OREANDA-NEWS. April 28, 2016. Fitch Ratings has assigned expected ratings to Sapphire XIV Series 2016-1 Trust's residential mortgage-backed floating-rate notes. The issuance consists of notes backed by Australian non-conforming residential loans originated by Bluestone Group Pty Limited and Bluestone Mortgages Pty Limited (Bluestone). The ratings are as follows:

AUD92.4m Class A1a notes: 'AAA(EXP)sf'; Outlook Stable
AUD40.0m Class A1b notes: 'AAA(EXP)sf'; Outlook Stable
AUD30.0m Class A2 notes: 'AAA(EXP)sf'; Outlook Stable
AUD8.2m Class B notes: 'AA(EXP)sf'; Outlook Stable
AUD9.6m Class C notes: 'A(EXP)sf'; Outlook Stable
AUD6.6m Class D notes: 'BBB(EXP)sf'; Outlook Stable
AUD3.6m Class E notes: 'BB(EXP)sf'; Outlook Stable
AUD3.0m Class F notes: 'B(EXP)sf'; Outlook Stable
AUD4.6m Class G notes: 'NR(EXP)sf'
AUD2.0m Class H notes: 'NR(EXP)sf'
AUD[TBD]m Class X1 notes*: 'NR(EXP)sf'.

The notes will be issued by Permanent Custodians Limited in its capacity as trustee of Sapphire XIV Series 2016-1 Trust.

*Class X1 note volume to be determined on the pricing date.

KEY RATING DRIVERS
Sufficient Credit Enhancement: The Class A1 and A2 notes benefit from credit enhancement of 33.8% and 18.8%, respectively, provided by the subordinate Class B, C, D, E, F, G and H notes; from the liquidity facility; and Bluestone's servicing and underwriting capabilities.

Experienced Originator/Servicer: Bluestone is a specialist non-conforming originator and servicer. Bluestone Servicing Pty Limited is a wholly owned subsidiary of Bluestone. Bluestone Group has originated more than AUD6.0bn worth of loans and completed 20 residential mortgage securitisations in Australia and New Zealand.

Delinquent Loans Included: The portfolio contains loans that were in arrears at the cut-off date. The 30+ day arrears were 7.7%, with 90+ day arrears totalling 1.9% of the pool. Portfolio arrears increased after the cut-off date, Fitch has incorporated this into its analysis. The weighted-average seasoning of the portfolio is 14.2 months, with a weighted-average indexed loan-to-value ratio of 67.2%. Low-documentation loans make up 53.7% of the portfolio and credit-impaired loans comprise 50.0%. Loans with greater than 80% loan-to-value ratio comprise 18.3%.

Strong Excess Spread: The transaction benefits from a strong flow of excess income, which is available to cover losses. Bluestone's non-conforming borrowers pay significantly higher interest rates than borrowers of conforming loans. The weighted-average interest rate is 7.2%.

EXPECTED RATING SENSITIVITIES
Unexpected decreases in residential property value, increases in the frequency of foreclosures, and loss severity on defaulted mortgages could produce loss levels higher than Fitch's base case, which could result in negative rating actions on the notes.

Fitch has evaluated the sensitivity of the expected ratings assigned to Sapphire XIV Series 2016-1 Trust to increased defaults and decreased recovery rates over the life of the transaction. Its analysis found that the expected rating on the Class A1a note was not impacted under Fitch's moderate and severe default stress scenarios (15% increase and 30% increase in defaults, respectively). The Class A1b notes' ratings declined to 'AA+sf' and 'AAsf' in the moderate and severe scenarios, respectively. The class A2, B, C, D and E notes' ratings each declined by two notches in the moderate scenario and three notches in the severe scenario.

There was no impact on the Class A1a note under Fitch's moderate and severe recovery scenarios, whereby recoveries are reduced by 15% and 30%, respectively. The remaining notes' ratings declined by at least two notches in the moderate scenario and by at least three notches in the severe scenario. The transaction shows greater sensitivity to a combination of both increased defaults and decreased recovery rates.

Portfolio arrears increased subsequent to the cut-off date. As part of its analysis, Fitch assessed the effect of the updated arrears levels on the expected ratings assigned and determined that the notes' ratings were not negatively impacted.

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

DATA ADEQUACY
Fitch conducted a file review of 10 sample loan files focusing on the underwriting procedures conducted by Bluestone compared to Bluestone's credit policy at the time of underwriting. Fitch has checked the consistency and plausibility of the information and no material discrepancies were noted that would impact Fitch's rating analysis.

Key Rating Drivers and Expected Rating Sensitivities are further discussed in the corresponding presale report entitled "Sapphire XIV Series 2016-1 Trust", published today. Included as an appendix to the report are a description of the representations, warranties and enforcement mechanisms.