A total of 200 publicly-rated tranches backed by assets in Australia or New Zealand were affirmed during Q309, one was upgraded and 59 were downgraded, Fitch reports.

Leanne Vallelonga, associate director in the agency's Asia-Pacific structured finance team, says: "Consistent with previous quarters, most Australian RMBS downgrades are not attributable to the deteriorating performance of the transactions, but rather to a change in Fitch's assessment of lenders' mortgage insurance providers. The Reserve Bank of Australia's increase in the official cash rate by 0.25% effective 7 October 2009 has signalled a change in monetary policy from historic lows. However, Australian interest rates remain at historically low levels and are not expected to significantly increase stress for borrowers at this point."

The one tranche upgraded during the quarter was from Interstar Titanium Series 2006-1, a well-seasoned Australian non-conforming RMBS transaction, which reflected the build-up in credit support following the significant pay-down of the most senior notes.

Five Australian CMBS tranches were downgraded during the quarter, however; four from Centro Shopping Centre Securities Limited - CMBS Series 2006-1 and one from Seiza Augustus Series 2007-1. The downgrades were primarily a result of declining commercial property prices, with further declines anticipated.

In the case of Centro, property values had fallen by nearly 10% by end-2008 from the previous peak portfolio value, although they remain above those at closing. As the outstanding loan balance remains unchanged since its origination, the reported loan-to-value ratio (LVR) was 52.2% as at July 2009, up from 46.9% as at end-December 2007, and marginally lower than the initial issuance level of 53.9%.

Incomes at the underlying properties supporting the loans have generally risen, but capitalisation rates have begun to widen. As a result, property values have begun to fall, leading to rising LVRs both at the property level and across the portfolio at the loan note level.

LVRs have thus become the drivers of ratings for the more senior classes of notes, rather than debt service cover ratios (DSCRs). Fitch anticipates further negative movements in Australian property values in the forthcoming reporting season and during the remainder of calendar-year 2009.

Approximately 41% of obligor loans are due for refinancing in December 2009, another 25% in December 2010 and 34% in December 2011. Given the extremely tight liquidity conditions in financial markets and, in particular, the Australian property market, Fitch anticipates the underlying obligors will have considerable difficulties in completing the refinancing of the upcoming maturing loans within the required timeframes. Under the transaction documentation and in the event that loans are not repaid on schedule, the obligors are required to proceed with the sale of sufficient properties to fully repay their outstanding obligation within 18 months of the due date.

In contrast, a combination of rising realised losses, together with a large number of properties in arrears taking longer than 300 days to sell and proceeds be realised, Seiza has seen charge-offs escalate significantly during Q309. This has resulted in notes not rated by Fitch being charged-off, thereby reducing credit support within the transaction.

As the loans progress through the foreclosure process, the agency expects recoveries to flow back to the transaction, resulting in partial or full reinstatement of notes not rated by Fitch, depending on recovery levels - although timing is uncertain at this stage.