© 2020 Arizent. All rights reserved.

Loan servicing key to latest Pepper Residential Securities deal

Register now

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.

For reprint and licensing requests for this article, click here.