OREANDA-NEWS. September 28, 2015. Fitch Ratings has affirmed the ratings of two transactions of Australian non-conforming residential mortgages originated by Pepper Homeloans Pty Limited -a wholly owned subsidiary of Pepper Australia Pty Limited. A full list of rating actions follows at the end of this commentary.

KEY RATING DRIVERS
The affirmations reflect Fitch's view that available credit enhancement levels are sufficient to support the notes' current ratings, the agency's expectations of Australia's economic conditions, Pepper's mortgage underwriting and servicing capabilities, the quality of the collateral, and performance of the underlying loans, which have remained in line with our expectations.

At end-August 2015, the non-conforming transactions' 30+ days arrears was 5.41% in Pepper Residential Securities Trust No. 10 (PRS10) and 8.98% in Pepper Residential Securities Trust No. 11 (PRS11), compared to Fitch's 1Q15 Dinkum non-conforming low-doc index of 7.58%. Recorded losses were 0.43% (AUD1.5m) and 0.14% (AUD0.5m) of the original pool balances for PRS10 and PRS11, respectively. Losses in PRS11 were fully covered by excess spread, while PRS10 had a debit of AUD36,945 against an excess retention ledger in July 2015 to cover losses of AUD432,196 for the month.

The mortgages in the non-conforming portfolios included approximately 40% reduced documentation loans, and the weighted average (WA) seasoning of the pools was 44 months and 30 months in PRS10 to PRS11, respectively. Fitch's calculated WA loan/value ratios (LVR) were between 68.9% and 71.0%, reducing to 64.1% and 67.2% after indexation.

The non-conforming transactions include a retention mechanism, which allows a certain level of excess income to be diverted towards payment of the most junior notes, excluding the unrated Class G notes, with retention ledger being maintained, replacing the credit protection provided by the unrated F notes being paid down. In addition, if the transactions are not called on the call option date, all post-tax excess income will be diverted to the principal waterfall to speed up the amortisation of the notes.

RATING SENSITIVITIES
The prospect for downgrades is considered remote given the level of subordination available to the rated notes, which has increased since issuance in both transactions as a result of the sequential paydown.

PRS10 Fitch 'AAAsf' breakeven stressed default rate is 25.6%. The Class A-1 notes can withstand an additional 72.5% in defaults at Fitch's 'AAAsf' loss severity. The Class A-2 notes can withstand an additional 55.4% in defaults at Fitch's 'AAAsf' loss severity.

PRS11 Fitch 'AAA'sf breakeven stressed default rate is 28.9%. The Class A-1 notes can withstand an additional 78.0% in defaults at Fitch's 'AAAsf' loss severity. The Class A-2 notes can withstand an additional 60.0% in defaults at Fitch's 'AAAsf' loss severity.

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 Pepper Homeloans Pty Limited compared to the 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.

The full list of rating actions is shown below:

Pepper Residential Securities Trust No. 10 (PRS10):
AUD74.2m Class A-1 (ISIN AU3FN0018651) affirmed at 'AAAsf'; Outlook Stable; and
AUD11.8m Class A-2 (ISIN AU3FN0018669) affirmed at 'AAAsf'; Outlook Stable.

Pepper Residential Securities Trust No. 11 (PRS11):
AUD72.5m Class A-1 (ISIN AU3FN0020715) affirmed at 'AAAsf'; Outlook Stable; and
AUD15.5m Class A-2 (ISIN AU3FN0020723) affirmed at 'AAAsf'; Outlook Stable.

Initial Key Rating Drivers and Rating Sensitivity are described further in the new issue reports listed under 'Related Research' and available on www.fitchratings.com.

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 given under Related Research below.