Fitch Ratings has assigned final ratings to Pepper SPARKZ Trust No.7'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 Pepper Asset Finance Pty Limited, a subsidiary of Pepper Money Limited (Pepper). The notes were issued by BNY Trust Company of Australia Limited as trustee for Pepper SPARKZ Trust No.7.

The final ratings on the class E and F notes are one and two notches higher than the expected rating, respectively, due to the reduction in the transaction's weighted-average (WA) margin from the indicative WA margin previously modelled, which increases the excess spread available.

RATING ACTIONS

Entity / Debt

Rating

Prior

Pepper SPARKZ Trust No.7

A1-x AU3FN0080081

LT

AAAsf

New Rating

AAA(EXP)sf

A1-a AU3FN0080073

LT

AAAsf

New Rating

AAA(EXP)sf

B AU3FN0080099

LT

AAsf

New Rating

AA(EXP)sf

C AU3FN0080107

LT

Asf

New Rating

A(EXP)sf

D AU3FN0080115

LT

BBBsf

New Rating

BBB(EXP)sf

E AU3FN0080123

LT

BB+sf

New Rating

BB(EXP)sf

F AU3FN0080131

LT

BB-sf

New Rating

B(EXP)sf

G

LT

NRsf

New Rating

NR(EXP)sf

Page

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VIEW ADDITIONAL RATING DETAILS

Transaction Summary

The total collateral pool at the 30 June 2023 pool cut-off date was AUD700 million and consisted of 14,017 receivables with a WA remaining maturity of 60.1 months.

KEY RATING DRIVERS

Stress Commensurate with Ratings: We have assigned base-case default expectations and 'AAAsf' default multiples are as follows:

Novated: 1.10% (7.75x)

Non-Novated Risk Tier A: 2.25% (6.0x)

Non-Novated Risk Tier B: 6.00% (4.75x)

Non-Novated Risk Tier C: 12.00% (3.75x)

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 3.5% and the 'AAAsf' default multiple was 5.1x.

Portfolio performance is supported by Australia's continued economic growth and tight labour market, despite increasing interest rates from May 2022 through June 2023. GDP growth for the year to March 2023 was 2.3% and unemployment was 3.7% in July 2023. We expect GDP growth to slow to 1.5% in 2023, with unemployment reaching 4.0%, reflecting high inflation combined with a slowdown in consumer spending.

Excess Spread Limited by Commission 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 subordinated notes still pass at their respective stress 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 by the G note will 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 back-up servicing arrangements. The nominated backup servicer is BNY Trust Company of Australia Limited. Fitch undertook an operational and file review and found that the operations of the originator and servicer were comparable with those of other auto and equipment lenders.

No Residual Value Risk: There is no residual value exposure in this transaction. However, 37.5% 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 Sensitivities

Notes: A1-x / A1-a / B / C / D / E / F

Rating: AAAsf / AAAsf / AAsf / Asf / BBBsf / BB+sf / BB-sf

Rating Sensitivity to Increased Default Rates

Increase defaults by 10%: AAAsf / AA+sf / AA-sf / Asf / BBBsf / BBsf / B+sf

Increase defaults by 25%: AAAsf / AA+sf / A+sf / BBB+sf / BBB-sf / BB-sf / B-sf

Increase defaults by 50%: AAAsf / AA-sf / A-sf / BBBsf / BBsf / Bsf / below Bsf

Rating Sensitivity to Decreased Recovery Rates

Recoveries decrease 10%: AAAsf / AAAsf / AAsf / Asf / BBBsf / BBsf / B+sf

Recoveries decrease 25%: AAAsf / AAAsf / AAsf / Asf / BBBsf / BBsf / B+sf

Recoveries decrease 50%: AAAsf / AAAsf / AA-sf / A-sf / BBBsf / BBsf / Bsf

Rating Sensitivity to Increased Defaults and Reduced Recovery Rates

Defaults increase 10%/recoveries decrease 10%: AAAsf / AA+sf / AA-sf / A-sf / BBBsf / BBsf / Bsf

Defaults increase 25%/recoveries decrease 25%: AAAsf / AAsf / Asf / BBB+sf / BB+sf / B+sf / below Bsf

Defaults increase 50%/recoveries decrease 50%: AA+sf / A+sf / BBB+sf / BBB-sf / BBsf / below Bsf / below 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 credit enhancement that would fully compensate for the credit losses and cash flow stresses commensurate with higher rating scenarios, all else being equal.

Upgrade Sensitivities

The class A1-a and A1-x notes are at 'AAAsf', which is the highest level on Fitch's scale, and 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:

Rating Sensitivity to Reduced Defaults and Increased Recoveries:

Notes: B / C / D / E / F

Rating: AAsf / Asf / BBBsf / BB+sf / BB-sf

Reduce defaults by 10% and increase recoveries by 10%: AA+sf / A+sf / A-sf / BBB-sf / BBsf

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 conducted a review of 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'.

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

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.

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