Moody's assigns provisional ratings to Bluestone Group's first non-conforming RMBS transaction for 2022

Rating Action: Moody's assigns provisional ratings to Bluestone Group's first non-conforming RMBS transaction for 2022Global Credit Research - 15 Aug 2022AUD400.00 million of debt securities ratedSydney, August 15, 2022 -- Moody's Investors Service ("Moody's") has assigned the following provisional ratings to the notes to be issued by Permanent Custodians Limited as trustee of Sapphire XXVI Series 2022-1 Trust."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: Sapphire XXVI Series 2022-1 Trust....AUD90.00 million Class A1S Notes, Assigned (P)Aaa (sf)....AUD210.00 million Class A1L Notes, Assigned (P)Aaa (sf)....AUD55.00 million Class A2 Notes are not rated by Moody's....AUD7.40 million Class B Notes are not rated by Moody's....AUD7.20 million Class C Notes are not rated by Moody's....AUD13.00 million Class D Notes are not rated by Moody's....AUD6.80 million Class E Notes are not rated by Moody's....AUD7.00 million Class F Notes are not rated by Moody's....AUD2.50 million Class G1 Notes are not rated by Moody's....AUD1.10 million Class G2 Notes are not rated by Moody'sThe transaction is an Australian residential mortgage-backed securities (RMBS) secured by a portfolio of residential mortgage loans. All receivables were originated by Bluestone Group Pty Limited or Bluestone Mortgages Pty Limited (Bluestone, unrated) and are serviced by Bluestone Servicing Pty Limited (Bluestone Servicing, unrated).Bluestone is an experienced securitiser in the Australian RMBS market, having completed 36 term RMBS transactions since 2000. Bluestone also has extensive securitisation experience through its various warehouse funding arrangements. This is Bluestone's first non-confirming RMBS transaction for 2022.RATINGS RATIONALEThe provisional ratings take into account, among other factors, the evaluation of the underlying receivables and their expected performance, 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 facility in the amount of 2.0% of the note balance, the legal structure, the experience of Bluestone Servicing as the servicer and the presence of AMAL Asset Management Limited as a back-up servicer.According to Moody's, the transaction benefits from high level of excess spread available to cover losses arising from the portfolio. A key credit challenge is that, based on our classifications, 62.4% of the loans were extended on an alternative documentation basis, with a further 0.4% granted on a low documentation basis.Key transactional features are as follows:- The structure provides 25% subordination to the Class A1S and Class A1L Notes, compared with the 15.3% Moody's MILAN credit enhancement (MILAN CE).- The trust will issue ten classes of notes to purchase the portfolio. Principal collections will be distributed sequentially at first. Once step-down conditions are satisfied, all notes may participate in proportional principal collections distribution, with principal due on the class G notes used to repay the notes in reverse sequential order starting from the Class F Notes.- The servicer is required to maintain the weighted-average interest rate on the mortgage loans of at least 3.5% above one-month BBSW, which is within the current portfolio yield of 5.1% as of 30 June 2022.Key model and portfolio assumptions:Moody's MILAN CE — representing the loss that Moody's expects the portfolio to suffer in the event of a severe recession scenario — is 15.3%. Moody's expected loss for this transaction is 1.8%.Key pool features are as follows:- Based on Moody's classifications, the pool has a weighted-average scheduled loan-to-value (LTV) ratio of 69.7% and around 19.4% of the loans have a scheduled LTV ratio over 80.0%.- Based on Moody's classifications, the portfolio contains 62.4% of loans extended on the basis of alternative documentation, with a further 0.4% extended on the basis of low documentation.- Around 62.9% of the loans in the portfolio were extended to self-employed borrowers.- Based on Moody's classifications, the portfolio contains 17.0% exposure to borrowers with prior credit impairment histories (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 July 2022 and available at https://ratings.moodys.com/api/rmc-documents/390481. Alternatively, please see the Rating Methodologies page on https://ratings.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.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 on https://ratings.moodys.com/rating-definitions.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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235.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 https://ratings.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 https://ratings.moodys.com.Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Si Chen Analyst Structured Finance Group Moody's Investors Service Pty. Ltd. 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