DBRS Assigns Ratings to Chesapeake Funding II LLC, Series 2015A

DBRS, Inc. (DBRS) has today assigned a new rating to the following notes (the Notes) issued by Chesapeake Funding II LLC (the Issuer):

-- Series 2015-A Notes, Class A rated A (sf)

Chesapeake Funding II LLC represents a new master trust established by Element Financial Corporation (Element) in connection with its acquisition of the North American fleet management operations of General Electric Capital Corporation (GE Fleet), which closed on August 31, 2015. The Notes are the second issuance under this new master trust. Proceeds from the Notes are refinancing corporate debt issued by Element in connection with its acquisition of GE Fleet. The Notes are secured by a first-priority, perfected security interest in the following (the Collateral):

-- Vehicles titled in the name of GELCO Corporation (GELCO),
-- The related open-end fleet leases and
-- Vehicles acquired by GELCO at the request of lessees that are in the process of being leased.

Unlike the prior Chesapeake Funding II LLC issuance, Series 2015-A is not revolving. The Collateral is static and the Notes amortize by 100% of principal collections and charge-offs post-closing.

The Collateral is titled in the name of GELCO, which is an operating company and wholly owned subsidiary of Element Vehicle Management Services Group, LLC (VMS). GELCO is the nominee title holder and contributed all economic benefits of ownership to a titling trust - Gelco Fleet Trust (GFT) - at closing. GELCO retains only bare legal title to the transferred vehicles and grants an irrevocable power of attorney to GFT to take all action necessary in the name of GELCO to transfer the titles to such vehicles to GFT. Issuer’s counsel delivered opinions addressing the true contribution of the vehicles to GFT pursuant to the contribution agreement and the non-consolidation of GFT’s equitable interest in the transferred vehicles with GELCO’s estate in a bankruptcy proceeding.

The transaction bears no residual value exposure since there are no close-ended leases and the lessees under open-ended leases are responsible for any difference between the liquidation value and the net book value of the vehicle.

Element also uses an existing master trust platform (Chesapeake Funding LLC), which finances its fleet lease portfolio prior to the acquisition of GE Fleet. The two structures are separate and not cross collateralized.

VMS, a subsidiary of Element, is the originator and servicer for the transaction. VMS and its affiliated companies provide vehicle leasing and fleet management services, including fuel and maintenance cards and accident management services, throughout the United States, with leading market shares across many of its product lines.

The Collateral is somewhat concentrated with the top ten obligors comprising approximately 51% of the pool; however, the pool exhibits a fairly high credit quality with approximately 65% of the obligors being rated investment grade. This high credit quality is reflected in VMS’s solid historical performance across its entire leasing portfolio. Late-stage delinquencies (90+ days past due) are relatively low, ranging between 15 basis points (bps) and 106 bps over the period from January 2010 to June 2015. Monthly net losses are under five bps over the same time period.

Credit enhancement for the Series 2015-A consists of overcollateralization (OC) equal to 7.75% of Collateral and a cash reserve equal to 1.30% of Collateral. The cash reserve and OC do not reduce.

The A (sf) rating for Series 2015-A is based on a review by DBRS of the following analytical considerations:

-- Transaction capital structure, proposed ratings and form and sufficiency of available credit enhancement.
-- Credit enhancement levels are sufficient to support DBRS stressed loss assumptions under various stress scenarios.
-- The yield supplement account is established to supplement the yield from any lease that does not meet a minimum yield requirement.
-- The ability of the Transaction to withstand stressed cash flow assumptions and repay investors according to the terms in which they have invested. The rating addresses the payment of timely interest on a monthly basis and principal by the final maturity date.
-- VMS’s capabilities with regard to originations, underwriting and servicing.
-- DBRS has performed an operational review of VMS and considers the company to be an acceptable originator and servicer.
-- The high credit quality and historical performance of the Collateral.
-- The leased vehicles are essential use vehicles for customers; therefore, such leases are likely to be affirmed by an obligor in a bankruptcy proceeding.
-- The legal structure and presence of legal opinions that address the true sale of the assets, the non-consolidation of the Issuer with VMS, the Issuer’s valid first-priority security interest in the assets and the consistency with DBRS’s “Legal Criteria for U.S. Structured Finance.”

Notes:
The applicable methodology is Rating U.S. Auto Fleet Lease Securitizations, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.