Credit Update: MME Horizon Warehouse Trust (April 2022)
Pool stats for April 2022
The RBA has started normalising the cash rate by lifting it by 25bp to 35bp, and more hikes are yet to come. The market is currently expecting approximately a 2.8% cash rate by the end of this year. The 1m BBSW (for which the MME coupons are referenced against) now stands at 0.34%. Thus, investors can expect an uptick in income received over the coming months as base rates continue to rise. However, for April 2022, the 1m BBSW for the payment period was only 0.0083%.
The A notes have 20% subordination, B1 notes 10% subordination, and B2 notes 5% subordination. Given the credit improvement noted below, we believe the class A notes should be a core holding across an investors fixed income portfolio − especially considering more hikes are expected to come.
The class B1 and B2 notes carry higher risk, but still compare favourably to other high-yield securities out in the market.
Nonetheless, the chance of loss on both the B1 and B2 notes is still quite minimal and the pool is capable of withstanding extreme stress over the next 12 months or so.
- Over 1,500 borrowers would need to default and there be no recovery between now and the scheduled maturity date of 18 March 2025 for the B1 note to suffer impairment, i.e., B2 note subordination as well as Equity or Class C notes = AUD8.5m (>1,500 x AUD5k average loan size) and
- Over 750 borrowers would need to default and there be no recovery between now and the scheduled maturity date of 18 March 2025 for the B2 note to suffer impairment, i.e., Equity or Class C notes subordination = AUD4.25m (>850 x AUD5k average loan size)
Chart 1. MME Interest Payments
Source: MME Pool Report
For April 2022, the arrears ratio was 6.3% (versus pool parameter of 12%) while the net loss rate was 0.4% (versus pool parameter of 10%). All other pool parameters as well as required subordination levels were in full compliance.
Both these levels are better than in March 2022 – and illustrative of credit improvement in the underlying pool.
The arrears ratio reflects the improvement as c.AUD20m of new receivables that were sold into the pool not in arrears. Those new receivables (and future sold receivables) should perform better than the existing receivables given their better credit score − which should help maintain a better arrears percentage going forward, and therefore generate more trust income.
The net loss ratio was reset in March 2022 to reflect the start of the new pool. Thus, the 0.4% net loss rate represents the cumulative loss rate for March and April 2022 only (i.e., two months). Investors should not compare this net loss rate to the one in the chart below (Chart 2) as it was reset in March 2022. This chart is provided purely as indicative to show the prior history of the pool since early 2019.
Chart 2. Arrears Ratio
Source: IAM Capital Markets
Chart 3. Net Loss Rate
Source: IAM Capital Markets
The assets and liabilities backing the pool can be seen in the extract below (Chart 4).
Chart 4. MME Asset and Liability Reconciliation
Source: MME Pool Report
Chart 5. MME Warehouse Trust Tranches
Source: MME Pool Report
Please talk to an IAM Sales Representative if you want further information/pricing on the three classes of notes – A, B1, or B2.
