DBRS Morningstar Finalizes its Provisional Ratings on AB Issuer LLC Series 2021-1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following notes (the Notes), to be issued by AB Issuer LLC :

-- $5,000,000 Advance Funding Facility at BBB (sf)
-- $50,000,000 Series 2021-1, Class A-1 Variable Funding Notes at BBB (sf)
-- $425,000,000 Series 2021-1, Class A-2 Fixed Rate Senior Secured Notes at BBB (sf)

The ratings on the Class A-1 and A-2 Notes are based on DBRS Morningstar’s review of the following considerations:

-- The transaction’s 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 macroeconomic scenario outlined in the commentary, with the moderate scenario serving as the primary anchor for the current rating. The moderate scenario factors in increasing success in containment during the first half of 2021, enabling the continued relaxation of restrictions.

-- Villa BidCo Inc.’s (doing business as Authority Brands (Authority Brands or the Company)) scale, diverse brand portfolio, nationwide footprint, and franchise business model, with a 97% franchised system, 1,700-plus units across the brands, and $1.3 billion in system sales annually.

-- The Company’s long track record of consistent financial performance, with systemwide sales and average unit volume (AUV) steadily growing overall since inception.

-- Favorable demand fundamentals in the home services industry with residential housing stock increasing and driving demand for more outsourcing of home services, an aging U.S. residential infrastructure needing more repair services, consumer preference shifts to outsourced home services for their time-saving benefit and convenience, and, finally, increased disposable income, which has made home services more affordable, particularly for younger homeowners.

-- The Company’s market positioning with its broad range of brands and breadth of home services offered in what is a highly fragmented industry.

-- DBRS Morningstar’s credit review of the Company, which includes an assessment of both the manager’s business risk profile and financial risk profile.

-- DBRS Morningstar’s operational risk review of Authority Brands as the manager. DBRS Morningstar deems Authority Brands an acceptable manager of home service franchises. DBRS Morningstar also performed an operational risk review of the back-up manager, FTI Consulting, and deems it an acceptable back-up manager for this transaction.

-- The structural features of the transaction, which include a senior interest reserve account funded with an initial deposit or the issuance of a letter of credit at closing in an amount equal to the senior notes quarterly interest amount and the A-1 Notes quarterly commitment fees amount. In addition, the transaction has a cash trap reserve account, an advancing reserve account, and a rapid amortization feature to be funded by cash flow in the waterfall.

-- DBRS Morningstar’s review of key transaction assumptions including the transaction management fee. The manager, in consultation with the back-up manager, determined the transaction management fee and assumes a sufficient level of fees to manage the transaction.

-- For the cash flow analysis, DBRS Morningstar assumed a base case constant growth rate of 3.0% over the life of the transaction. This assumption considers the Company’s organic growth rate estimated at 5%, the longer time-horizon for this transaction, the impact of growth from acquisitions, and the industry average annual growth rate of 3%, which is in line with the rate of growth in the general home services industry over the past five years.

-- The Cleaning Authority (TCA) demonstrated the worst performance for a single brand with a decline of 20.0% from a curtailment of customer demand for indoor home cleaning service as a result of the pandemic. This reduction was applied to the two largest brands, TCA and One Hour, which represent about 40.0% of overall systemwide sales. Application of this assumption resulted in a 5.0% decline year-over-year, consistent with DBRS Morningstar’s “A” scenario. This is 3.0% lower than the worst year in systemwide sales for Authority Brands.

-- DBRS Morningstar’s BBB scenario assumption assumes a reduction in revenues of 2.3% annually. Under this scenario, the transaction pays timely interest and ultimate payment of principal on the notes prior to the legal final maturity.

-- DBRS Morningstar conducted a break-even Day 1 revenue haircut analysis to the Class A-1 and A-2 Notes and assumed revenues do not recover. Break-even revenue haircuts for the Class A-1 and Class A-2 Notes are 63.4% and 55.1%, respectively, which are thresholds at the high end of the range of other DBRS Morningstar BBB rated whole business securitizations.

-- Two additional stress scenarios were assessed to simulate franchise closures. The first scenario ceases revenues on Day 1 from franchises in the top five states (36% of annualized gross sales as of YE2020). The second scenario stopped revenue on Day 1 from the Company’s Indoor Recurring Business (28% of annualized gross sales as of YE2020). In each of these scenarios, the transaction pays timely interest and ultimate principal on the notes prior to the legal final maturity.

-- The consistency of the transaction’s legal structure and legal opinions with the DBRS Morningstar’s “Legal Criteria for U.S. Structured Finance.”

-- The rating for the Advance Funding Facility, which is based on the Pass-Through Liquidity Rating Approach set forth in DBRS Morningstar’s methodology, “Rating and Monitoring Asset-Backed Commercial Paper: U.S. ABCP Conduits,” and allows each liquidity instrument associated with each transaction to be rated to the level of that particular transaction.

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