ABS defaults increasing

Moody's Investor Service released its first Australian ABS Performance Review last week. This is a new quarterly publication commenting on trends in the ABS market as well as providing detailed performance reviews of individual ABS deals rated by Moody's.

Examining the first quarter of 2009 and looking forward, Moody's says it expects default rates in the sector to increase over this year. In this context, it maintains a negative outlook on car loan collateral and notes that a combination of macro-economic and structural factors within the auto sector is exerting material pressure on the delinquency and net loss rates being experienced in underlying collateral pools.

Nevertheless, the ratings on senior tranches of ABS issued prior to 2008 should be unaffected, with only some junior tranches of such issues and the tranches of more recent ABS issues being vulnerable. Otherwise, Moody's has a stable outlook on ABS ratings generally.

The timing of the release of Moody's new publication was probably not coincidental, with Standard & Poors' releasing its well established, Australia & New Zealand ABS Performance Watch report for the first quarter, just a day later. S&P observed that the softening in economic and industry conditions is expected to result in some performance deterioration in the sector; however widespread rating actions are not expected, due to build up of credit support to rated notes in seasoned transactions. But the same cannot be said of less seasoned transactions.

S&P notes that auto- and equipment-backed ABS form the majority of ABS transactions and an upward trend in arrears is being seen in most of these, in the first quarter. However, to date performance has continued to be within rating expectations, although Elderslie MTN Trust Series 2006-1 and two Liberty auto ABS issues were singled out as exceptions.

Among small ticket CMBS transactions, the Seiza Augustus Series 2007-1 issue was noted for its negative performance trend. In fact, only the day before S&P lowered its ratings on the C, M, D, E and F tranches to 'BBB+', 'BBB+', 'B-', 'CCC-', and 'CC' from 'A-', 'A-', 'BB-', 'CCC+' and 'CCC-', respectively.

S&P stated that the continuing deterioration in the performance of the underlying portfolio had already resulted in the Class G tranche being completely charged-off and a partial charge-off of the Class F tranche. This weakens the credit support available to the higher tranches and only the 'AAA' and 'AA' ratings on the Class A and B tranches were affirmed.

On the other hand, the Illawarra CMBS Trusts were said to have performed strongly. The Series 2004-1 transaction has experienced no losses to date although arrears are increasing and while the Series 2007-1 transaction has reported a low level of losses, arrears are below 0.5 per cent of the portfolio.

In fact, as these comments were being published, Fitch Ratings was announcing an upgrade of the ratings it assigns to seven tranches of Illawarra CMBS notes and the confirmation of the ratings on three other tranches. For the Series 2004-1 Trust the 'AAA' ratings on the Class A and B tranches were affirmed while the Class C, D and E tranches were upgraded to 'AAA', 'AA' and 'A' from 'AA+', 'A+' and 'BBB', respectively.

The 'AAA' rating on the Class A tranches of the Series 2007-1 Trust was affirmed while the Class B, C, D and E tranches were upgrade to 'AAA', 'AA', 'A' and 'BB+' from 'AA', 'A', 'BBB' and 'BB', respectively. Fitch said the upgrades and confirmations reflect the pay down of the most senior tranches and the consequent building of additional credit support for the lower tranches, along with the very stable delinquency performance of each Trust.

Loss severity ratings of 1, 2 or 3 were assigned to all tranches. The ratings reflect expected loss severity given an event of default.

Fitch also released its first quarter report on RMBS delinquency experience, last week. Fitch noted that mortgage delinquencies had decreased from Q408 to Q109, the first decrease in arrears from the fourth quarter of a year to the first quarter of the next year recorded in the 10 years of Dinkum Index Data. The combination of historically low interest rates and the Australian Government's $1000 payments to eligible families in December 2008 provided a buffer sufficient to counter the normal seasonal effects.

Non-conforming, low-documentation, 30+ day delinquencies bucked the Q109 trend and set a new record high of 19.79 per cent. Fitch believes the non-conforming sector continues to suffer from an inability to refinance with the practical closure of the low-documentation origination market.

The agency expects its low-documentation index to deteriorate at a consistently faster speed than the full-documentation index. The future direction of delinquencies for Australian residential borrowers is uncertain as decreasing interest rates may be countered by increasing unemployment.

Finally, and of relevance to holders of all Crusade RMBS issues in which St. George Insurance Australia Pty Ltd is a lenders' mortgage insurance provider, Fitch affirmed its 'AA-' insurer financial strength rating on the company with a stable outlook. Fitch noted that while current reinsurance arrangements are not considered to be a reliable source of support, as the claims paying ability of SGIA's reinsurance counterparty, Radian Insurance Inc., has been severely affected by the financial crisis, this is offset by the significant support that may be available to SGIA from its ultimate parent, Westpac Banking Corporation.

SGIA meets its regulatory capital ratios and the capital adequacy requirements of Fitch's risk-based Australian Depression Model.