DBRS Morningstar Upgrades and Finalizes Provisional Ratings on United Auto Credit Securitization Trust 2020-1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by United Auto Credit Securitization Trust 2020-1 (UACST 2020-1 or the Issuer):

-- $116,420,000 Class A Notes rated AAA (sf)
-- $32,780,000 Class B Notes rated AA (sf)
-- $32,780,000 Class C Notes rated A (sf)
-- $18,730,000 Class E Notes rated BB (sf)

In addition, DBRS Morningstar upgraded and finalized its outstanding provisional ratings on the following classes of notes:

-- $31,450,000 Class D Notes rated BBB (sf)
-- $7,360,000 Class F Notes rated B (high) (sf)

DBRS Morningstar upgraded these tranches by one notch between the time the provisional rating report was issued and closing because of the estimated coupons in credit enhancement cash flow exercises versus those the Issuer obtained in pricing the transaction.

The ratings are based on DBRS Morningstar’s review of the following analytical considerations:

(1) Transaction capital structure, ratings, and form and sufficiency of available credit enhancement.
-- Credit enhancement is in the form of overcollateralization (OC), subordination, amounts held in the reserve fund, and excess spread. Credit enhancement levels are sufficient to support the DBRS Morningstar-projected cumulative net loss (CNL) assumption under various stress scenarios.
-- DBRS Morningstar’s projected CNL assumption includes an assessment of how collateral performance could deteriorate because of macroeconomic stresses related to the Coronavirus Disease (COVID-19) pandemic.
-- The transaction assumptions include an increase to the expected loss. The transaction assumptions consider DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the coronavirus, available in its commentary “Global Macroeconomic Scenarios: June Update,” published on June 1, 2020. DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020. The scenarios were updated on June 1, 2020, and are reflected in DBRS Morningstar’s rating analysis. The assumptions also take into consideration observed performance during the 2008–09 financial crisis and the possible impact of the stimulus from the Coronavirus Aid, Relief, and Economic Security Act.
-- The assumptions consider the moderate macroeconomic scenario outlined in the commentary (the moderate scenario serving as the primary anchor for current ratings). The moderate scenario assumes some success in containment of the coronavirus within Q2 2020 and a gradual relaxation of restrictions, enabling most economies to begin a gradual economic recovery in Q3 2020.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested. For this transaction, the ratings address the timely payment of interest on a monthly basis and principal by the legal final maturity date.

(2) UACST 2020-1 provides for a Class C Notes coverage multiple that is slightly below the DBRS Morningstar range of multiples set forth in the criteria for this asset class. DBRS Morningstar believes that this is warranted, given the magnitude of expected loss, company history, and structural features of the transaction.

(3) United Auto Credit Corporation’s (UACC or the Company) capabilities with regard to originations, underwriting, and servicing and the existence of an experienced and capable backup servicer.

(4) DBRS Morningstar has performed an operational risk review of UACC and considers the entity an acceptable originator and servicer of subprime automobile loan contracts with an acceptable backup servicer.

(5) The Company’s senior management team has considerable experience and a successful track record within the auto finance industry.

(6) UACC successfully consolidated its business into a centralized servicing platform and consolidated originations into two regional buying centers. The Company retained experienced managers and staff at the servicing center and buying centers.

(7) UACC continues to evaluate and fine-tune its underwriting standards as necessary. The Company has a risk management system allowing centralized oversight of all underwriting and substantial technology systems, which provide daily metrics on all originations, servicing, and collections of loans.

(8) The credit quality of the collateral and performance of the Company’s auto loan portfolio.

(9) UACC originates collateral that generally has shorter terms, higher down payments, lower book values, and higher borrower income requirements than some other subprime auto loan originators.

(10) UACST 2020-1 provides for Class F Notes with an assigned rating of B (sf). While DBRS Morningstar's “Rating U.S. Retail Auto Loan Securitizations” methodology does not set forth a range of multiples for this asset class at the B (sf) level, the analytical approach for this rating level is consistent with that contemplated by the methodology. The typical range of multiples DBRS Morningstar applies in its stress analysis for a B (sf) rating is 1.00 times (x) to 1.25x.

(11) The legal structure and presence of legal opinions, which address the true sale of the assets to the Issuer, the nonconsolidation of the special-purpose vehicle with UACC, that the trust has a valid first-priority security interest in the assets, and the consistency with DBRS Morningstar's “Legal Criteria for U.S. Structured Finance.”

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in in U.S. dollars unless otherwise noted.

The principal methodology is Rating U.S. Retail Auto Loan Securitizations (May 13, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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