OREANDA-NEWS. Fitch Ratings has assigned expected ratings to Medallion Trust Series 2016-1's residential mortgage-backed floating-rate notes. The issuance consists of notes backed by first-ranking Australian residential mortgages originated by Commonwealth Bank of Australia Limited (CBA, AA-/Stable/F1+). The ratings are as follows:

AUD690m Class A1 (a & b) notes: 'AAAsf(EXP)'; Outlook Stable;
AUD45m Class B notes: 'A+(EXP)sf'; Outlook Stable; and
AUD15m Class C notes: 'NR(EXP)sf'.

The Class A1 notes will be split into a monthly distribution Class A-1a note and a quarterly distribution Class A-1b note with a coupon of 1-month BBSW plus margin and 3-month BBSW plus margin, respectively, with sizing based on investor demand.

The notes will be issued by Perpetual Trustee Company Limited in its capacity as trustee of Medallion Trust Series 2016-1.

KEY RATING DRIVERS
Sufficient Credit Support: The Class A1 notes have sufficient credit enhancement of 8%, provided by the Class B and C notes, and is independent of any credit provided by lenders' mortgage insurance (LMI). The rating of the Class B notes is reliant upon the credit support of 2% provided by both the subordinated Class C notes and LMI.

Conservative Pool Characteristics: The portfolio contains loans that have been conservatively underwritten. The weighted-average (WA) seasoning is 33 months, with a WA unindexed loan/value ratio (LVR) of 59.1% and WA Indexed LVR of 56.5%. The average obligor current loan size is AUD293,882; investment loans represent 23.6% of the pool by balance, and interest-only loans represent 19.5%.

Sequential/Pro Rata Paydown: Interest is paid sequentially (after expenses) towards the Class A1, B and then C notes' interest. The reimbursement of all losses is paid after the distribution of interest on Class B notes. Principal will be allocated pro rata towards the Class A1 and B notes, with the Class B notes receiving the Class C pro rata share, if certain conditions are met.

Sufficient Liquidity Support: Liquidity support will be provided via excess spread, principal draws and a liquidity facility sized at 0.75% of the notes' balance, with a facility floor of AUD562,500. The liquidity facility will amortise, subject to the floor, while performance-based triggers are satisfied.

Strong Track Record: CBA has considerable experience in mortgage lending and servicing. It originates loans through its nationwide branch network, mobile sales force, online and telephone sales operations, and third-party mortgage brokers. The arrears level of securitised Medallion transactions has tracked in line or below Fitch's Dinkum Index for prime RMBS.

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 ratings assigned to Medallion Trust Series 2016-1 to increased defaults and decreased recovery rates over the life of the transaction. Its analysis found that the Class A1 notes' ratings remained stable under the mild and severe default scenarios and the mild recovery scenario. Under a reduced recovery rate stress where Fitch's recovery expectation is reduced by 30% (severe), the Class A1 notes' rating would decline to 'AA+sf'.

The analysis found the Class B notes' ratings were sensitive to the mild and severe default and recovery scenarios. Under a stress where Fitch's default rate is increased by 15% (mild) and 30% (severe), the Class B rating would decline to 'Asf' and 'A-sf', respectively. Under a reduced recovery rate stress where Fitch's recovery expectation is reduced by 15% (mild) and 30% (severe), the Class B rating would decline to 'A-sf' and 'BBB+sf', respectively.

The Class B rating is severely impacted by the combination scenario where the additional stresses for defaults and recoveries are applied simultaneously, with ratings moving to 'BBB+sf' (mild) and 'BB+sf' (severe), respectively. The rating of the Class A1 notes are impacted only by a combination scenario of 30% increased defaults and 30% decrease in recovery rates, with the rating declining to 'AAsf.'

The transaction structure supports a LMI independent rating for the Class A1 notes. Therefore LMI is not required to support the rating due to the level of credit support provided by the lower notes. The Class B notes are reliant upon LMI to support the rating.

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 CBA 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.

Fitch reviewed the results of the agreed-upon procedures (AUP) conducted on the portfolio. The AUP reported no material errors that would impact Fitch's rating analysis.

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