Pepper Residential Securities Trust No. 25 is relying on rigorous servicing to ensure the performance of its collateral of low-doc, high-loan-to-value loans made to borrowers with unfavorable credit records, according to details from an S&P Global presale report.
About 40% of the 1,617 loans in the portfolio lack full income verification, which prompted S&P Global Ratings to assume a higher default rate on the loans. That higher default assumption applies to several other features that S&P Global considers weaknesses. For one, about 20.6% of the loans in the portfolio are to borrowers who have had unfavorable credit records in the five years leading up to the loan settlement.
Self-employed borrowers make up 46.3% of the loans in the pool. Inconsistent cash flows and higher loan arrears make the group more susceptible to defaults, should the Australian economy undergo a downtown.
Finally, the weighted-average loan-to-value of the pool 71.7%, and 54.2% of the loans have an LTV of more than 75%.
Two of the top-rated classes of notes, the A1-a and A-1G, will be issued in Australian and Euro currencies. The latter, the A1-G€, is euro-denominated and carries an exchange rate of €0.61 per Australian dollar. All other notes are Australian-dollar denominated.
Pepper Residential's complex structure includes several notable features, such as class A1-u notes that have a schedule amortization principal payment structure, with an expected maturity date before the call-option date.
Its complex structure notwithstanding, Pepper Residential is supported by specialist skills in underwriting and security valuation, S&P Global said. Also, the servicer is experienced in servicing loans specifically for the requirements of the Australian market.
S&P noted, in particular, that it has given Pepper Group, Ltd., a strong residential subprime loan-servicer ranking, and that it has a stable outlook on Pepper's ability in that role given that Pepper has a clearly defined business strategy, high-quality servicing standards, an experienced management team, and a well-designed and scalable technology platform.
For the A1 notes, S&P Global found that the note subordination provides a level of credit support that exceeds the level of credit support in line with an 'AAA' rating.
As for the ratings on the deal, S&P assigned 'AAA' to the A1-u class; 'AAA' to the A1-a class; 'AAA' to the A1-G€ class; 'AAA' to the A2 class; 'AA' to the B class; 'A' to the C class; 'BBB' to the D class; 'BB' to the E class; and 'B' to the F class. The G class is not rated by S&P Global.
