DBRS Finalizes Provisional Ratings on Ford Auto Securitization Trust, Asset-Backed Notes, Series 2017-R2

DBRS Limited (DBRS) has today finalized the provisional ratings on the following notes issued by Ford Auto Securitization Trust (FAST) 2017-R2:

-- Asset-Backed Notes, Series 2017-R2, Class A-1 (the Class A-1 Notes) rated AAA (sf)
-- Asset-Backed Notes, Series 2017-R2, Class A-2 (the Class A-2 Notes) rated AAA (sf)
-- Asset-Backed Notes, Series 2017-R2, Class A-3 (the Class A-3 Notes and together with the Class A-1 Notes and the Class A-2 Notes, the Class A Notes or the Senior Notes) rated AAA (sf)
-- Asset-Backed Notes, Series 2017-R2, Class B (the Class B Notes) rated AA (high) (sf)
-- Asset-Backed Notes, Series 2017-R2, Class C (the Class C Notes) rated A (high) (sf)
-- Asset-Backed Notes, Series 2017-R2, Class D (the Class D Notes and together with the Class B Notes and the Class C Notes, the Subordinated Notes) rated BBB (high) (sf)

The Senior Notes and Subordinated Notes (collectively, the Notes) are supported by a portfolio of prime retail auto loan contracts originated by Ford Credit Canada Company (Ford Credit Canada) and secured by new and used light trucks (including sport-utility vehicles) and passenger cars (the Portfolio of Assets).

Repayment of the Notes will be made from collections from the Portfolio of Assets, which include scheduled monthly and bi-weekly loan payments, prepayments as well as proceeds from vehicle sales in the case of defaults. Principal repayment on the Notes will be sequential in the order of the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes, the Class B Notes, the Class C Notes and the Class D Notes. The ratings assigned are based on the full repayment of the Notes by their respective Final Scheduled Payment Dates.

The ratings incorporate the following considerations:

(1) Credit Enhancement — Amount
The high level of credit enhancement provided by subordination (7.0% of the Initial Adjusted Pool Balance; 5.0% on the Closing Date), which builds as principal on the Senior Notes is repaid; a Cash Reserve Account (1.0% of the Initial Pool Balance); and an annual excess spread of approximately 4.54%, net of cost of funds and the 1.0% Replacement Servicer Fee, which will be available to offset collection shortfalls on a monthly basis.

(2) Credit Enhancement — Structure (non-amortizing)
The level of subordination for the Class A Notes and the Class B Notes and Cash Reserve Account remain at their initial levels even as principal on the Notes is repaid. This deleveraging structure results in increased credit enhancement as the Portfolio of Receivables amortizes.

(3) Transaction Structure
Monthly excess spread is generated in the transaction by virtue of the Yield Supplement Overcollateralization Amount (YSOA) schedule. The YSOA schedule is fixed and determines the amount of overcollateralization (OC) that needs to be maintained each month. It was set based on an amortization of the portfolio under a zero prepayment and no losses scenario, and under which additional yield from the OC would result in initial excess spread of 4.54%. As some level of prepayments is likely to occur, increasing the rate of amortization while the YSOA schedule remains fixed, DBRS expects that the yield generated from the OC would increase against the Notes in such scenario. In addition, the transaction structure ensures that excess collections are not released to the Seller until the Targeted OC Amount is met. The Targeted OC Amount is calculated as the sum of the YSOA amount on each payment date and the excess of 1.50% of the current pool balance over 1.0% of the Initial Pool Balance.

(4) Obligor Profile
The obligors of the underlying loan contracts represent high-credit-quality customers, as the weighted-average FICO score is 754. Commercial obligors and obligors with FICO scores below 600 comprise 16.2% and 5.1% of the pool balance, respectively. Over 57% of the pool has a FICO score of greater than or equal to 700. The strong credit profile is also supported by low and consistent historical credit losses and delinquency levels of prior FAST transactions and the Seller’s owned and managed portfolio.

(5) Operational and Brand Strength of Seller/Servicer
The Seller was confirmed at BBB with a Stable trend by DBRS on February 23, 2017. The corporate rating confirmation recognizes Ford Credit Canada’s demonstrated experience in the origination and servicing of retail auto receivables and securitization transactions. In addition, there is a performance guarantee provided by Ford Credit Canada’s parent, Ford Motor Credit Company LLC (FMCC), rated BBB/R-2 (middle) by DBRS with Stable trends as of February 23, 2017. Ford had a 2.0% increase in sales in the first quarter of 2017 over 2016. As a subsidiary of FMCC, Ford Credit Canada benefits from its parent’s strong financial standing and global presence, allowing it to leverage the experience and expertise to ensure sound and consistent underwriting standards and efficient servicing operations. The Ford brand continues to be strong in Canada as evidenced by its 14.9% market share – second in the industry (year-to-date March 31, 2017) – and with its F-Series trucks.

DBRS cash flow analysis includes a conservative base case cumulative net loss estimate. Available credit enhancement is able to withstand the stresses at levels commensurate with the assigned ratings.

Notes:
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 principal methodologies are Rating Canadian Auto Loan and Lease Securitizations and Legal Criteria for Canadian Structured Finance, which can be found on dbrs.com under Methodologies.

The full report providing additional information and analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.