OREANDA-NEWS. June 23, 2015. Fitch Ratings has affirmed the ratings of 20 tranches from six Interstar Millennium Series transactions and placed one on rating watch negative. These transactions are backed by pools of Australian conforming residential mortgages originated through a network of mortgage originators and brokers under the Interstar Millennium Trust Securitisation programmes. A full list of rating actions can be found at the end of this commentary.

KEY RATING DRIVERS
The affirmations reflect Fitch's view that the available credit enhancement is sufficient to support the notes' current ratings, and the agency's expectations of Australia's economic conditions. Credit quality and performance of the underlying loans have remained within the agency's expectations.

At 30 April 2015, Interstar Millennium Series 2005-2L had the highest level of 30+ arrears at 5.0%, below Fitch's Low-doc Dinkum Index of 5.4%. Interstar Millennium Series 2006-2G had the lowest level of 30+ arrears at 1.98%.

Interstar 2004-5, Interstar 2006-1 and Interstar 2006-2G each contain less than 30% low-doc loans. At end-April 2015, 30+ day arrears were 3.2%, 2.3% and 1.98%, respectively, compared with Fitch's 30+ days Dinkum prime index of 1.17%.

Both Interstar 2005-2L and Interstar 2006-3L have underlying mortgage pools comprising 90% low-doc loans. At end-April 2015, their 30+ day arrears were 5.0% and 4.7%, respectively, compared with Fitch's 30+ days Dinkum conforming low-doc index of 5.4%.

Interstar 2006-4H is a high loan-to-value ratio (LVR) pool, with 100% of full-doc loans with LVRs above 90% at issuance. By 30 April 2015, the percentage of the pool with LVRs over 90% had reduced to 32.9% from 35.1% and the 30+ day arrears were 4.0%.

The weighted average indexed LVRs ranged from 46.6% in Interstar Millennium Series 2004-5 to 86.2% in Interstar Millennium Series 2006-4H, and the weighted average seasoning is greater than five years for each of the transactions.

The underlying pools for all transactions are fully covered by LMI, with policies provided by QBE Lenders Mortgage Insurance Ltd (Insurer Financial Strength Rating: 'AA-'/Outlook Stable) and Genworth Financial Mortgage Insurance Pty Ltd (Insurer Financial Strength Rating: 'A+'/Outlook Stable).

The rating watch negative placed on the Class A2, AB and B notes of Interstar 2005-3E reflect the downgrade of The Royal Bank of Scotland plc (RBS, BBB+/Stable/F2) on 19 May 2015, which is a currency swap provider for the transaction. No remedy has been taken within 30 calendar days from the downgrade and the transaction has not been collateralised to reflect the current ineligibility of the counterparty as specified in the documentation. Fitch is monitoring the situation as the trust manager and the currency swap provider are investigating a range of possible solutions. Fitch expects to resolve the rating watch negative in the upcoming weeks.

RATING SENSITIVITIES
The ratings of all Class A notes are independent of any potential downgrades to the LMI provider's ratings.

Interstar 2004-5 pays sequentially. Consequently there has been a build-up in credit enhancement and the transactions are relatively insensitive to increases in foreclosures. At the 'AAAsf' modelled loss severity of 23.9%, the Class A2-2 notes of Interstar 2004-5 can withstand an increase in foreclosures of 100%.

At the 'AAAsf' modelled loss severities of 19.7%, the Interstar 2005-2L's Class A1 and Class A2 notes can withstand an increase in foreclosures to 61.3%. At the 'AA+sf' modelled loss severity the Class AB notes can withstand an increase in foreclosures to 30.8%. The Interstar 2006-3L's Class A2 and AB notes can withstand an increase in foreclosures to 52.1% and 29.5% at their respective 'AAAsf' and 'AA+sf' modelled loss severities of 23.6% and 17.6%.

The Class A2 and Class AB notes of the Interstar 2006-4H can withstand an increase in foreclosures to 98.53% and 50.54% at the 'AAAsf' modelled loss severity of 18.61%. At the 'AAAsf' loss severity of 24.44%, the Class A and A2 notes of Interstar 2006-2G can withstand an increase in foreclosure frequency to 39.7%. At the same level the Class AB notes can withstand an increase in foreclosures to 21.7%.

At the 'AAAsf' loss severity of 24.57%, the Class A notes of the Interstar 2006-1 can withstand an increase in foreclosure frequency to 54.7%. At the 'AA+sf' loss severity of 18.39%, the Class AB notes can withstand an increase in foreclosures to 24.1%

Class B notes for all transactions would be downgraded if there was a significant reduction in payment of LMI claims and an unexpected deterioration in delinquencies, defaults and losses. There are currently no charge offs to date on the Class B notes. Fitch's analysis excludes credit to excess spread.

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 Advantedge compared to its 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.

A comparison of the transactions' representations, warranties and enforcement mechanisms (RW&Es) to those of typical RW&Es for this asset class is also available by accessing the reports and/or links given under Related Research below.

The full list of rating actions is as follows (note balances are as at 30 April 2015):

Interstar Millennium Series 2004-5 Trust (Interstar 2004-5):
AUD3.2m Class A2-2 notes (ISIN AU3FN0003901) affirmed at 'AAAsf'; Outlook Stable;
AUD33.8m Class AB notes (ISIN AU300INTA032) affirmed at 'AAAsf'; Outlook Stable; and
AUD11.3m Class B notes (ISIN AU300INTA040) affirmed at 'Bsf'; Outlook Stable.

Interstar Millennium Series 2005-2L Trust (Interstar 2005-2L):
USD45.0m Class A1 notes (ISIN US46071TAA16) affirmed at 'AAAsf'; Outlook Stable;
AUD68.0m Class A2 notes (ISIN AU300INTC012) affirmed at 'AAAsf'; Outlook Stable;
AUD10.8m Class AB notes (ISIN AU300INTC020) affirmed at 'AA+sf'; Outlook Stable; and
AUD5.9m Class B notes (ISIN AU300INTC038) affirmed at 'Bsf'; Outlook Stable.

Interstar Millennium Series 2005-3E Trust (Interstar 2005-3E):
GBP53.8m notes Class A2 (ISIN XS0232803709) 'AAAsf'; placed on RWN;
AUD37.0m notes Class AB (ISIN AU300INTD010) 'AAAsf'; placed on RWN; and
AUD44.5m notes Class B (ISIN AU300INTD028) 'Bsf'; placed on RWN.

Interstar Millennium Series 2006-1Trust (Interstar 2006-1):
AUD88.4m Class A notes (ISIN AU300INTE018) affirmed at 'AAAsf'; Outlook Stable;
AUD3.2m Class AB notes (ISIN AU300INTE026) affirmed at 'AA+sf'; Outlook Stable; and
AUD3.8m Class B notes (ISIN AU300INTE034) affirmed at 'Bsf'; Outlook Stable.

Interstar Millennium Series 2006-2G Trust (Interstar 2006-2G):
USD68.7m Class A1 notes (ISIN USQ49677AA73) affirmed at 'AAAsf'; Outlook Stable;
USD63.0m Class A2 notes (ISIN USQ49677AB56) affirmed at 'AAAsf'; Outlook Stable;
AUD8.6m Class AB notes (ISIN AU0000INBHC6) affirmed at 'AAAsf'; Outlook Stable; and
AUD10.1m Class B notes (ISIN AU0000INBHD4) affirmed at 'Bsf'; Outlook Stable.

Interstar Millennium Series 2006-3L Trust (Interstar 2006-3L):
AUD186.5 Class A2 (ISIN AU0000INNHB3) affirmed at 'AAAsf'; Outlook Stable;
AUD14.5m Class AB (ISIN AU0000INNHC1) affirmed at 'AA+sf'; Outlook Stable; and
AUD11.1m Class B (ISIN AU0000INNHD9) affirmed at 'Bsf'; Outlook Stable.

Interstar Millennium Series 2006-4H Trust (Interstar 2006-4H):
AUD58.5m Class A2 notes (ISIN AU3FN0000816) affirmed at 'AAAsf'; Outlook Stable
AUD10.6m Class AB notes (ISIN AU3FN0000824) affirmed at 'AAAsf'; Outlook Stable
AUD11.0m Class B notes (ISIN AU3FN0000832) affirmed at 'Bsf'; Outlook Stable