.2 Trust's pass-through floating-rate notes.
The notes are backed by a pool of first-ranking Australian automotive and equipment lease and loan receivables originated by
This is a whole loan sale, where the trustee acquired all of the seller trustee's rights, title and interest in the receivables using funds provided by the investors under a whole loan pass-through structure. All notes and units are held by investors.
RATING ACTIONS
Entity / Debt
Rating
Prior
Pepper Asset Securities No.2 Trust
A1-a
LT
NRsf
New Rating
NR(EXP)sf
A1-x
LT
NRsf
New Rating
NR(EXP)sf
B AU3FN0088803
LT
BBBsf
New Rating
BBB(EXP)sf
C AU3FN0088811
LT
BBsf
New Rating
BB(EXP)sf
D AU3FN0088829
LT
Bsf
New Rating
B(EXP)sf
G AU3FN0088837
LT
NRsf
New Rating
NR(EXP)sf
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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 as follows:
Novated: 1.10% (7.75x)
Non-novated risk Tier A: 2.25% (6.00x)
Non-novated risk Tier B: 8.25% (4.25x)
Non-novated risk Tier C: 19.25% (3.00x)
The recovery base case is 35.0%, 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 4.45x.
Portfolio performance is supported by
Class A to G notes will receive principal repayments pro rata upon satisfaction of stepdown criteria. Other structural features include a reverse turbo mechanism that redirects available excess income to repay note principal, and a loss reserve that is initially funded by note issuance at closing and traps excess income on or before the third payment date, which is available for loss reimbursement. 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, 48.3% of the portfolio by loan value, including all novated leases, 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 credit enhancement (CE) available to the notes.
Downgrade Sensitivities
Unanticipated increases in the frequency of defaults and decreases in recoveries on defaulted receivables 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 the coverage decline. Hence, Fitch conducts sensitivity analysis by stressing a transaction's initial base-case assumptions; these include increasing WA defaults and decreasing the WA recovery rate.
The rating sensitivity section provides insight into the model-implied sensitivities the transaction faces when assumptions - defaults or recoveries - are modified, while holding others equal. The modelling process uses the modification of default and loss assumptions to reflect asset performance in up and down environments. The results should only be considered as one potential outcome, as the transaction is exposed to multiple dynamic risk factors.
Notes: B / C / D
Rating: BBBsf / BBsf / Bsf
10% defaults increase: BBB-sf / BBsf / less than Bsf
25% defaults increase: BB+sf / B+sf / less than Bsf
50% defaults increase: BBsf / less than Bsf / less than Bsf
10% recoveries decrease: BBBsf / BBsf / Bsf
25% recoveries decrease: BBB-sf / BBsf / less than Bsf
50% recoveries decrease: BBB-sf / BB-sf / less than Bsf
10% defaults increase/10% recoveries decrease: BBB-sf / BB-sf / less than Bsf
25% defaults increase/25% recoveries decrease: BBsf / Bsf / less than Bsf
50% defaults increase/50% recoveries decrease: B+sf / less than Bsf / less than Bsf
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Economic conditions, loan performance and credit losses that are better than Fitch's baseline scenario or sufficient build-up of CE that would fully compensate for credit losses and cash flow stresses commensurate with higher rating scenarios, all else being equal.
Upgrade Sensitivities
Notes: B / C / D
Expected Rating: BBBsf / BBsf / Bsf
10% defaults decrease/10% recoveries increase: BBB+sf / BB+sf / BB-sf
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 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.
Date of Relevant Committee
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'.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
Additional information is available on www.fitchratings.com
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