DBRS Morningstar Publishes Finalized Canadian Residential Rental Equipment Contract Receivables Appendix

DBRS Morningstar Credit Ratings (DBRS Morningstar) finalized its Residential Rental Equipment Contract Receivables Appendix in the “Rating Canadian Structured Finance Transactions” methodology.

This appendix presents the criteria for which Canadian residential rental equipment contract receivables ratings are assigned and/or monitored.

On September 25, 2019, DBRS Morningstar published a request for comment on the proposed new appendix. The comment period has ended and DBRS Morningstar has received comments from various parties, all of whom wished to remain anonymous. DBRS Morningstar has amended the appendix to address the following comments:

(1) Opinions on billing arrangements with a utility company
One comment indicated that billing arrangements between a biller and a utility company are typically in the form of a standard form industry-wide agreement and due authorization and enforceability opinions by the utility company would not normally be given in respect of such billing arrangements. As a result, DBRS Morningstar removed the provision for opinions from utility companies in billing arrangements and added an expectation to review any standard billing arrangements and factor such arrangements into its rating analysis.

(2) Security registration expectations
One comment requested clarification on circumstances where notice of appropriate security registrations to be registered on title is expected. DBRS Morningstar clarified that security registrations on title are only expected where credit for recoveries on default is included in the cash flow analysis.

(3) Consumer protection legislation compliance
One comment noted that compliance with consumer protection legislation is similar to other rated consumer asset classes and is typically addressed in a transaction’s eligibility criteria and representations and warranties of the seller and servicer rather than through legal opinions. Another comment stated the satisfaction of a rating agency condition (RAC) for the origination of new contracts at the time of legislative change would be cumbersome on the parties’ ability to carry out a securitization. As a result, DBRS Morningstar removed the provision of a legal opinion with respect to consumer protection legislation compliance for contract originations and will instead review the eligibility criteria and the representations and warranties of the seller and servicer. DBRS Morningstar will also assess the impact of any legislative changes on rated securities at the time of such change.

(4) Representations, warranties and covenants
One comment suggested that the representations, warranties and covenants outlined in the new appendix were sufficiently addressed in other sections of the appendix or in the DBRS Morningstar “Legal Criteria for Canadian Structured Finance”; therefore, DBRS Morningstar removed this section.

(5) Amendments, waivers and consents
One comment stated that, since billing arrangements are often in the form of uniform contracts, billing companies do not have control over the amendment process on the basis of a RAC. DBRS Morningstar removed the requirement for the satisfaction of the RAC for material amendments, waivers or consents as they relate to billing arrangements; however, DBRS Morningstar expects to receive notice of all such amendments, waivers or consents.

DBRS Morningstar made other minor changes to the AAA (sf) rating expectations under the new appendix.

All comments received during the request for comment period have been published to the DBRS Morningstar website, except in cases where confidentiality is requested by the respondent.

Notes:
DBRS Morningstar methodologies are publicly available on its website www.dbrs.com under Methodologies & Criteria.

For more information on this methodology, residential rental equipment contract receivables or on this industry, visit www.dbrs.com or contact us at [email protected].