Rating Action: Moody's upgrades ratings on two classes of notes from Pepper Residential Securities Trust No. 19Global Credit Research - 14 Apr 2021Sydney, April 14, 2021 -- Moody's Investors Service has upgraded the ratings on two classes of notes issued by Pepper Residential Securities Trust No. 19."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."The affected ratings are as follows:Issuer: Pepper Residential Securities Trust No. 19....Class D Notes, Upgraded to Aa3 (sf); previously on September 27, 2019 Upgraded to A1 (sf)....Class F Notes, Upgraded to Ba2 (sf); previously on November 2, 2017 Upgraded to B1 (sf)RATINGS RATIONALEThe upgrades were prompted by the level of credit enhancement available for the affected notes and the collateral performance to date, with low level of losses from defaulted loans and low level of loans under COVID-19-related hardship payment arrangements.Following the March 2021 payment date, note subordination available for the Class D Notes has increased to 6.9% from 6.8% at the last rating action for these notes in September 2019, and for the Class F Notes it has increased to 2.9% from 1.0% at closing.The deal has been making pro-rata payments among all rated notes since November 2019. The Class F Notes currently benefit from additional principal repayments from the turbo principal allocation, which is used to make principal repayments to the rated notes in reverse sequential order starting with the Class F Notes.As of the end of February 2021, 5.1% of the outstanding pool was 30-plus day delinquent and 2.1% was 90-plus day delinquent. The deal has incurred AUD616,744 in losses, which have been covered by excess spread.Based on the observed performance to date, loan attributes, COVID-19-related hardship assistance, and considering the gradual and uneven recovery, Moody's has revised its expected loss assumption to 2.5% as a percentage of the outstanding pool (equivalent to 1.0% of the original pool), compared with 2.4% at the last rating action in October 2019.Moody's has also lowered its MILAN CE assumption to 13.6% from 15.5% at the last rating action in October 2019, based on the current portfolio characteristics.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.The transaction is an Australian RMBS secured by portfolio of residential mortgage loans, originated and serviced by Pepper Group Pty Limited, an Australian non-bank lender. A portion of the portfolio consists of loans extended to borrowers with impaired credit histories or made on a limited documentation basis.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 ratings include (1) performance of the underlying collateral that is better than Moody's expectations and (2) an increase in credit enhancement available for the notes.Factors that could lead to a downgrade of the ratings include (1) performance of the underlying collateral that is worse than Moody's expectations, (2) a decrease in the credit enhancement available for the notes and (3) a deterioration in the credit quality of the transaction counterparties.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. Alena Chen VP - Senior Credit Officer Structured Finance Group Moody's Investors Service Pty. Ltd. 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