Rating Action: Moody's confirms ratings of three classes of notes issued by Latitude Australia Personal Loans Series 2020-1 Trust
Global Credit Research - 26 Aug 2020
Sydney, August 26, 2020 -- Moody's Investors Service has confirmed the ratings of Class C, Class D and Class E Notes issued by Latitude Australia Personal Loans Series 2020-1 Trust.
"IMPORTANT NOTICE: MOODY'S RATINGS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS. SUCH USE WOULD BE RECKLESS AND INAPPROPRIATE. SEE FULL DISCLAIMERS BELOW."
The confirmation concludes the review for downgrade initiated on 30 April 2020 as a result of the deteriorating Australian economic environment due to the coronavirus outbreak, which could impact the performance of the underlying consumer loans.
The affected ratings are as follows:
Issuer: Latitude Australia Personal Loans Series 2020-1 Trust
....Class C Notes, Confirmed at A2 (sf); previously on April 30, 2020 A2 (sf) Placed Under Review for Possible Downgrade
....Class D Notes, Confirmed at Baa2 (sf); previously on April 30, 2020 Baa2 (sf) Placed Under Review for Possible Downgrade
....Class E Notes, Confirmed at Ba2 (sf); previously on April 30, 2020 Ba2 (sf) Placed Under Review for Possible Downgrade
RATINGS RATIONALE
The rating confirmation reflects the balance between (1) the increase in credit enhancement available to the affected notes, and (2) the risk of deterioration in loan credit quality stemming from the economic shocks triggered by the coronavirus outbreak.
Portfolio performance has been stable through the review period but the proportion of loans subject to covid-related hardship assistance has been increasing gradually. At the same time, note subordination has increased. As a result, Moody's has concluded that the net effect of risks posed to the notes is consistent with the current ratings of the notes.
The increase in credit enhancement is driven by the amortization of the portfolio and the repayment of the notes in sequential order since closing. Following the July 2020 payment date, the note subordination available for the Class C, Class D and Class E Notes has increased to 19.7%, 14.6% and 6.7% respectively, from 15.7%, 11.6% and 5.3% at closing.
The risk of deterioration in the underlying loans' performance is driven by both the proportion of loans currently subject to covid-related hardship assistance, and the ongoing challenging economic environment. As of 31 July 2020, about 10.1% of the pool was under hardship assistance due to coronavirus disruptions with most of these borrowers making partial instalment payments. We have also taken into consideration the potential performance deterioration from borrowers located in Victoria that is currently under strict lockdown.
Moody's notes that despite the covid-related hardship assistance granted, principal and interest collections and excess spread in the transaction have not deteriorated and arrears and losses remain stable. As of July 2020, 1.18% of the outstanding pool was 30-plus day delinquent, and 0.23% was 90-plus day delinquent. The portfolio has incurred 1.18% of net losses to date which have all been covered by excess spread. Moody's cash flow analysis has considered the excess spread available in the transaction to cure losses.
Based on the observed delinquencies, losses, covid-related hardship assistance and considering the ongoing economic disruptions and the expected higher unemployment levels in 2020 and 2021, Moody's has increased its default assumption for the remaining pool to 13.1%, which represents a 20% increase from the initial default rate assumption of 10.13% on the closing portfolio balance.
Moody's analysis has also considered a stress scenario with a 40% increase from the initial default rate. The Class C Notes and Class D Notes rating did not show any rating sensitivity to this stress scenario, while the ratings of Class E Notes show some rating sensitivity.
The rapid spread of the coronavirus outbreak, the government measures put in place to contain it and the deteriorating global economic outlook have created a severe and extensive credit shock across sectors, regions and markets. Moody's analysis has considered the impact on the performance of consumer credit from the collapse in Australia's economic activity and increase in unemployment in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies, while also safeguarding public health and avoiding a further surge in infections. As a result, the degree of uncertainty around our forecasts is unusually high. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
Latitude Australia Personal Loans Series 2020-1 Trust is an Australian ABS. It is a cash securitization of personal loans extended to obligors located in Australia. The receivables are typically unsecured, although a portion is partially secured by motor vehicles. All receivables were originated by Latitude Personal Finance Pty Limited (Latitude).
The transaction is supported by a liquidity facility of 1.5% of the balance of the notes, subject to a floor of AUD1,200,000, which can cover approximately 4 months of interest payments if no collections come in at all.
The principal methodology used in these ratings was Moody's Approach to Rating Consumer Loan-Backed ABS published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1230138. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors that could lead to an upgrade of the ratings include (1) performance of the underlying collateral that is better than Moody's expectations, and (2) an increase in the notes' available credit enhancement.
Factors that could lead to a downgrade of the ratings include (1) performance of the underlying collateral that is worse than Moody's expectations, (2) a decrease in the notes' available credit enhancement, and (3) a deterioration in the credit quality of the transaction counterparties.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
John Paul Truijens Vice President - Senior Analyst Structured Finance Group Moody's Investors Service Pty. Ltd. Level 10 1 O'Connell Street Sydney NSW 2000 Australia JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077 Marie Lam Associate Managing Director Structured Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Pty. Ltd. Level 10 1 O'Connell Street Sydney NSW 2000 Australia JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077
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