OREANDA-NEWS. March 14, 2016. Fitch Ratings has affirmed 14 tranches of two Sapphire series transactions as well as five Bluestone Warehouse tranches of residential mortgage-backed floating rate notes. The transactions are securitisations of Australian non-conforming residential loans originated by Bluestone Group Pty Limited. The full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS
The affirmations reflect Fitch's view that available credit enhancement supports the relevant notes at their current ratings, the agency's expectations of Australia's economic conditions, and that the credit quality and performance of the underlying loans remain within the agency's expectations.

Arrears are high across the transactions, as is common in the non-conforming market. At 31 January 2016, 30+ days arrears levels ranged between 4.8% (Bluestone WH) and 14.0% (Sapphire XII), compared to Fitch's 3Q15 non-conforming low-documentation Dinkum RMBS Index of 7.7%. Defaults and losses have been stable since January 2014 and are still below Fitch's expectations. Losses were covered by strong excess income available over the period.

The collateral underlying Sapphire XII and Sapphire XIII is highly seasoned, with a weighted average (WA) seasoning of over nine years. As a result, Fitch's calculated WA loan-to-value ratio reduced significantly by between 9pp and 10pp after indexation was applied. Loans in the Bluestone Mortgages Warehouse Trust are less seasoned due to the inclusion of newly originated loans as the transaction features an availability period.

RATING SENSITIVITIES
Unexpected increases in delinquencies, defaults, and losses would be necessary before any negative rating action is considered on the transactions' senior notes. The credit enhancement levels of the senior notes can support multiples of the arrears levels reported in the latest investor reports.

Available credit enhancement is expected to increase for Sapphire XII and Sapphire XIII as the rated notes pay down, thereby reducing sensitivities to combinations of increased delinquencies and defaults. As a result, any negative rating action on these transactions is considered very unlikely. The prospect for future upgrades is however constrained by future concentration issues. The rated notes can withstand additional defaults ranging from 6.3% to 73.5% of the current collateral pool at Fitch's breakeven default and loss severity at their rating level.

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 Bluestone Group Pty Limited (Bluestone) 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.

The rating actions are as follows:

Sapphire XII Series 2013-1 Trust (Sapphire XII):
AUD45.7m Class A1 notes (AU3FN0021424) affirmed at 'AAAsf'; Outlook Stable;
AUD11.9m Class A2 notes (AU3FN0021432) affirmed at 'AAAsf'; Outlook Stable;
AUD5.9m Class B notes (AU3FN0021440) affirmed at 'AAsf'; Outlook Stable;
AUD6.8m Class C notes (AU3FN0021457) affirmed at 'Asf'; Outlook Stable;
AUD4.6m Class D notes (AU3FN0021465) affirmed at 'BBBsf'; Outlook Stable;
AUD2.6m Class E notes (AU3FN0021473) affirmed at 'BBsf'; Outlook Stable; and
AUD2.0m Class F notes (AU3FN0021481) affirmed at 'Bsf'; Outlook Stable.

Sapphire XIII Series 2014-1 Trust (Sapphire XIII):
AUD89.6m Class A1 notes affirmed at 'AAAsf'; Outlook Stable;
AUD26.1m Class A2 notes affirmed at 'AAAsf'; Outlook Stable;
AUD7.6m Class B notes affirmed at 'AAsf'; Outlook Stable;
AUD7.4m Class C notes affirmed at 'Asf'; Outlook Stable;
AUD4.8m Class D notes affirmed at 'BBBsf'; Outlook Stable;
AUD2.7m Class E notes affirmed at 'BBsf'; Outlook Stable; and
AUD2.1m Class F notes affirmed at 'Bsf'; Outlook Stable.

Bluestone Mortgages Warehouse Trust (Bluestone WH):
AUD158.4m Class A notes affirmed at 'AAAsf'; Outlook Stable;
AUD9.0m Class B notes affirmed at 'AAsf'; Outlook Stable;
AUD10.8m Class C notes affirmed at 'Asf'; Outlook Stable;
AUD7.6m Class D notes affirmed at 'BBBsf'; Outlook Stable; and
AUD5.2m Class E notes affirmed at 'BB-sf'; Outlook Stable.

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.