DBRS Morningstar Finalizes Provisional Ratings on Crossroads Asset Trust 2021-A

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes (the Notes) issued by Crossroads Asset Trust 2021-A:

-- $42,000,000 Class A-1 Notes at R-1 (high) (sf)
-- $74,106,000 Class A-2 Notes at AAA (sf)
-- $14,336,000 Class B Notes at AA (sf)
-- $11,336,000 Class C Notes at A (sf)
-- $11,669,000 Class D Notes at BBB (sf)
-- $9,502,000 Class E Notes at BB (sf)

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

-- The transaction analysis considers DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the Coronavirus Disease (COVID-19), available in its commentary “Global Macroeconomic Scenarios: January Update,” published on January 28, 2021. DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020, which have been regularly updated. The scenarios were last updated on January 28, 2021, and are reflected in DBRS Morningstar’s rating analysis. The analytical considerations incorporate the moderate macroeconomic scenario outlined in the commentary, with the moderate scenario serving as the primary anchor for current ratings. The moderate scenario factors in increasing success in containment during the first half of 2021, enabling the continued relaxation of restrictions.

-- The coronavirus pandemic has been negatively affecting economies worldwide since early 2020. DBRS Morningstar’s baseline cumulative net loss (CNL) assumption of 7.06% considered the coronavirus pandemic’s potential impact on the performance of the collateral securing the Notes.

-- The assumption also took into account the continuing rollout of the vaccination program in the U.S., the recently enacted second legislative package aimed at supporting small businesses across the country, and the expectation of when a sustained economic recovery will begin. DBRS Morningstar also considered the exposure of the transaction exclusively to the cargo transportation sector, which has not been as heavily affected by the coronavirus as some other industries.

-- DBRS Morningstar’s expected CNL assumption also incorporated a 50% credit for seasoning of the expected financed unit pool of approximately 11 months (further adjusted to reflect that approximately 15% of the Aggregate Securitization Value will be funded during the funding period).

-- Crossroads Equipment Lease & Finance, LLC (Crossroads or the Company) participates in the California Capital Access Program for Small Business (CalCAP), which is a program sponsored by the California Pollution Control Financing Authority designed to encourage financial institutions to make loans to small businesses that have difficulty obtaining financing. CalCAP is a loan loss reserve program, which provides coverage on enrolled loans subject to the satisfaction of program conditions. As a CalCAP participant, Crossroads has the option to enroll loans satisfying CalCAP eligibility criteria into the program upon origination. Any loss on a charged-off financed unit enrolled by Crossroads in CalCAP may be covered by funds in Crossroads’ loan loss reserve account established by CalCAP.

-- Up to 27.50% of the Aggregate Securitization Value may be represented by financed units enrolled in CalCAP. Although Crossroads is required under the Sale and Servicing Agreement to deposit into the Collection Account amounts released to the Servicer from the loss reserve account (CalCAP Loss Payment) and allocable to a financed unit, none of the Issuing Entity, Grantor Trust, or Indenture Trustee will have a security interest in such loss reserve account. Consequently, while DBRS Morningstar views the availability of CalCAP Loss Payments as providing additional benefit to the holders of the Notes, it did not formally incorporate the historical loss mitigation impact from the CalCAP loss reserve account into its baseline CNL assumption.

-- The transaction’s capital structure and form and sufficiency of available credit enhancement. The subordination, overcollateralization, cash held in the Reserve Account, available excess spread, and other structural provisions create credit enhancement levels that are commensurate with the respective ratings for each class of the Notes. Under various cash flow scenarios, the credit enhancement available to the transaction can withstand the stressed expected loss using target multiples of 5.25 times (x) with respect to the Class A-1 and A-2 Notes, 4.25x with respect to the Class B Notes, 3.35x with respect to the Class C Notes, 2.45x with respect to the Class D Notes, and 1.85x with respect to the Class E Notes.

-- The Securitization Rate for the financed unit pool as of the Initial Cut-off Date was 11.25%, resulting in an excess spread of approximately 8.44% per annum at closing, given the servicing fee, transaction fees and interest expenses.

-- While Crossroads provided deferrals to a substantial number of its obligors during the early stages of the coronavirus pandemic, the Company was successful in bringing the overwhelming majority of its borrowers to resume making scheduled payments by September 2020. The overall delinquency rate for Crossroads’ portfolio was below 1% as of November 2020. No contracts in a pandemic-related deferral status will be included in the financed unit pool as of the applicable cut-off date.

-- DBRS Morningstar performed a telephone operational risk review and deems Crossroads to be an acceptable originator and servicer of equipment-backed leases and loans. GreatAmerica Portfolio Services Group, LLC, an experienced servicer of equipment-backed collateral, will be the Backup Servicer for the Transaction.

-- The financed unit pool is granular but has approximately 70% of obligor concentration in California, which was considered in DBRS Morningstar’s data review. Overall, more than 80% of all transactions underwritten by Crossroads have a personal guarantee requirement, 90% of transactions come with a down payment (which is held for term of the financing), and approximately 80% of customers pay through an automated clearing house.

-- The transaction is supported by an established structure and is consistent with DBRS Morningstar’s “Legal Criteria for U.S. Structured Finance” methodology. Legal opinions covering true sale and non-consolidation were also provided.

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. Equipment Lease and Loan Securitizations (July 7, 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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