MELBOURNE (S&P Global Ratings) Aug. 5, 2022--S&P Global Ratings today affirmed its ratings on two classes of notes issued by Trustees Executors Ltd. as trustee for Interstar NZ Millennium Series 2004-A Trust. We affirmed our 'BBB- (sf)' rating on the Tranche 2 notes and our 'B (sf)' rating on the Tranche 3 notes.
The rating actions take account of the notes' exposure to long-dated arrears and pool concentration from the underlying mortgage loans. We expect the pool to become further concentrated and increasingly exposed to nonperforming loans as the underlying collateral amortizes. We note the timing and level of interest and principal recoveries is uncertain for the long-dated arrears portfolio because Challenger Securitisation Management Pty Ltd. has amended the original loan terms and conditions for a portion of the asset pool.
The pool has high levels of borrower concentration, which we would expect to increase as the collateral continues to amortize. As of May 31, 2022, the asset pool consisted of 50 consolidated loans, with a total loan balance of about NZ$5.8 million. Approximately 46.5% of the collateral pool represents loans in long-dated arrears.
Our view on significantly reduced asset pools is that as a pool amortizes, tail-end risk will take greater precedence in our rating analysis. As of May 31, 2022, the largest borrower exposure in the portfolio is 19.4% and the top 10 borrowers in the portfolio comprise 55.1% of the pool balance. Accordingly, we have assessed the credit risk using our borrower concentration analysis in our "New Zealand RMBS Rating Methodology And Assumptions," published on Sept. 14, 2011.
Tranche 2 continues to benefit from the sequential pay structure, with increased credit support in the form of subordination of the Tranche 3 notes. Given the relatively small size of Tranche 2, we expect it will fully amortize within the next couple of years. However, we expect the loans that are in long-dated arrears will continue to represent an increasing proportion of the overall pool, even as the performing loans amortize. This could constrain the overall yield position and mismatch of performing assets versus liabilities, leading to increasing tail-end risk. In our cash flow analysis of Tranche 2, we have assumed there is no cash inflow from the loans in long-dated arrears, yet our analysis indicates that there should be sufficient cash flow to support the timely payment of interest and ultimate repayment of principal for the Tranche 2 notes at their current rating stress.
For Tranche 3, the timely payment of interest and ultimate principal repayment is not only reliant on excess spread and lenders' mortgage insurance, but also on the successful repayment of the loans that are in long-dated arrears. We believe the latter is highly uncertain, and therefore there is limited ability for Tranche 3 to withstand anything more than a mild economic stress.
Since our previous review, in August 2021, we have observed that the performance of the remaining loans in the pool has remained relatively stable and the transaction continues to generate excess spread. In our view, as the pool becomes more concentrated there may be lumpy cash flows and more variability in the income to the transaction. This increases reliance on the performance of a handful of loans (as opposed to a portfolio of loans) for the timely payment of interest and ultimate repayment of principal on the notes. We could lower our rating on the Tranche 2 or Tranche 3 notes if the concentrations evolve such that we believe the risk level becomes materially higher or if loan performance deteriorates.
Related Criteria
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- Criteria | Structured Finance | General: Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
- Criteria | Structured Finance | General: Methodology To Derive Stressed Interest Rates In Structured Finance, Oct. 18, 2019
- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
- Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
- Criteria | Structured Finance | RMBS: Methodology For Assessing Mortgage Insurance And Similar Guarantees And Supports In Structured And Public Sector Finance And Covered Bonds, Dec. 7, 2014
- Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
- General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
- Criteria | Structured Finance | RMBS: New Zealand RMBS Rating Methodology And Assumptions, Sept. 14, 2011
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
- Criteria | Structured Finance | RMBS: Methodology And Assumptions For Analyzing The Cash Flow And Payment Structures Of Australian And New Zealand RMBS, June 2, 2010
- Criteria | Structured Finance | General: Methodology For Servicer Risk Assessment, May 28, 2009
Related Research
- 2022 Outlook Assumptions For The New Zealand RMBS Market, Jan. 7, 2022
- Australia And New Zealand Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, April 17, 2017
- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
- RMBS Performance Watch: New Zealand, published quarterly
REGULATORY DISCLOSURES
Please refer to the initial rating report for any additional regulatory disclosures that may apply to a transaction.
AUSTRALIA
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| Primary Credit Analyst: | Mary Chiang, Melbourne + 61 3 9631 2935; mary.chiang@spglobal.com |
| Secondary Contact: | Elizabeth A Steenson, Melbourne + 61 3 9631 2162; elizabeth.steenson@spglobal.com |
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