OREANDA-NEWS. July 27, 2015. Fitch Ratings has today, affirmed six classes of notes from Pepper Prime 2012-1 Trust and Pepper Prime 2013-1 Trust. The notes were issued by Permanent Custodians Limited as trustee of the transactions. The transactions are securitisations of Australian residential mortgages originated by GE Capital and purchased by Pepper Group Limited in August 2011. A full list of rating actions follows at the end of this commentary.

KEY RATING DRIVERS
The affirmation reflects Fitch's view that the available credit enhancement is sufficient to support the notes' current rating, 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.

The purchased GE loan book had experienced arrears, losses and lenders mortgage insurance (LMI) claims well in excess of those experienced by other prime residential mortgage originators in Australia. Pepper's servicing has had a positive impact on the portfolio and at 30 June 2015, 30+ days arrears counted for 2.7% and 2.1% of the pools of Pepper 2012-1 and Pepper 2013-1 respectively, above Fitch's Dinkum RMBS index of 1.17%.

The underlying pools are 100% covered by LMI, provided by Genworth Financial Mortgage Insurance Pty Limited (Insurer Financial Strength Rating: A+/Stable) and QBE Lenders' Mortgage Insurance Ltd (Insurer Financial Strength Rating: AA-/Stable). At June 2015, losses prior to LMI recoveries for both transactions had been below 0.08% of the original pool balance. LMI has covered 87.5% and 68.1% of all losses for Pepper Prime 2012-1 Trust & Pepper Prime 2013-1 Trust respectively. All losses not covered by LMI, have been covered by excess spread.

RATING SENSITIVITIES
Sequential pay-down has increased credit enhancement for the rated notes of each transaction. The ratings of the rated notes are independent of any potential downgrades to the LMI provider's ratings.

The 'AAAsf' breakeven default rate for Pepper Prime 2012-1 Trust is 10.09%. The Class A notes can withstand an additional 61.7% in defaults at Fitch's 'AAAsf' loss severity. The Class AB notes can withstand an additional 14.8% in defaults.

Fitch's 'AAAsf' breakeven default rate for Pepper Prime 2013-1 Trust is 12.46%. The Class A notes can withstand an additional 45.08% in defaults at Fitch's 'AAAsf' loss severity. The Class AB notes can withstand an additional 11.73% in defaults.

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 Pepper Group Limited 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 transaction's representations, warranties and enforcement mechanisms (RW&Es) to those of typical RW&Es for this asset class is available by accessing the reports and/or links under Related Research below.

The rating actions are as follows:

Pepper Prime 2012-1 Trust:
AUD72.2m Class AR-u (ISIN AU3FN0024907) notes affirmed at 'AAAsf'; Outlook Stable;
AUD98.9m Class A-a (ISIN AU3FN0017075) notes affirmed at 'AAAsf'; Outlook Stable; and
AUD25.4m Class AB (ISIN AU3FN0017083) notes affirmed at 'AAAsf'; Outlook Stable.

Pepper Prime 2013-1 Trust:
AUD138.4m Class AR-u (ISIN AU3FN0027942) notes affirmed at 'AAAsf'; Outlook Stable.
AUD92.3m Class A-a (ISIN AU3FN0019675) notes affirmed at 'AAAsf'; Outlook Stable; and
AUD25.0m Class AB (ISIN AU3FN0019683) notes affirmed at 'AAAsf': Outlook Stable.

The Class A-u2 notes have matured and have been paid in full today.