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Challenger Millennium Series 2007-1E And 2007-2L Class B Note Ratings Class A And Class AB Notes Affirmed

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MELBOURNE--18 Apr--S&P Global Ratings

MELBOURNE (S&P Global Ratings) April 18, 2018--S&P Global Ratings today lowered its ratings on the class B notes issued by Perpetual Trustees Victoria Ltd. as trustee of Challenger Millennium Series 2007-1E Trust and Challenger Millennium Series 2007-2L Trust.

At the same time, we affirmed our ratings on the senior and mezzanine notes of both transactions (see list).
The lowered rating on the Challenger Millennium Series 2007-1E Trust class B notes reflects:
  • The junior ranking of the class B notes in the transaction structure, given that it does not benefit from any subordination or overcollateralization.
  • The greater precedence of tail risk in transactional performance and our rating analysis as outstanding assets and notes continue to decrease. We expect that the potential for event risk and other tail risks will increasingly drive our ratings on pools with less than a 5% pool factor. The pool factor for this transaction is about 7.1% as of Feb. 28, 2018.
  • The relatively high level of arrears compared with our Standard & Poor's Performance Index for prime residential mortgage-backed securities (RMBS). A total of 3.9% of the portfolio is more than 30 days in arrears as of Feb. 28, 2018.
The lowered rating on the Challenger Millennium Series 2007-2L Trust class B notes reflects:
  • The junior ranking of the class B notes in the transaction structure, given that it does not benefit from any subordination or overcollateralization.
  • The greater precedence of tail risk in transactional performance and our rating analysis as outstanding assets and notes continue to decrease. We expect that the potential for event risk and other tail risks will increasingly drive our ratings on pools with less than a 5% pool factor. The pool factor for this transaction is about 6.4% as of Feb. 28, 2018.
  • The relatively high level of borrower concentration in the portfolio. The 10 top borrowers by current balance represent 11.4% of the pool, as of Dec. 31, 2017. We expect borrower concentration to increase as the pool amortizes further. A lack of hard credit support magnifies the emerging risks for the class B notes, with any losses required to be covered by lenders' mortgage insurance (LMI) and excess spread, the amount and timing of which are variable.
  • The high level of arrears compared with our Standard & Poor's Performance Index for prime RMBS. A total of 7.1% of the portfolio is more than 30 days in arrears, of which 4.1% is more than 90 days past due, as of Feb. 28, 2018.
  • The large proportion of low-documentation borrowers in the portfolio, accounting for 88.9% of the total asset pool. We generally assess loans for which a borrower's income and affordability are not fully verified as being a riskier asset than full-documentation loans. However, these risks are somewhat mitigated, given the loan seasoning.
The rating affirmations on the class A and AB notes reflect:
  • The buildup of credit support in the form of subordination provided by the class B notes, which is higher than the assessed level of credit support required at their respective rating levels.
  • For the 2007-1E notes, the currency-swap documentation does not reflect our current counterparty criteria, and therefore the maximum achievable rating on the rated securities is 'AA', which is one rating level above the Issuer Credit Rating on Westpac Banking Corp.
  • 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.
  • The provision of LMI for all loans in each of the portfolios.
Both transactions benefit from strong income cash flows available to each trust, in the form of excess spread.
RATINGS LOWERED
Class To From
Challenger Millennium Series 2007-1E Trust
B A+ (sf) AA- (sf)
Challenger Millennium Series 2007-2L Trust
B BBB (sf) A+ (sf)
RATINGS AFFIRMED
Class Rating
Challenger Millennium Series 2007-1E Trust
A2a AA (sf)
A2b AA (sf)
AB AA (sf)
Challenger Millennium Series 2007-2L Trust
A AAA (sf)
AB AAA (sf)

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