DBRS Morningstar Confirms Ratings on ME Funding, LLC, Series 2019-1; Removes Ratings from Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the following classes of securities issued by ME Funding, LLC, Series 2019-1:

-- Series 2019-1, Class A-1 VFN at BBB (high) (sf)
-- Series 2019-1, Class A-2 Notes at BBB (sf)

DBRS Morningstar also removed these ratings from Under Review with Negative Implications, where they were placed on April 22, 2020, and were maintained on subsequent reviews.

DBRS Morningstar based the rating actions on the following analytical considerations:

-- The transaction assumptions consider DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the Coronavirus Disease (COVID-19), available in its commentary “Global Macroeconomic Scenarios: March 2021 Update,” published on March 17, 2021. DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020, which have been regularly updated. The scenarios were last updated on March 17, 2021, and are reflected in DBRS Morningstar’s rating analysis.

-- The assumptions consider the moderate and adverse 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.

-- Transaction performance has shown improvement since the initial impact of the onset of the coronavirus pandemic in Q2 2020 along with signs of improvement in the underlying credit profile of the manager. Systemwide sales, same-clinic sales, and same-clinic service counts have significantly recovered from their bottoms in March 2020, when strict stay-at-home orders were implemented, leaving only essential businesses allowed to operate. Membership cancellations continue to be successfully contained by efforts made by franchisees to retain current memberships and to encourage conversion by trial members to new memberships. Since December 2020, Massage Envy has added approximately 30,000 new members. In addition, nearly 100% of Massage Envy’s clinics have reopened, as restrictions across the U.S. were eased in Q1 2021.

-- Massage Envy’s active member count has increased since the end of December 2020, bringing total active members to approximately 1.26 million. Even with clinic closures throughout Q1 2021, resulting from government restrictions, Massage Envy generated systemwide sales in Q1 2021 that were in excess of 86% of systemwide sales during the same period in 2020. With a significant portion of revenues coming from membership dues, the containment of membership terminations, and a rising trend in the number of active members, Massage Envy is positioned to continue its recovery in 2021.

--The deal’s structural features, including the backup manager mechanism, Massage Envy’s franchise business model, amortization triggers, and the liquidity of the manager, support the current ratings.

-- Principal and interest debt service coverage ratio (DSCR), the interest-only DSCR, and leverage ratios remain in compliance as of the Q1 2021 reports.

-- While DBRS Morningstar recognizes notable improvements in transaction performance and signs of improvement in the credit profile of the manager, the physical contact nature of Massage Envy’s business remains susceptible to an impact from a resurgence of coronavirus cases. Open clinic counts, same-clinic sales, and systemwide sales could be significantly affected should additional lockdowns and restrictions be imposed in the coming months.

PRIOR RATING ACTIONS
DBRS Morningstar placed both classes of securities Under Review with Negative Implications on April 22, 2020. DBRS Morningstar maintained the Under Review with Negative Implications status on both ratings on July 28, 2020, November 5, 2020, and again on March 3, 2021. For more information on the April 22, 2020, rating action, please refer to the press release titled “DBRS Morningstar Takes Rating Action on ME Funding, LLC, Series 2019-1.” Please refer to the DBRS Morningstar press releases published on the aforementioned dates for more information.
ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
The principal methodology is U.S. ABS General Ratings Methodology (December 2018), 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 not 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.

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

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