ABS collateral outlook remains negative

Moody's Investor Service has updated its outlook for the collateral underlying Australian asset-backed securities. The outlook remains negative, unchanged from when Moody's last gave its opinion in January.

Moody's observes that while the performance of Australian ABS transactions continues to be relatively good, the economic deterioration through 2009 to date and uncertainties surrounding the used motor vehicle market, are translating into worsening arrears and losses.

In a separate report, Moody's said it continues to uphold its generally stable outlook on Australian asset-backed ratings, primarily due to the seasoned nature of ABS portfolios and the consequent build-up in note subordination.

For commercial mortgage-backed securities, the supply-demand imbalance evident in 2008 has continued into 2009 as commercial real estate transaction volumes have decreased from their 2007 levels. On the supply side, institutional property owners are looking to de-lever their balance sheet by unloading non-core assets and thus providing a supply overhang in the market.  On the demand side, property investors are facing hurdles in obtaining debt funding from banks that are weary of over-exposing themselves to the commercial real estate sector.

Although there is no immediate short-term unease with regard to the performance of residential mortgage-backed collateral, Moody's is nevertheless concerned with the situation over the next 12 to 18 months, as expectations of increased unemployment and an uncertain global economic climate filter through the Australian economy.

Just as Moody's was about to release its report, Standard & Poor's warned of an impending default by Seiza Augustus Series 2007-1 Trust on its Class F RMBS. The trust manager advised S&P that the holders of the Class F notes are unlikely to receive an interest payment due on August 28. If this eventuates the 'CC' rating on the notes will be lowered to 'D'.

Given that the trust manager also advised that the principal of the notes has already been written off, why wait? The Class E notes are rated 'CCC-'; lowered to this level at the start of June.

S&P also resolved its CreditWatch on the Class D notes issued by Interstar Titanium Series 2006-1 Trust and affirmed the 'BB' rating assigned to the notes. The resolution and affirmation reflects the continuing amortisation and accumulation of credit support within the portfolio of subprime and non-conforming mortgages and an expectation there will be sufficient excess spread to withstand further losses at the rating level. There is an unrated Class E tranche supporting the Class D notes.