DBRS Assigns Provisional Ratings to Ford Auto Securitization Trust, Asset-Backed Notes, Series 2017-R5

DBRS Limited (DBRS) assigned provisional ratings to the following notes to be issued by Ford Auto Securitization Trust 2017-R5 (the Trust):

-- Asset-Backed Notes, Series 2017-R5, Class A-1 (the Class A-1 Notes) provisionally rated AAA (sf)
-- Asset-Backed Notes, Series 2017-R5, Class A-2 (the Class A-2 Notes) provisionally rated AAA (sf)
-- Asset-Backed Notes, Series 2017-R5, Class A-3 (the Class A-3 Notes, together with the Class A-1 Notes and Class A-2 Notes, the Class A Notes) provisionally rated AAA (sf)
-- Asset-Backed Notes, Series 2017-R5, Class B (the Class B Notes) provisionally rated AA (high) (sf)

The Trust will also issue Asset-Backed Notes, Series 2017-R5, Class C (the Class C Notes, together with the Class A Notes and Class B Notes, the Notes), which are not rated. The Notes will be 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 and the Class C Notes. The provisional ratings are based on the full repayment of the Class A Notes and Class B Notes by their respective Final Scheduled Payment Dates.

The provisional ratings incorporate the following considerations:

(1) Credit Enhancement - Amount
The high level of credit enhancement provided by subordination (5.00% of the Initial Adjusted Pool Balance to the Class A Notes and 2.00% of the Initial Adjusted Pool Balance to the Class B Notes); overcollateralization (OC; 2.00% of the Initial Adjusted Pool Balance; zero on the Expected Closing Date), which builds as principal on the Notes is repaid; a Cash Reserve Account (1.00% of the Initial Pool Balance); and an annual excess spread of approximately 4.05%, net of indicative cost of funds and the 1.05% 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, OC 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
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 yield supplement overcollateralization amount (YSOA) on each payment date, 2.00% of the Initial Adjusted Pool Balance and the excess of 1.50% of the current pool balance over 1.0% of the Initial Pool Balance. The YSOA schedule is fixed as of the cut-off date and is equal to the aggregate excess of (a) the present value of all payments on each receivable discounted at the annual percentage rate of each contract over (b) the present value of all payments on each receivable discounted at the Discount Rate of 7.70%. It was set based on an amortization of the portfolio under a zero prepayment and no-loss scenario, and under which additional yield from discounting the receivables at the Discount Rate would result in initial excess spread of approximately 4.05%. 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.

(4) Obligor Profile
The obligors of the underlying loan contracts represent high-credit-quality customers, as the weighted-average FICO score is 756. Commercial obligors and obligors with FICO scores below 600 constitute 16.3% and 4.3% of the pool balance, respectively. Over 58% 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 sales are up 3.1% year over year as at September 2017. 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 15.5% market share in sales year-to-date September 2017 (the highest in the industry) and with its popular 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:
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 principal methodologies are Rating Canadian Auto Retail Loan and Lease Securitizations and Legal Criteria for Canadian Structured Finance, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

The full report providing additional 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.