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Triton Trust No.8 to price A$500 million with subordination and mortgage insurance

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Triton Trust No.8 is issuing approximately A$500 million in pass-through securities backed by prime residential mortgages in Australia, with a substantial amount of loans that are made to investors, 40.4%, according to an S&P Global presale report.

In addition, 16% of the portfolio is made up of interest-only periods of up to five years. S&P cited those factors as sources of potential pressure on the subordination and principal allocation structure that would maintain the deal’s credit support.

The loans mature no later than 18 months after the final maturity date on the notes, which are scheduled to price in November 2019, according to S&P.

Triton Trust No.8’s notes are floating-rate securities, and pay a margin over one-month bank bill swap rate, S&P said. The deal also features a call-option date, wherein the interest on classes C, D, and E will pay on their stated amounts, according to S&P. If the notes are not called on their call dates then the margins on classes A1-AU, A1-%y, A2, and Class AB will increase by 0.25%. Also, the margins on classes B, C, D, and E will step down, S&P said.

Should certain step-down tests be met, the transaction can convert to a pro rata payment structure, according to S&P. Under that scenario, the class A1-5Y notes will receive no principal payments until the whole outstanding of class A1-AU notes is paid down to zero. As long as the A1-AU notes are outstanding they will receive the class A1-%Y principal allocation.

Holders of class F notes might face a daunting position, if circumstances align under the pro rata structure. Class F notes they will not receive any payments until all rated notes have been repaid.

As for what the pro rata triggers are, S&P says a payment is made at least two years after the transaction closes; credit support to the class A1 notes from subordination is at least 27%; during the preceding three collection periods, no more than 2% of mortgages is 90 days or more in arrears; there are no unreimbursed carryover charge-offs; and the payment date is not on or after the call-option date.

Standard & Poor’s did note Triton Trust No.8’s reliance on mortgage insurance. Approximately 54.6% of the mortgage loans in the pool are insured by a primary LMI policy provided by a rated mortgage insurer. The insurance agreement contains language that allows the insurer to reduce or deny a claim under certain circumstances. If a claim is reduced, resulting in a loss to the trust, the issuer might be able to offset that loss by applying excess spread to cover those losses, even before making distributions to beneficiaries.

S&P’s preliminary ratings are: ‘AAA’ on A1-AU; ‘AAA’ on A1-5Y; ‘AAA’ on A2; ‘AAA’ on AB; ‘AA’ on B; ‘A’ on C; ‘BBB’ on D; ‘BB’ on E and class F was not rated.

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