DBRS Finalizes Provisional Ratings on GMF Canada Leasing Trust’s Asset-Backed Notes, Series 2018-1

DBRS Limited (DBRS) finalized the following provisional ratings on the Class A-1 2.498% Asset-Backed Notes, Series 2018-1 (Class A-1 Notes); Class A-2 3.030% Asset-Backed Notes, Series 2018-1 (Class A-2 Notes); Class A-3 3.262% Asset-Backed Notes, Series 2018-1 (Class A-3 Notes; together with the Classes A-1 and A-2 Notes, the Class A Notes); Class B 3.794% Asset-Backed Notes, Series 2018-1 (Class B Notes); and Class C 3.898% Asset-Backed Notes, Series 2018-1 (Class C Notes; together with the Class A Notes and the Class B Notes, the Offered Notes). The Subordinated 3.998% Asset-Backed Notes, Series 2018-1 (Subordinated Trust Note; together with the Offered Notes, the 2018-1 Trust Notes) are retained by the Issuer and are not rated. The 2018-1 Trust Notes were issued by GMF Canada Leasing Trust on the Closing Date:

-- Class A-1 Notes at AAA (sf)
-- Class A-2 Notes at AAA (sf)
-- Class A-3 Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (sf)
-- Subordinated Trust Note: unrated

The 2018-1 Trust Notes are supported by Senior and Subordinated Borrower Notes (together, the 2018-1 Borrower Notes) that are 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 2018-1 Borrower Notes and the proceeds from the 2018-1 Borrower Notes will be used to repay the 2018-1 Trust Notes. No payments of interest or principal will be made on the Subordinated Borrower Note or the Subordinated Trust Note until all principal and interest on the Senior Borrower Note and the Offered Notes have been paid in full. The Subordinated Borrower Note is fully subordinated to the Senior Borrower Note and the Subordinated Trust Note is fully subordinated to the Offered Notes. Collections from the Designated Pool generally include scheduled monthly and bi-weekly 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.

The Offered Notes will be repaid in sequential order with the Class A-1 Notes 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 ratings are based on the full repayment of the Offered Notes by their respective Final Scheduled Payment Dates.

The ratings incorporate the following considerations:

High Level of Credit Enhancement (CE)
Initially, hard CE of 19.55%, 15.70% and 12.15% is available to the Class A Notes, Class B Notes and Class C Notes, respectively, and consists of 0.50% of cash reserve, 7.00% of overcollateralization (OC) and subordination of 12.05%, 8.20% and 4.65% to the Class A Notes, the Class B Notes and the Class C Notes, respectively. By using excess monthly collections to repay the outstanding principal of the Offered Notes, the OC amount will build to 8.75% 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, 3.08% (annualized) of excess spread, net of the cost of funds of the Offered Notes and monthly servicing fees, is available to offset any collection shortfalls on a monthly basis.

Non-Amortizing CE
The requirement to maintain the cash reserve account and OC amounts at their target levels provides a deleveraging structure as principal on the Offered 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 CE ensures that an increasing level of protection is available to offset potential vehicle disposition losses.

Conservative Advance Rate on Residual Values
The Base Residual Value of each vehicle in the pool is determined by using the lowest of the contract residual value, Automotive Lease Guide (ALG) value at lease inception and updated ALG value as of Q3 2018. The reference to the ALG values in setting the Base Residual Value eliminates the 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.

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. General Motors Company (GM) and its related entities are rated BBB with a Positive trend by DBRS as at March 29, 2018. The change to a Positive trend from a Stable trend was made in recognition of GM’s positive financial risk assessment and the expectation that earnings performance and credit metrics will remain at current levels despite headwinds arising from emerging automotive technologies and any trade uncertainties. As a subsidiary of GM, General Motors 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 Corp. As a subsidiary of GM Financial, GMFC benefits from its parent’s strong financial standing and global presence, allowing it to leverage GM Financial’s experience and expertise of to ensure sound and consistent underwriting standards and efficient servicing operations.

Strong Obligor Profile
The obligors of the underlying lease contracts represent high-credit-quality customers, as the weighted-average credit bureau score is 762. 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 17 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 CE available provides sufficient protection to the Offered Notes to warrant the ratings assigned.

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

The principal methodologies are Rating Canadian Auto Retail Loan and Lease Securitizations (October 2018) and Legal Criteria for Canadian Structured Finance (July 2018), which can be found on dbrs.com under Methodologies.

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

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.

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