Fitch Ratings has assigned expected ratings to Pepper SPARKZ Trust No.8's pass-through floating-rate notes.

The notes are backed by a pool of first-ranking Australian automotive and equipment lease and loan receivables originated by Pepper Asset Finance Pty Limited, a subsidiary of Pepper Money Limited (Pepper). The notes will be issued by BNY Trust Company of Australia Limited as trustee for Pepper SPARKZ Trust No.8.

RATING ACTIONS

Entity / Debt

Rating

Pepper SPARKZ Trust No.8

A1-a

LT

AAA(EXP)sf

Expected Rating

A1-x

LT

AAA(EXP)sf

Expected Rating

B

LT

AA(EXP)sf

Expected Rating

C

LT

A(EXP)sf

Expected Rating

D

LT

BBB(EXP)sf

Expected Rating

E

LT

BB(EXP)sf

Expected Rating

F

LT

B(EXP)sf

Expected Rating

G

LT

NR(EXP)sf

Expected Rating

Page

of 1

VIEW ADDITIONAL RATING DETAILS

Transaction Summary

The total collateral pool at the 31 December 2023 pool cut-off date was AUD650 million and consisted of 15,576 receivables with a weighted-average (WA) remaining maturity of 59.0 months and an average contract balance of AUD41,731.

KEY RATING DRIVERS

Stress Commensurate with Ratings (Positive): We have assigned base-case default expectations and 'AAAsf' default multiples are as follows:

Novated: 1.10% (7.75x)

Non-Novated Risk Tier A: 2.25% (6.0x)

Non-Novated Risk Tier B: 8.25% (4.25x)

Non-Novated Risk Tier C: 19.25% (3.00x)

The recovery base case is 35.0%, with a 'AAAsf' recovery haircut of 50.0% across all risk grades. The WA base-case default assumption was 4.7% and the 'AAAsf' default multiple was 4.4x.

Portfolio performance is supported by Australia's continued economic growth and tight labour market, despite interest rate hikes in 2022-2023. GDP growth in the year to September 2023 was 2.1% and unemployment was 4.1% in January 2024. Fitch expects GDP growth of 1.5% in 2024, with unemployment increasing to 4.2%. This reflects the economic impact from China's property downturn and the lagged effect of tighter monetary policy on consumption.

Excess Spread Limited by Commission Note Repayment (Negative): The transaction includes a class A1-x note to fund the purchase-price component related to the unamortised commission paid to introducers for the origination of the receivables. The note will not be collateralised, but will amortise in line with an amortisation schedule. The note's repayment limits the availability of excess spread to cover losses, as it ranks senior in the interest waterfall; above the class B to F notes. However, the rated subordinated notes still pass at their respective stress rating levels.

Class A to F notes will receive principal repayments pro rata upon satisfaction of the stepdown criteria. The percentage of credit enhancement (CE) provided by the G note will increase as the A to F notes amortise. Fitch's cash flow analysis incorporates the transaction's structural features and tests each note's robustness by stressing default and recovery rates, prepayments, interest-rate movements and default timing.

Counterparty Risks Addressed (Neutral): Counterparty risk is mitigated by documented structural mechanisms that ensure remedial action takes place should the ratings of the swap providers or transaction account bank fall below a certain level. The transaction includes interest-rate swaps with a fixed schedule, which allows for future over- or under-hedging, depending on the level of prepayments and defaults. Fitch conducted additional sensitivity analysis for these hedging scenarios.

Low Operational and Servicing Risk (Positive): All receivables were originated by Pepper Asset Finance, which demonstrated adequate capability as originator, underwriter and servicer. Pepper is not rated by Fitch. Servicer disruption risk is mitigated by back-up servicing arrangements. The nominated backup servicer is BNY Trust Company of Australia Limited. Fitch undertook an operational and file review and found that the operations of the originator and servicer were comparable with those of other auto and equipment lenders.

No Residual Value Risk (Positive): There is no residual value exposure in this transaction. However, 44.5% of the portfolio by loan value has balloon amounts payable at maturity.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Transaction performance may be affected by changes in market conditions and the economic environment. Weakening asset performance is strongly correlated with increasing levels of delinquencies and defaults that could reduce CE available to the notes.

Downgrade Sensitivities

Unanticipated increases in the frequency of defaults and decreases in recoveries on defaulted receivables could produce loss levels higher than Fitch's base case, and are likely to result in a decline in CE and remaining loss-coverage levels available to the notes. Decreased CE may make certain note ratings susceptible to negative rating action, depending on the extent of the coverage decline. Hence, Fitch conducts sensitivity analysis by stressing a transaction's initial base-case assumptions; these include increasing WA defaults and decreasing the WA recovery rate.

The rating sensitivity section provides insight into the model-implied sensitivities the transaction faces when assumptions - defaults or recoveries - are modified, while holding others equal. The modelling process uses the modification of default and loss assumptions to reflect asset performance in up and down environments. The results should only be considered as one potential outcome, as the transaction is exposed to multiple dynamic risk factors.

Notes: Class A1-a / Class A1-x / Class B / Class C / Class D / Class E / Class F

Expected Ratings: AAAsf / AAAsf / AAsf / Asf / BBBsf / BBsf / Bsf

10% defaults increase: AA+sf / AAAsf / AA-sf / A-sf / BBBsf / BBsf / less than Bsf

25% defaults increase: AA+sf / AAAsf / A+sf / BBB+sf / BBB-sf / BB-sf / less than Bsf

50% defaults increase: AA-sf / AA+sf / A-sf / BBBsf / BBsf / less than Bsf / less than Bsf

10% recoveries decrease: AAAsf / AAAsf / AA-sf / Asf / BBBsf / BBsf / less than Bsf

25% recoveries decrease: AAAsf / AAAsf / AA-sf / Asf / BBBsf / BBsf / less than Bsf

50% recoveries decrease: AA+sf / AAAsf / A+sf / A-sf / BBB-sf / BB-sf / less than Bsf

10% defaults increase / 10% recoveries decrease: AA+sf / AAAsf / A+sf / A-sf / BBB-sf / BBsf / less than Bsf

25% defaults increase / 25% recoveries decrease: AAsf / AA+sf / Asf / BBB+sf / BB+sf / Bsf / less than Bsf

50% defaults increase / 50% recoveries decrease: A+sf / AAsf / BBB+sf / BBB-sf / BB-sf / less than Bsf / less than Bsf

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Economic conditions, loan performance and credit losses that are better than Fitch's baseline scenario or sufficient build-up of CE that would fully compensate for credit losses and cash flow stresses commensurate with higher rating scenarios, all else being equal.

Upgrade Sensitivities

The class A1-a and A1-x are at the highest level on Fitch's scale and cannot be upgraded. As such, upgrade sensitivities are not relevant.

Notes: Class B / Class C / Class D / Class E / Class F

Expected Ratings: AAsf / Asf / BBBsf / BBsf / Bsf

10% defaults decrease / 10% recoveries increase: AA+sf / A+sf / A-sf / BB+sf / B+sf

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

DATA ADEQUACY

As part of its ongoing monitoring, Fitch reviewed a small targeted sample of Pepper Asset Finance's origination files and found the information contained in the files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. Prior to the transaction closing, Fitch sought to receive a third-party assessment conducted on the asset portfolio information, but none was made available to Fitch.

Overall, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis, according to its applicable rating methodologies, indicates that it is adequately reliable.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.

Additional information is available on www.fitchratings.com

(C) 2024 Electronic News Publishing, source ENP Newswire