Zip Master Trust - Series 2021-2

Presale:

Zip Master Trust - Series 2021-2August 16, 2021

Preliminary Ratings

Class Preliminary rating Preliminary amount (A$)Percentage of issuance

(%) Available subordination (%)

A AAA (sf) 325,000,000 65.0 35.0

B AA (sf) 85,000,000 17.0 18.0

C A (sf) 15,000,000 3.0 15.0

D BBB (sf) 20,000,000 4.0 11.0

E BB (sf) 15,000,000 3.0 8.0

F B (sf) 15,000,000 3.0 5.0

G NR 25,000,000 5.0 N/A

Note: This presale report is based on information as of Aug. 16, 2021. The ratings shown are preliminary. Subsequent information may result inthe assignment of final ratings that differ from the preliminary ratings. Accordingly, the preliminary ratings should not be construed asevidence of final ratings. This report does not constitute a recommendation to buy, hold, or sell securities. NR--Not rated. N/A--Not applicable.

Profile

Expected closing date September 2021

Final maturity date September 2033

Collateral Buy-now-pay-later line of credit receivables to consumers

Issuer Perpetual Corporate Trust Ltd. as trustee of Zip Master Trust – Series 2021-2

Servicer, manager, and seller zipMoney Payments Pty Ltd.

Standby servicer Perpetual Corporate Trust Ltd.

Security trustee P.T. Ltd.

Primary credit enhancement Note subordination and excess spread, if any

Supporting Ratings

Bank account provider National Australia Bank Ltd.

Series liquidity facility provider National Australia Bank Ltd.

Presale:

Zip Master Trust - Series 2021-2August 16, 2021

PRIMARY CREDIT ANALYST

Calvin C Leong

Melbourne

+ 61 3 9631 2142

[email protected]

SECONDARY CONTACTS

Paul Prajogo

Melbourne

+ 61 3 9631 2069

[email protected]

Elizabeth A Steenson

Melbourne

(61) 3-9631-2162

[email protected]

www.standardandpoors.com August 16, 2021 1

© S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of Use/Disclaimeron the last page.

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mailto: [email protected]






Master Trust Key Features

Aggregate receivables (A$) 1,592,596,557

Receivables delinquent for 30 or more days (%) 3.58

Country of origination Australia

Product type concentration (by account numbers; %) Zip Pay (75%), Zip Money (25%)

Product type concentration (by receivable balance; %) Zip Pay (53%), Zip Money (47%)

Rationale

The preliminary ratings assigned to the class A, class B, class C, class D, class E, and class F notesof series 2021-2 to be issued by Perpetual Corporate Trust Ltd. as trustee of Zip Master Trust -Series 2021-2 (the issuer) reflect the following factors.

We considered the portfolio's historical payment, purchase, charge-off, yield, and dilution rates inour analysis. We set our base-case assumptions in line with our global consumer receivablescriteria, taking into account macroeconomic conditions and industry trends (see "GlobalMethodology And Assumptions For Assessing The Credit Quality Of Securitized ConsumerReceivables," published on Oct. 9, 2014). We analyzed historical performance data for the portfoliosince December 2015. In setting our base-case assumptions, we considered the historicalperformance of zipMoney Payments Pty Ltd.'s (Zip's) two buy now, pay later (BNPL) line-of-creditreceivables to consumers--Zip Pay and Zip Money--and the overall composition of the portfolio tobe securitized.

Under our "Global Framework For Assessing Operational Risk In Structured Finance Transactions"operational risk criteria, published on Oct. 9, 2014, we consider the servicer's severity risk to below and portability and disruption risks to be moderate. In assessing operational risk, weconsidered the growth phase of the Australian BNPL market as well as the nature of the BNPLbusiness, with a strong reliance on use of proprietary technology, systems, and practices. We alsonote a standby servicing arrangement is in place with Perpetual Corporate Trust.

We performed cash-flow analysis under series rapid amortization. Because there are nodocumented limits on the proportion of Zip Pay and Zip Money in the overall portfolio to besecuritized, we performed further cash-flow analysis assuming a shift in the portfolio productcomposition. Under such scenarios, the available credit enhancement for each of the ratedclasses of notes is sufficient to support the various stresses commensurate with the ratings onthe notes.

The transaction is exposed to counterparty risk through National Australia Bank Ltd. (NAB) asbank account provider and series liquidity facility provider. The documented downgrade andreplacement language is consistent with our "Counterparty Risk Framework: Methodology AndAssumptions" criteria, published on March 8, 2019.

The master trust is established as a special-purpose entity and meets our criteria for insolvencyremoteness.

Environmental, Social And Governance (ESG)

Our rating analysis considers a transaction's potential exposure to ESG credit factors. As theportfolio is a revolving pool of line of credit receivables, we considered our ESG sector benchmark



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Presale: Zip Master Trust - Series 2021-2

for credit card ABS, for which we view the exposure to environmental credit factors as belowaverage, social credit factors as above average, and governance credit factors as average (see"ESG Industry Report Card: Credit Card Asset-Backed Securities," published March 31, 2021).

The exposure to environmental credit factors in this transaction is in line with our sectorbenchmark, in our opinion. The underlying receivables are unsecured and the significant collateralpool diversification by obligor and geography reduces exposure to physical climate risks.

We have factored the above-average exposure to social risk for this transaction into ouroperational risk assessment. BNPL products generally fall outside the scope of the NationalConsumer Credit Protection Act 2009 (NCCPA), because low and/or flat fees (rather than interest)are charged to consumers. The lack of legislated consumer protections for BNPL users potentiallyincreases conduct risk because BNPL providers are not subject to the same debt serviceabilityand product suitability requirements as regulated credit providers. However, Zip offers aregulated product (Zip Money) in addition to the unregulated product, Zip Pay. Because bothproducts are written through the same origination platform (with additional checks andverification in place for Zip Money), Zip is well-placed to manage increased credit regulationshould it become applicable for Zip Pay.

Servicing processes that mitigate the risk of increasing indebtedness if the customer isexperiencing financial stress include but are not limited to the locking of accounts that go intoarrears.

We consider the transaction's exposure to governance credit factors to be average, which is in linewith the sector benchmark. Given the nature of structured finance transactions, most haverelatively strong governance frameworks through, for example, documented restrictions onactivities.

Strengths And Weaknesses

Strengths

The strengths observed in our rating analysis are:

- The relatively small average receivable size, which reduces credit exposure per borrower.

- That the receivables are generated through a diversified and large number of retailers and theportfolio is not overly exposed to any merchant, with the top exposure representing less than3.5% of total transaction volume.

- That the transaction benefits from a sequential pay structure during the series rapidamortization period, which means the subordinated items are only paid after senior notes.

- That the presence of a series-specific liquidity facility, in our view, mitigates potentialdisruption risks to timely interest payments on the rated notes during a servicer transitionperiod following a servicer default.

Weaknesses

The weaknesses we observed in our rating analysis are:

- That with a three-year revolving period, the credit characteristics of the portfolio could change,potentially undermining the portfolio's overall credit quality. This is partly mitigated by



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documented eligibility criteria and a specified limit on the addition of new receivables over 12consecutive months, which limits the potential shift in the composition of the portfolio.

- That Zip Pay and Zip Money historically each comprised about half of Zip's portfolio and thereare no documented parameters that govern the product composition of the portfolio during therevolving period. However, we undertook additional cash-flow analysis assuming the portfoliocomposition shifts to 65% Zip Pay and 35% Zip Money as well as 35% Zip Pay and 65% ZipMoney. Our cash-flow analysis demonstrates that such a shift would not affect our ratings onthe rated classes of notes.

Originator And Servicer

We assess the quality of the origination, underwriting, and servicing of the receivables as part ofour credit analysis since it can affect the performance of the portfolio.

Zip, the originator, manager, and servicer, is based in Sydney and is a wholly owned subsidiary ofZip Co. Ltd. (Zip Co.). Zip Co. has been listed on the Australian Stock Exchange (ASX) since 2015.Zip offers two BNPL line-of-credit products to consumers: Zip Pay and Zip Money. Zip Pay has alimit of up to A$2,000 while Zip Money has a limit of up to A$50,000. The Zip Pay product isinterest free, while Zip Money is interest free for three months. Thereafter, interest is payable onany balance outstanding on Zip Money. Other than the three-month interest-free period,promotional interest-free periods of up to 60 months may apply for certain point-of-salepurchases for Zip Money. Both Zip Pay and Zip Money offer flexible repayments, with a minimumof A$10 required per week. While Zip Money is subject to the NCCPA, Zip Pay is not a specificallyregulated product.

Zip Pay and Zip Money are originated using Zip's online lending platform, available through itsmobile application and website. Credit assessment for Zip Pay is fully automatic, while for ZipMoney it is almost entirely automatic, bar a small number of referrals to the credit underwritingteam for assessment. Both Zip Pay and Zip Money utilize three scoring approaches in creditassessment: bank score, credit risk score, and credit bureau score. Zip's data science and riskanalytics team supports and continuously enhances its automatic credit assessment platform.The team uses data science to optimize approval rates, arrears, and losses to Zip's risk appetite.Zip policy requires all customers to set up a direct debit at account activation.

Zip is also the servicer and ensuring a high level of customer service by being accessible andresponsive is a key focus. It has a customer experience team of 60 based in Sydney, engaging withcustomers via multiple media, including various social platforms. Its collections process is highlyautomated, with email and SMS reminders of upcoming payments sent as due dates approach. Anaccount will be locked on day 1 of becoming overdue, with further email and SMS notifications. Byday 61 of becoming overdue, default notices are sent and skip tracing is initiated. Zip has adedicated collections team primarily focused on the larger loan size Zip Money accounts. Acollector is assigned to an overdue Zip Money account from day 16 until 180 days overdue.Specialist Zip staff handle any hardship arrangements and debt agreements. To date,enforcement action has been carried out on only a small number of overdue receivables. Given thesize of most Zip Pay and Zip Money accounts, enforcement action is only considered if it iseconomically viable and once all other avenues have been exhausted.

Zip has a dedicated financial hardship team that assesses each application on a case-by-casebasis. To be considered for hardship assessment, customers are required to provide a statementof financial position and banking information. Such hardship support can take the form of apayment arrangement, variation to the contract, moratorium, or deferral.



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Zip writes-off accounts at 180 days of becoming overdue, unless written off earlier; for example,due to borrower bankruptcy, death, or proven fraud. Zip does not sell written-off receivables tothird parties.

Master Trust Structure And Series Summary

The Zip master trust is structured as a master trust that issues notes through separate series,along with a seller note. The trust uses the issuance proceeds of each series to acquirereceivables from Zip, and each series will be entitled to a proportional share of the collectionproceeds from the receivables held by the trust. Similarly, any receivable defaulted amounts areallocated proportionally to each series and the seller note.

The receivables are equitably assigned to the trustee of Zip master trust, with legal title to thereceivables to remain with the seller. Title to the receivables can be perfected if the sellerbecomes insolvent.



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Chart 1

Principal collections may be retained by the trust for the purpose of purchasing new receivablesand/or investment in authorized investments. To mitigate negative carry, if the amount of principalretained over a consecutive five-month period exceeds 20% of the outstanding principal balanceof total trust receivables for each of those months, then it will trigger a partial amortization eventof each series. Any principal more than the 20% limit must then be applied to partially amortizeeach series of notes. Furthermore, to limit the potential shift in composition of the receivablesportfolio, the trust transaction documents restrict the purchase of new receivables during anyperiod of 12 consecutive months to no more than 50% by number of receivables.

Aside from shared excess income (discussed below), liquidity support available is specific to eachseries. Each series could have different classes of notes, with issuance of a new series subject to



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rating notification if there are any rated series outstanding. Series 2021-2 is the fourth series to beissued from the Zip master trust and is the first series to be rated by S&P Global Ratings.

Allocation of interest and principal collections

All income collections received by the trust are firstly applied to meet trust senior expenses,before proportional distribution to each series and the seller note, for application in accordancewith each series and seller note income waterfalls. For Series 2021-2, the income waterfallcontemplates firstly payments to the series liquidity facility provider, followed by sequentialinterest payments to each class of rated notes, reimbursement of any outstanding series principaldraws, then to meet defaulted amounts in respect of the series, then to meet class G notesinterest. Following that, income collections are applied to reimburse any series note charge-offs,in order of seniority, from class A through to class G. Excess spread, if any, from each series andthe seller note are pooled together as shared excess income, available as liquidity support, thenas credit support (to meet any unreimbursed charge-offs) to any series that requires it. In addition,series-specific liquidity support is available. For Series 2021-2, a series-specific liquidity facility isavailable to support timely payment of Series 2021-2 required payments.

All principal collections received by the trust are allocated proportionally to each series and theseller note for application in accordance with each series and seller note principal waterfalls. ForSeries 2021-2, the principal waterfall contemplates four different periods: revolving, controlledaccumulation, scheduled amortization, and rapid amortization. Note that different series mayhave different periods.

Revolving period

During the revolving period, principal collections of all series are pooled together with seller noteprincipal and classified as shared excess principal, which is available to support funding theamortization amounts, if any, of any series. The remaining shared excess principal is allocatedbetween each series and the seller note for the purposes of acquiring new receivables and/or toinvest in authorized investments. The revolving period commences on the closing date and endson the earlier of the enforcement date or commencement of the controlled accumulation,scheduled amortization, or rapid amortization period.

Controlled accumulation period

During the controlled accumulation period, a portion of Series 2021-2 principal collections will bedeposited into the controlled accumulation ledger of the collections account, to be applied torepay Series 2021-2 notes on the earlier of the expected maturity date, a redemption call date, orrapid amortization period. If the series payment date is the expected maturity date (but not aredemption call date), such repayment out of the controlled accumulation ledger will be allocatedfirstly on a pro-rata basis to the class A to class F notes, then sequentially to the class G notes ofSeries 2021-2. Otherwise, the controlled accumulation ledger will be applied to repay Series2021-2 notes on a sequential basis. The controlled accumulation period commences from thecontrolled accumulation commencement date and ends on the earlier of the enforcement date orthe commencement of the scheduled amortization or rapid amortization period.



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Scheduled amortization period

During the scheduled amortization period, a portion of Series 2021-2 principal collections will beused to repay the class A to class F notes of Series 2021-2 on a pro rata basis. There is norepayment of class G notes during this period. The scheduled amortization period commencesfrom the expected maturity date and ends on the earlier of the scheduled maturity date,commencement of the rapid amortization period, or the enforcement date.

Rapid amortization period

During the rapid amortization period, principal collections of Series 2021-2 will be used to repaythe stated amount of each class of Series 2021-2 notes on a sequential basis. This periodcommences from the occurrence of a series rapid amortization event and ends on the earlier ofwhen the invested amount of all Series 2021-2 notes is fully repaid or the enforcement date.

The series rapid amortization events include automatic triggers and events that also require anextraordinary resolution of Series 2021-2 voting secured creditors to trigger rapid amortization.

Automatic events include:

- During the scheduled amortization period, the Series 2021-2 notes are not repaid an amountequal to their scheduled amortization amount.

- The Series 2021-2 notes remained outstanding following the scheduled maturity date.

- The Series 2021-2 average portfolio yield for three consecutive months is less than theaggregate of the average of the expense rate for Series 2021-2 for those three months plus amargin.

- The seller becomes insolvent.

- There is no Series 2021-2 excess spread for three consecutive months.

Events that require an extraordinary resolution include:

- Interest on the most senior class of Series 2021-2 notes outstanding is not paid on time and inthe manner required under the transaction documents, unless in the case of timely payment, itis paid within five days of the due date.

- The seller does not pay any amount payable by it on time and in the manner required under thetransaction documents, unless in the case of timely payment, it is paid within five days of thedue date.

- The seller or trustee does not comply with any of its obligations under any transactiondocuments and it has a material adverse payment effect; and if the noncompliance can beremedied, is not remedied within 60 days.

- The seller or trustee breaches a representation or warranty made or repeated by it in atransaction document and it has a material adverse payment effect; and if such breach can beremedied, is not remedied within 60 days.

- The seller note interest is less than the seller note interest minimum amount for twoconsecutive months;

- A servicer termination event occurs and it has a material adverse payment effect;

- A transaction document is or becomes void, voidable, or unenforceable or does not have the



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priority the security trustee intended it to have, and it has a material adverse payment effect;and

- On any day, the aggregate invested amount of Series 2021-2 notes is less than or equal to 8.0%of the aggregate invested amount of the Series 2021-2 notes on the closing date.

-

Principal allocation method

The principal allocation method for each series varies depending on the period the series is in.During the revolving period, principal allocation from the trust to each series is based on a floatingallocation percentage. For all other periods, principal allocation from the trust to each series isbased on a fixed allocation percentage. For the floating allocation method, the numerator refers tothe aggregate stated amount of all series notes on that day. In contrast, the numerator for thefixed allocation method refers to the aggregate stated amount of all series notes on the last day ofthe revolving period for that series. By locking in the allocated share of principal on the last day ofthe revolving period, the fixed allocation method effectively accelerates the repayment of principalto the series.

Allocation of defaulted amounts and charge-offs

Any receivable defaulted amounts are allocated to each series and seller note on a floatingallocation percentage basis. The proportion allocated to Series 2021-2 is to be firstly absorbed bySeries 2021-2 income collections. Any remaining defaulted amounts are then allocated to theSeries 2021-2 loss reserve ledger, then to the class G notes until their outstanding balance isreduced to zero, followed by the class F, class E, class D, class C, class B, then class A notes.Reimbursement of charge-offs occurs in the reverse order, excluding the loss reserve ledger.Under the series transaction documents, funding of the loss reserve ledger is at the discretion ofthe seller.

Liquidity support

Liquidity support to meet trust required payments is available firstly from a trust principal draw. Ifthis is insufficient, then proportional principal draws can be made from all series and the sellernote. Trust required payments includes payments due to the trustee, security trustee, manager,servicer, and standby servicer.

Liquidity support to meet Series 2021-2 required payments is available firstly from the Series2021-2 yield reserve ledger, then from a Series 2021-2 principal draw and finally from the Series2021-2 liquidity facility. Series 2021-2 required payments includes senior payments due to theSeries 2021-2 liquidity facility provider and interest due to the Series 2021-2 rated notes.However, liquidity support will not be available to meet interest shortfalls on the class B, class C,class D, and class E and class F notes if at any time the stated amount of that class of notes iszero. Under the series transaction documents, funding of the yield reserve ledger is at thediscretion of the seller.

Minimum seller note interest

The master trust documents require a minimum of 1% seller note interest to be maintained. The



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seller note is to be available to set-off against dilutions or ineligible receivables in the mastertrust.

Credit Analysis

We set our base-case and stressed performance assumptions using our "Global Methodology AndAssumptions For Assessing The Credit Quality Of Securitized Consumer Receivables" criteria,published Oct. 9, 2014. The variables that we stress for revolving lines of credit includecharge-offs, portfolio yield, payment rate, purchase rate, and dilutions.

We reviewed the performance data of Zip's total book of Zip Pay and Zip Money from December2015 to May 2021. In determining our base-case assumptions, we considered the historical creditperformance parameters of Zip Pay and Zip Money separately. While certain credit performanceparameters of both products were comparable, we observed distinct differences with the yield,payment rate, and purchase rate of Zip Pay and Zip Money. Consequently, the ongoing creditperformance of Zip Pay and Zip Money each could affect our base-case assumptions for theportfolio.

Zip Pay and Zip Money historically each represented approximately 50% of Zip's portfolio byreceivables balance. We note that the historical observations were over a period of high portfoliogrowth, however, and that there are no documented limits on the proportion of Zip Pay versus ZipMoney in the overall portfolio to be securitized. To partly constrain portfolio shifts, the trusttransaction documents limit the purchase of new receivables during any period of 12 consecutivemonths to no more than 50% by number of receivables. Therefore, as part of our rating analysis wealso considered the impact of changes to the composition of the securitized portfolio (see"Cashflow Analysis").

Eligibility criteria

The trust transaction documents set out certain eligibility criteria for the receivables, some ofwhich are highlighted below. The seller also represents and warrants that each receivable meetsthe eligibility criteria on each sale date.

- The receivable is denominated in and repayable in Australian dollars.

- The receivable is governed by the laws of a state or territory of Australia.

- The receivable was originated by the seller in accordance with the credit procedures applicableat the time of origination in all material respects and in the ordinary course of its business.

- The receivable was originated by the seller in compliance with all material respects with allapplicable laws.

- The receivable is not subject to any dispute, litigation, or claim.

- The receivable requires at least monthly payments of fixed amounts or percentages sufficientto pay interest and fully amortize principal over no longer than 72 months from the date of itsorigination.

- The terms of the receivable require the obligor to make all payments without deduction,withholding, set-off, or counterclaim.

- Immediately following the assignment of the receivable, the receivable will not be subject toany right of recission, set-off, counterclaim, or similar defense.



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- The provision of further financial accommodation under the receivable is at the absolutediscretion of the seller.

- The seller has not received any notice of the insolvency or bankruptcy of the obligor in respectof the receivable.

- The obligor is not more than seven days in arrears in respect of any payment due under thereceivable.

- The seller has not waived any of the obligations of the obligor under the receivable, other thanfor hardship reasons in accordance with its credit procedures.

- The seller is not in any material breach of its obligations under the receivable.

Charge-off rate

We define charge-offs as the balance of receivables that defaulted in any given month divided bythe portfolio balance at the beginning of that month, annualized and expressed as a percentage. Areceivable is considered defaulted when it is 180 days in arrears. We also reviewed charge-offrates calculated on a six-month lagged receivables balance basis to observe any biasing effect ofa changing receivables balance in the denominator of the charge-off rate calculation. Given Zip'sportfolio growth rate, the six-month lagged receivables balance basis indicated higher levels ofcharge-off. We took this into consideration in sizing our base-case assumption. Chart 2 showsZip's historical gross charge-offs on a nonlagged basis.

Chart 2

Our base-case charge-off assumption reflects our expectation of steady state charge-offs, giventhe historical trend and volatility in Zip's charge-off rates. Our 'AAA', 'AA', and 'A' rating stresses



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assume that charge-offs reach their peak over 12 months, then remain at that level for thetransaction's life.

Payment rate

We define the monthly payment rate as the total collections received in a particular month dividedby the portfolio balance at the beginning of that month, expressed as a percentage. In our view, ahigh payment rate is beneficial for the transaction because during the amortization period theseries is paid down more quickly, meaning noteholders are exposed to losses for a shorter period.

Zip Money exhibits a lower payment rate historically compared with Zip Pay, reflecting productattributes and use. While Zip Pay and Zip Money both offer flexible repayment terms with aminimum dollar repayment amount per week, Zip Money tends to represent higher-valuetransactions with a predetermined interest-free period; Zip Pay's are lower-value transactionsand perpetually interest-free. The incentive for Zip Pay customers to pay more than the minimumrequired is lower than if it were an interest-bearing product. However, the minimum weeklyrepayment of A$10 for both products, coupled with the lower facility limits and shorter term forZip Pay, results in a higher payment rate relative to Zip Money.

Despite the relative difference between the two products, the payment patterns of both productssuggest borrower behaviors that are more akin to revolvers. The nature of both products, beingoriginated at point-of-sale and with an interest-free feature, attracts customers who tend to usethe facilities to purchase specific discretionary items rather than solely for convenience(transactors).

Chart 3



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Yield

We define yield as total income in a particular month divided by the portfolio balance at thebeginning of that month, annualized and expressed as a percentage. Total income to the trustconsists of merchant fees, interest charges, establishment fees, monthly service fees, late fees,and sundry income. Because Zip Pay is an interest-free product, all interest charges for theportfolio are from the Zip Money product. Although we would consider the borrowers of Zip Payand Zip Money to be more akin to revolvers, we do not expect this to positively generate significantgrowth in interest income, given the interest-free nature of the products.

Chart 4



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To determine our base-case yield assumption, we gave no credit to establishment fees, merchantfees, and sundry income. Therefore, the adjusted yield in chart 5 reflects interest charges,monthly service fees, and late fees only.

Chart 5

Purchase rate

When setting assumptions regarding purchase rate, we tend to look at the quality of the originatorand its rating rather than the historical data. The originator is not a bank and is not rated. We alsolook at the nature of the receivables to be securitized.

According to our global consumer finance criteria, the purchase rate assumption for retail orcobranded credit card receivables is generally lower than bankcard receivables. This is becausethe utility of the card depends on the strength and survival of the retailer or cobrand relationship.It is also because we assume unrated or noninvestment grade-rated originators or servicers ofprivate-label cards would not be able to originate new receivables under stress scenariosexceeding 'BB'. Because Zip Pay and Zip Money are originated at point of sale with merchants, weconsequently assumed a 0% purchase rate for 'BBB' and higher ratings, 0.25% for 'BB' ratings,and 1.0% for 'B' ratings.

Dilutions

Dilution, which we measure as a percentage of the outstanding receivables, comprises thenoncash reductions in the principal receivables balance from merchandise returns or any otherreason except for losses and payments. Dilutions can also arise because of fraud. There weresome limitations on the historical fraud data available for the Zip portfolio, which we took into



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account in determining our rating stress assumptions for dilutions. We typically see slightly higherdilutions in portfolios with high rates of new purchases than portfolios with more revolvers.Comparatively, we observed the dilutions of Zip Pay and Zip Money have been relatively low. Wereviewed the trust's monthly returns data, then staggered dilution that occurred during the 30-,60-, and 90-day cycles, and applied a multiple to the base-case dilution rate to derive the dilutioncoverage level that we believe is commensurate with our ratings on the Series 2021-2 notes. Inthis master trust, dilutions are firstly to be covered by the seller, then by the seller note. However,the transaction documents also contemplate utilizing the seller note to cover any ineligiblereceivables, and we believe the ability to access the seller note to cover dilutions may beconstrained in a rating stress environment. As such, we have given no credit to the ability toaccess the minimum seller note amount to cover dilutions. Instead, in our cash-flow modeling wereflected dilutions as defaulted amounts to Series 2021-2.

Table 1 summarizes our base-case, haircut or multiple, and stressed assumptions for each ratingrelevant to this transaction. The base cases shown reflect an assumed overall portfolio of 50% ZipPay and 50% Zip Money.

Table 1

Credit Analysis Summary

Charge-off Payment rate Yield Purchase rate Dilutions

Base case (%) 3.50 16.25 8.50 N/A 0.70

'AAA' rating assumption

Haircut (%)/multiple (x) 5.70x 52.50% 48.75% N/A 4.50x

'AAA' stressed assumption (%) 19.95 7.72 4.36 0.00 3.15

'AA' rating assumption


'AA' stressed assumption (%) 15.93 8.53 4.73 0.00 2.66

'A' rating assumption


'A' stressed assumption (%) 11.55 9.34 5.10 0.00 2.21

'BBB' rating assumption


'BBB' stressed assumption (%) 7.88 10.97 5.84 0.00 1.44

'BB' rating assumption


'BB' stressed assumption (%) 5.78 12.39 6.27 0.25 1.16

'B' rating assumption


'B' stressed assumption (%) 4.90 14.22 6.69 1.00 0.98

N/A--Not applicable.



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Cash-Flow Analysis

Our ratings on the class A, class B, class C, class D, class E, and class F notes of Series 2021-2address the timely payment of interest and the ultimate payment of principal by the legal maturitydate of the notes.

Series 2021-2 features a trigger we consider equivalent to a base-rate trigger that, if breached, isa series rapid amortization event (see "Rapid amortization period"). Accordingly, consistent withour consumer finance criteria, for rating scenarios of 'A-' and above we assumed the base-ratetrigger was breached at transaction close and therefore the series was in its rapid amortizationperiod. We therefore modeled the series cash flows assuming the starting level of excess spreadto be negative for such rating scenarios. For rating scenarios of 'BBB+' and below, we modeled theseries cash flows assuming that portfolio losses increase from a level that would cause a trigger tobe breached to the rating scenario peak loss level over a period of time. For 'BBB', 'BB', and 'B'rating scenarios, we considered a starting excess spread of -2.0%, -1.0%, and 0%, respectively.Additional cash-flow modeling assumptions include stressing the interest rate on the liabilities byvarying the bank bill swap rate (BBSW) curves at each rating level and a stressed servicer feeshould it be necessary for Zip to be replaced as servicer.

Zip Pay and Zip Money historically each represented approximately 50% of Zip's portfolio.Because there are no documented limits that govern the proportion of Zip Pay and Zip Moneyduring the transaction's revolving period, we undertook additional cash-flow analysis thatassumes the portfolio composition shifted to comprise 65% Zip Pay and 35% Zip Money as well as35% Zip Pay and 65% Zip Money.

Our analysis indicates that the available credit enhancement to each rated class of Series 2021-2notes is sufficient to support the respective assigned ratings. Nonetheless, any deviation of theportfolio composition beyond our cash-flow analysis could affect our ratings.

Sensitivity Analysis

We cash-flow modeled two additional scenarios to determine the notes' vulnerability to adowngrade under each scenario. We ran the scenarios by adjusting our base-case assumptionswhile maintaining the same stress multiples/haircuts for each rating level:

- Scenario 1: Compared with our base case, yield deteriorates 10%, charge-offs increase 30%,and payment rate deteriorates 10%.

- Scenario 2: Compared with our base case, yield deteriorates 20%, charge-offs increase 50%,and payment rate deteriorates 20%

For both scenarios we did not change our purchase-rate, dilution, or interest-rate curveassumptions. We applied each of the two scenarios on an assumed portfolio of: 50% Zip Pay and50% Zip Money, 65% Zip Pay and 35% Zip Money, and 35% Zip Pay and 65% Zip Money. Thesensitivity analysis base cases are shown in table 2.



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Table 2

Sensitivity Analysis Base Cases

Charge-off (%) Payment rate (%) Yield (%)

50% Zip Pay and 50% Zip Money

Sensitivity scenario 1 4.55 14.63 7.65








Table 3 sets out the what the rating level of the rated classes of notes would be at transactionclose--after incorporating cash-flow modeling outcomes--under each sensitivity scenario.

Table 3

Sensitivity Analysis Results

Class A B C D E F

Rating AAA (sf) AA (sf) A (sf) BBB (sf) BB (sf) B (sf)


Sensitivity scenario 1 AAA (sf) A+ (sf) A- (sf) BBB (sf) BB (sf) B (sf)

Sensitivity scenario 2 AAA (sf) A- (sf) BBB+ (sf) BBB (sf) BB (sf) B (sf)


Sensitivity scenario 1 AAA (sf) A (sf) A- (sf) BBB (sf) BB (sf) B (sf)

Sensitivity scenario 2 AAA (sf) A- (sf) BBB+ (sf) BBB (sf) BB (sf) B (sf)


Sensitivity scenario 1 AAA (sf) A+ (sf) A (sf) BBB (sf) BB (sf) B (sf)

Sensitivity scenario 2 AAA (sf) A (sf) BBB+ (sf) BBB (sf) BB (sf) B (sf)

Counterparty Risk

Liquidity facility

A liquidity facility provided by NAB is available to be drawn to support the timely payment of Series2021-2 required payments. The required balance of the liquidity facility is the greater of 1.0% ofthe aggregate invested amount of Series 2021-2 notes (excluding class G notes), subject to a floorof A$750,000, and the performing balance of trust receivables. To the extent there is a liquidityfacility draw, liquidity support will be used to reimburse the draw on subsequent payment dates.



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Bank account and commingling risk

The trust collection account is opened in the name of the trustee and held with NAB. Thetransaction documents require the trust collection account to be held with an eligible bank thathas a minimum long-term rating of 'A' or short-term rating of 'A-1'.

Under the trust transaction documents, Zip must deposit collections into the trust collectionaccount within two business days to mitigate commingling risk.

Set-off risk

In our view, set-off risk is mitigated by the eligibility criteria, which prevent receivables subject toset-off to be part of the receivables portfolio. Zip is not an authorized deposit-taking institutionand therefore there is no risk of borrowers setting off their obligations against deposits.

Related Criteria

- Criteria | Structured Finance | General: Global Framework For Payment Structure And CashFlow Analysis Of Structured Finance Securities, Dec. 22, 2020

- Criteria | Structured Finance | General: Methodology To Derive Stressed Interest Rates InStructured Finance, Oct. 18, 2019

- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology AndAssumptions, March 8, 2019

- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology,March 29, 2017

- Criteria | Structured Finance | ABS: Global Methodology And Assumptions For Assessing TheCredit Quality Of Securitized Consumer Receivables, Oct. 9, 2014

- Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk InStructured Finance Transactions, Oct. 9, 2014

- General Criteria: Global Investment Criteria For Temporary Investments In TransactionAccounts, May 31, 2012

- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

- Criteria | Structured Finance | General: Methodology For Servicer Risk Assessment, May 28,2009

Related Research

- ESG Industry Report Card: Credit Card Asset-Backed Securities, March 31, 2021

- Australia And New Zealand Structured Finance Scenario And Sensitivity Analysis:Understanding The Effects Of Macroeconomic Factors On Credit Quality, April 17, 2017

- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top FiveMacroeconomic Factors, Dec. 16, 2016

- Yield Considerations In Standard & Poor's Cash-Flow Analysis Of Australian And New Zealand



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ABS, Nov. 21, 2013

- Repayment Structures Of Australian RMBS and ABS Play An Important Role in SupportingRatings Stability, Aug. 16, 2010

- ABS Performance Watch: Australia and New Zealand, published quarterly

The issuer has informed S&P Global Ratings Australia Pty. Limited that the issuer will be publiclydisclosing all relevant information about the structured finance instruments that are subject tothis rating report.

S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the CorporationsAct 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to anyperson in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).



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Standard & Poor’s | Research | August 16, 2021 20

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Zip Master Trust - Series 2021-2

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Transcript of Zip Master Trust - Series 2021-2