DBRS Assigns Provisional Ratings to GMF Canada Leasing Trust’s Asset-Backed Notes, Series 2016-1

DBRS Limited (DBRS) has today assigned the following provisional ratings to the Class A-1 *% Asset-Backed Notes, Series 2016-1 (Class A-1 Notes); Class A-2 *% Asset-Backed Notes, Series 2016-1 (Class A-2 Notes); Class A-3 *% Asset-Backed Notes, Series 2016-1 (Class A-3 Notes; collectively, with the Classes A-1 and A-2 Notes, the Class A Notes); Class B *% Asset-Backed Notes, Series 2016-1 (Class B Notes); and Class C *% Asset-Backed Notes, Series 2016-1 (Class C Notes; collectively, the 2016-1 Trust Notes) issued by GMF Canada Leasing Trust:

-- Class A-1 Notes provisionally rated at AAA (sf)
-- Class A-2 Notes provisionally rated at AAA (sf)
-- Class A-3 Notes provisionally rated at AAA (sf)
-- Class B Notes provisionally rated at AA (sf)
-- Class C Notes provisionally rated at A (sf)

The 2016-1 Trust Notes will be supported by a 2016-1 Borrower Note that is supported by a first-priority security interest in a portfolio of closed-end lease contracts of new automobiles, light-duty trucks and utility vehicles (the Designated Pool). The lease contracts were originated through authorized General Motors dealers in Canada.

The collections from the Designated Pool will be used to repay the 2016-1 Borrower Note, and the proceeds from the 2016-1 Borrower Note will be used to repay the 2016-1 Trust Notes. Collections from the Designated Pool generally include scheduled monthly lease payments (including residual value payments in the case of customer-retained vehicles) as well as proceeds from vehicle sales either at the end of the lease term or earlier in the case of prepayments and defaults. Proceeds from excess mileage and wear-and-tear charges, if any, also form part of the collections from the Designated Pool.

Monthly payments of interest and principal will be made according to the amortization schedule of the 2016-1 Trust Notes based on the amortization of the Designated Pool. The 2016-1 Trust Notes will be repaid in sequential order, with the Class A-1 Notes being repaid first, followed by the repayment of the Class A-2 Notes, Class A-3 Notes, Class B Notes and, finally, Class C Notes. The assigned provisional ratings are based on the full repayment of the 2016-1 Trust Notes by their respective Final Scheduled Payment Dates.

The provisional ratings incorporate the following considerations:

(1) HIGH LEVEL OF CREDIT ENHANCEMENT
Initially, hard credit enhancements of 19.55%, 15.70% and 12.15% will be available to the Class A Notes, Class B Notes and Class C Notes, respectively, and will consist of 0.50% of cash reserve, 11.65% of overcollateralization (OC) and subordination of 7.40% and 3.55% to the Class A Notes and the Class B Notes, respectively. By using excess monthly collections to repay the outstanding principal of the 2016-1 Trust Notes, the OC amount will build to 13.40% of the Securitization Value at closing. No cash will be released to the Issuer until the target OC amount is met, which is expected by month four based on scheduled payments (assuming no losses, delinquencies or prepayments). In addition, approximately 3.94% (annualized) of excess spread, net of indicative cost of funds and monthly servicing fees, is available to offset any collection shortfalls on a monthly basis.

(2) NON-AMORTIZING CREDIT ENHANCEMENT
The requirement to maintain the cash reserve account and OC amounts at their target levels provides a deleveraging structure as principal on the 2016-1 Trust Notes is repaid. Residual values represent the largest risk in closed-end auto-lease securitizations, and exposure to such risk is at its highest at the maturities of the lease contracts. Non-amortizing credit enhancement ensures that an increasing level of protection is available to offset potential vehicle-disposition losses.

(3) CONSERVATIVE ADVANCE RATE ON RESIDUAL VALUES
The Base Residual Value is determined by using the lowest of contract residual value, ALG values at lease inception and updated ALG values as at September 2016. The reference to the ALG values in setting the Base Residual Value eliminates funding of potential embedded losses (negative equity in relation to residual values) on the Closing Date, effectively reducing residual value risk in the Designated Pool. The ALG values at origination and updated ALG values have been provided for each of the vehicles in the Designated Pool. As ALG projects its residual values primarily based on auction proceeds, ALG values represent an independent and conservative estimate of the expected wholesale value of the vehicles in the portfolio at maturity.

(4) SECURITIZATION EXPERIENCE AND PARENT STRENGTH
General Motors Financial of Canada, Ltd (GMFC) has demonstrated its ability to manage successful private securitization transactions supported by auto leases in Canada. In addition, GM and its related entities have been upgraded to BBB with a Stable trend by DBRS. The upgrade was a result of a well-established presence in the auto finance market and an evolving and strengthening franchise. As a subsidiary of General Motors Company (GM), GM Financial Company, Inc. (GM Financial) continues to evolve toward a more prime-focused loan and lease portfolio from its historically higher-risk, sub-prime-loan-oriented profile under AmeriCredit Corporation. As a subsidiary of GM Financial, GMFC benefits from its parent’s strong financial standing and global presence, allowing it to leverage the experience and expertise of GM Financial to ensure sound and consistent underwriting standards and efficient servicing operations.

(5) STRONG OBLIGOR PROFILE
The obligors of the underlying lease contracts represent high-credit-quality customers as the weighted-average Credit Bureau score is 750. The strong credit profile is also supported by low credit losses and the delinquency levels of the Seller’s owned and managed portfolio in the last three years as well as 18 months of seasoning in the current pool.

DBRS’s cash flow analysis included stresses on credit and residual value loss exposures, vehicle turn-in rates and prepayments, which indicate that the credit enhancement available provides sufficient protection to the 2016-1 Trust Notes to warrant the ratings assigned.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Canadian Auto Retail Loan and Lease Securitizations (October 2016) and Legal Criteria for Canadian Structured Finance (July 2016), which can be found on our website under Methodologies.