OREANDA-NEWS. Fitch Ratings has affirmed six tranches issued from two Emerald Series of Australian reverse mortgages. The transactions are securitisations of Australian reverse mortgage receivables originated by Bluestone Equity Release Pty Limited (Bluestone). The rating actions are listed at the end of this commentary.

KEY RATING DRIVERS

The affirmations reflect Fitch's view that current credit enhancement levels adequately support the notes' ratings, the agency's expectations of Australia's economic conditions, and that the performance of the portfolio with regard to borrower exit rates, property values and interest rates, remain in line with expectations.

Given the nature of the reverse mortgage asset class, these transactions may have the unusual feature of an increasing liability note balance. The increase is evident in the class B and C notes of each transaction, and is primarily driven by the additional funding of further advances and periodic instalments paid to the borrowers and the capitalisation of interest. It should be noted that the transaction's note balances reflect the amount payable to the note holders, as well as the committed advance facility and further advance facility provider.

The agency has conducted a full cash flow analysis of the two transactions based on an expected cash flow approach. The loan-by-loan data provided by Bluestone (including loan balance, property valuation, borrower age and gender) has been used to produce an expected cash flow for each payment date. The key assumptions underpinning this cash flow output include the borrower's probability of death, the probability of moving to aged care, voluntary prepayment rates, property price stresses and property price growth rates.

The cash flows are then input into Fitch's proprietary RMBS cash flow model to determine whether the notes can withstand various combinations of stresses of the key assumptions. The cash flow model has been customised to reflect the particular features of the single-waterfall transaction structure. Fitch has applied the following in its analysis.

Mortality Assumptions: A probability of death is estimated for each borrower, for each month of the loan term, taking into account the borrower age and gender and using a modified version of the mortality tables published by the Australian Bureau of Statistics. The weighted-average age of the borrowers in Emerald 2006-1 and 2007-1 is 78.8 and 78.9 respectively, and considering the age of the deals, the borrowers are unlikely to exhibit positive selection as they age further.

Morbidity: The probability of a borrower moving into long-term care (morbidity) is assumed to be linked to the mortality probability. The morbidity factor measured as a percentage of mortality is 50% and has been derived using Emerald's performance data.

Redemption Lag: Sales in a reverse mortgage transactions are not necessarily correlated with a property price stress and foreclosure. Fitch has assumed a period of 12 months from death to settlement.

Voluntary Prepayment: Data provided by Bluestone show evidence of much higher prepayments than the assumptions in the initial analysis with average prepayment rate of 9%. A fast prepayment rate of 12%-20% per year and a low rate of 6% per year have been assumed based on historical Emerald data.

Property Price Declines: In a reverse mortgage transaction, borrowers exit a pool due to three reasons: death, moving into long-term care, or voluntary early repayment. These are believed to be much less correlated with the economic cycle. Therefore 75% of the rating-dependent market value decline (MVD) used for Australian RMBS has been applied (excluding the quick sale adjustment).

Quick-Sale Adjustment: Properties sold at a time when the loan-to-value-ratio (LVR) is below 100% are not subject to a quick-sale adjustment in Fitch's analysis. Loans above 100% LVR will have a quick-sale adjustment of 10% applied.

Property Price Growth: Long-term property price growth has been incorporated into the analysis. Growth of 1.25% (AAAsf), 1.50% (AAsf), 1.75% (Asf), 2.0% (BBBsf/BBsf/Bsf) per annum has been applied.

Property Sale Cost: The cost to sell the property is assumed to be equivalent to the foreclosure cost used for Australian RMBS of 5%.

Emerald I Reverse Mortgage 2006-1 Trust:

By the April 2016 payment date, the trust's reverse mortgage portfolio experienced 1,120 borrower exits, amounting to AUD137.0m. Exits have come from borrower mortality, morbidity, or voluntary prepayments. The majority of exits from the pool to date have been due to voluntary prepayments (767 exits), or loans repurchased by the Bluestone Equity Release Series 1 Warehouse Trust (72 exits). Mortality and morbidity account for 177 and 102 exits respectively. The weighted average borrower age was 78.8 years, compared with 70.3 years at issue. The weighted average (WA) LVR on the pool has increased to 40.0%, from 35.1% at closing.

At the April 2016 payment date, the liability balance was AUD106.5m (excluding the accrued step-up margin) from an initial balance of AUD112.2m. There are no outstanding drawings on the liquidity facility.

Emerald II Reverse Mortgage 2007-1 Trust:

By the March 2016 payment date, the trust's reverse mortgage portfolio had experienced 964 borrower exits, totalling AUD130.9m. The majority of exits from the pool to date have been due to voluntary prepayments (743 exits), or loans repurchased by the Bluestone Equity Release Series 1 Warehouse Trust (7 exits), while mortality and morbidity account for 155 and 59 exits, respectively. The weighted average borrower age was 78.9 years, compared with 70.9 years at issue. The WA LVR on the pool has increased to 42.2%, from 32.4% at closing.

At March 2016, the liability balance was AUD118.3m (excluding the accrued step-up margin), down from the initial note balance of AUD124.2m. There are no drawings outstanding on the liquidity facility.

Both transactions have benefited from faster borrower exits primarily driven by higher voluntary prepayments, which have contributed to stronger levels of overollateralisation.

RATING SENSITIVITIES

Unanticipated significant falls in property prices or higher than expected longevity of the borrowers, could result in proceeds from the sale of the property being insufficient to cover the accrued balance outstanding. Fitch's analysis found that the two transactions are less vulnerable to downgrade, given that prepayment rates have been steady since these transactions were issued, which have paid down the senior notes and produced an over-collateralised position for each of the deals.

Voluntary prepayment rates would need to decrease to 2% p. a. in order to impact the note ratings.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY

Fitch has checked the consistency and plausibility of the information it has received about the performance of the underlying pools and the transactions. There were no findings that were material to this analysis.

The full list of rating actions is as follows:

Emerald I Reverse Mortgage 2006-1 Trust:

AUD72.5m Class A notes (ISIN AU300EMER013) affirmed at 'AAAsf'; Outlook Stable;

AUD13.2m Class B notes (ISIN AU300EMER021) affirmed at 'AAsf'; Outlook Stable; and

AUD15.9m Class C notes (ISIN AU300EMER039) affirmed at 'Asf'; Outlook Stable;

Emerald II Reverse Mortgage 2007-1 Trust:

AUD82.6m Class A notes (ISIN AU3FN0003307) affirmed at 'AAAsf'; Outlook Stable;

AUD13.6m Class B notes (ISIN AU3FN0003315) affirmed at 'AAsf'; Outlook Stable; and

AUD12.2m Class C notes (ISIN AU3FN0003323) affirmed at 'Asf'; Outlook Stable