OREANDA-NEWS. Fitch Ratings has assigned final ratings to SMART ABS Series 2016-1 Trust's automotive and equipment-backed floating-rate notes. The issuance consists of notes backed by automotive and equipment lease receivables originated by Macquarie Leasing Pty Limited (Macquarie Leasing). The ratings are as follows:
- AUD765.0m Class A notes: 'AAAsf'; Outlook Stable
- AUD22.5m Class B notes: 'AAsf'; Outlook Stable
- AUD112.5m Seller notes: 'NRsf'.

The notes were issued by Perpetual Trustee Company Limited in its capacity as trustee of SMART ABS Series 2016-1 Trust. The latter is a legally distinct trust established pursuant to a master trust and security trust deed.

The collateral backing the SMART ABS Series 2016-1 Trust transaction is of similar credit quality to prior pools securitised under the SMART programme. The pool comprises lease and loan receivables backed by motor vehicles and equipment, with weighted-average seasoning of 7.1 months and average receivable size of AUD32,606. Novated contracts contributed to the relatively low arrears levels on prior SMART transactions and make up 38.1% of the current transaction pool.

KEY RATING DRIVERS
Sufficient Enhancement: The SMART ABS Series 2016-1 Trust transaction incorporates a sequential pay/pro-rata pay structure, consistent with prior transactions. Initial hard credit enhancement to the 'AAAsf' notes totals 15%. Pro-rata pay-down will commence when hard credit enhancement reaches 19.9%. Overall credit enhancement is sufficient to cover the 'AAAsf' and 'AAsf' stressed cumulative net loss assumptions in all Fitch scenarios.

Consumer/Equipment Included: This is the sixth SMART transaction to include both consumer and equipment receivables. Macquarie Leasing has originated consumer loans and leases directly to individual retail consumers since 2008. Historical gross losses by quarterly vintage for novated leases (cars) range from 0.3% to 1.6%; non-novated leases (cars) from 1.0% to 3.5%; trucks 0.5%-5.4%; equipment 0.2%-5.0%; and consumer 0.8%-5.0%.

Balloon Loans in Portfolio: The pool comprises amortising principal and interest lease and loan receivables, with varying balloon amounts payable at maturity. The weighted-average balloon by original balance is 16.2%, however, 45.5% of the portfolio has no balloon payment.

Adequate Liquidity: Liquidity support is provided by the liquidity reserve and will ensure stable cash flows for the required payments. The reserve will initially be funded at AUD9.0m on the closing date (funded by issuance proceeds) and subsequently the greater of: 1) 1.0% of the aggregate invested amount of the notes for that payment date; and 2) AUD300,000.

Fitch modelled various loss distributions and recovery profiles, as well as prepayment speeds, in its analysis. In running the scenarios, Fitch observed that most scenarios passed, however, the model did observe one minor (0.5%) scenario failure. Fitch determined the small amount of discrepancy caused by severe stress on a number of variables simultaneously in a short time period is within the tolerance level of the rating assigned.

RATING SENSITIVITIES
Unexpected increases in the frequency of defaults and loss severity on defaulted loans 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 ratings assigned to SMART ABS Series 2016-1 Trust to increased gross default levels and decreased recovery rates over the life of the transaction.

Its analysis found the Class A notes displayed sensitivity to increased defaults, showing downgrades of one notch under Fitch's mild (10% increase) scenario, three notches under Fitch's moderate (25% increase) scenario and four notches ('A+sf') under Fitch's severe default (50% increase) scenario. The Class B notes ratings' were also sensitive to increased defaults, with the rating declining by one, two and three notches under the mild, moderate and severe scenarios, respectively.

When subject to reduced recovery rates, the Class A note rating declined to 'AA+sf' under the mild, moderate and severe scenarios, whereby recovery rate assumptions are reduced by 10%, 25% and 50%, respectively. The Class B notes were susceptible to a once notch downgrade under the severe scenario only.

The analysis also showed that under a combination of mild, moderate and severe default and recovery scenarios, the Class A notes would be downgraded to 'AA+sf', 'AA-sf' and 'Asf', respectively. The Class B note rating declined to 'A+sf' under the moderate combination scenario and declined to 'BBB+sf' under the severe combination scenario.

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 15 sample loan files focusing on the underwriting procedures conducted by Macquarie Leasing compared to its credit policy at the time of underwriting. Fitch 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 Rating Sensitivities are further discussed in the corresponding presale new issue report entitled, "SMART ABS Series 2016-1 Trust", published today. Included as an appendix to the report are a description of the representations, warranties and enforcement mechanisms.