S&P: Various Rating Actions Taken On 18 Classes From Six Interstar Millennium Series Transactions

S&P Global Ratings today lowered its ratings on the class B notes issued by Perpetual Trustee Co. Ltd. as trustee of Interstar Millennium Series 2002-1G Trust, Interstar Millennium Series 2003-3G Trust, Interstar Millennium Series 2004-1E Trust, Interstar Millennium Series 2004-4E Trust, Interstar Millennium Series 2004-5 Trust, and Interstar Millennium Series 2005-2L Trust.

At the same time, we lowered our rating on the Interstar Millennium Series 2004-1E Trust class AB notes and affirmed our ratings on the class A notes for Interstar Millennium Series 2003-3G Trust, Interstar Millennium Series 2004-1E Trust, Interstar Millennium Series 2004-4E Trust, Interstar Millennium Series 2004-5 Trust, and Interstar Millennium Series 2005-2L Trust (see list).

The lowered ratings on the class B notes reflect:That the class B notes are the junior notes in these structures, not benefitting from any subordination or overcollateralization. The small and increasingly concentrated nature of the pools. As of Dec. 31, 2017, five of the trusts have fewer than 500 consolidated loans, with the exception of Interstar 2004-4E, which has 523 consolidated loans. Interstar 2003-3G and Interstar 2004-5 contain 214 and 224 consolidated loans, respectively. That as outstanding assets and notes decrease significantly, we take the view that tail risk takes greater precedence in transactional performance and our rating analysis. We expect that our ratings on pools beyond a 5% pool factor will be increasingly driven by the potential for event risk, and other tail risks. That as of Dec. 31, 2017, all transactions have top 10 borrower concentrations of greater than 10%, with the top 10 borrowers in the Interstar 2003-3G and Interstar 2004-5 trusts representing 17.26% and 19.16%, respectively. That we have assessed pool concentrations by sizing an alternate loss scenario for the pool. Under this scenario, the top 10 loans at the 'AAA' rating level and top four loans at the 'BBB' rating level default and are recovered upon. The loss severity for each loan is the higher of 50%, the loan's loss severity, and the pool's weighted-average loss severity. The expected loss for the pool is the higher of that number, and the number sized applying our "Australian RMBS Rating Methodology And Assumptions" criteria, published Sept. 1, 2011. This approach is consistent with the "U. S. RMBS Surveillance Credit And Cash Flow Analysis For Pre-2009 Originations" criteria, published March 2, 2016.That arrears for these transactions are tracking significantly higher than our Standard & Poor's Performance Index for prime residential mortgage-backed securities (RMBS). A total of 7.00% of the loans in the Interstar 2005-2L transaction are more than 30 days in arrears. The figure is 4.90% for the Interstar 2003-3G transaction. The 'BBB' category ratings reflect the strong cash flows available to each trust, despite the small size of the pools. S&P Global Ratings' cash-flow modeling supports a higher-than-assigned rating level in certain scenarios; however, emerging event risk weakens the overall profile of the transactions. S&P Global Ratings assesses the financial strength of the class B notes as adequate, but they are more likely to have a weakened capacity to pay as the transaction size decreases further and the potential effect of event risk increases.

The lowered rating on the Interstar 2004-1E class AB notes reflects:The relatively small amount of credit enhancement available to this class of note in the form of subordination, which is now A$1.05 million, as a result of the pro-rata paydown of the structure. In our opinion, this leaves this tranche vulnerable to increasing tail risk in a 'AAA' rating scenario.

The affirmations of our ratings on the class A notes reflect:The buildup of credit support to the class A notes in the form of subordination provided by the class B notes is higher than the assessed level of credit support required at the 'AAA (sf)' rating level in all cases. Our view of the credit risk of the underlying collateral portfolios, which consist of loans to prime-quality borrowers, with lower weighted-average loan-to-value ratios, and seasoning of more than five years in all cases. Lenders' mortgage insurance is provided for all loans in each of the portfolios. The strong cash flows available to each trust, despite the small size of the pools.
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