DBRS Morningstar Finalizes Provisional Ratings on Commercial Equipment Finance 2021-A, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of equipment contract-backed notes (the Notes) issued by Commercial Equipment Finance 2021-A, LLC (the Issuer):

-- $74,900,000 Class A Notes at AA (sf)
-- $5,000,000 Class B Notes at A (sf)
-- $5,700,000 Class C Notes at BBB (sf)
-- $5,300,000 Class D Notes at BB (low) (sf)

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

-- 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 support the cumulative net loss (CNL) assumption projected by DBRS Morningstar under various stressed cash flow scenarios at levels commensurate with the respective ratings for each class of the Notes. Under various cash flow scenarios, the credit enhancement levels can withstand the expected loss using DBRS Morningstar multiples of 4.45 times (x) for the Class A Notes, and 3.55x, 2.50x, and 1.77x for the Class B Notes, the Class C Notes, and the Class D Notes, respectively.

-- Expected CNL of 5.85% used by DBRS Morningstar in its cash flow scenarios was estimated using CEFI Finance, LLC’s (CEFI) actual performance data and accounting for the expected Asset Pool’s geographic and equipment mix.

-- The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios For Rated Sovereigns,” published on September 8, 2021. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020. The baseline macroeconomic scenarios reflect the view that, although the coronavirus pandemic remains a risk to the outlook, uncertainty around the macroeconomic effects of the pandemic has gradually receded. Current median forecasts considered in the baseline macroeconomic scenarios incorporate some risks associated with further outbreaks, but remain fairly positive on recovery prospects given expectations of continued fiscal and monetary policy support. The policy response to the coronavirus pandemic may nonetheless bring other risks to the forefront in the coming months and years.

-- Given the expectation of generally improving economic environment and the strong rebound in delinquency and charge-off performance metrics for equipment lessors following the initial negative impact from the coronavirus, DBRS Morningstar does not apply any adjustments to its expected CNL assumption for the transaction in consideration of the impact from the coronavirus pandemic.

-- Puerto Rico has a special statute that governs the commercial and consumer leasing of personal property. This special statute provides the rights and remedies of the lessor and the lessee but defers to Article 9 of the UCC (which has been adopted in Puerto Rico) to govern the filing and perfection of liens over personal property, including commercial equipment..

-- The rating on the Class A Notes reflects 26.28% of initial hard credit enhancement (as a percentage of the collateral balance) provided by the subordinated notes (16.00%), the Reserve Account (1.18%, as a percent of the total aggregate Discounted Pool Balance equal to the initial Discounted Pool Balance plus the discounted pool balance of any additional receivables transferred during the prefunding period and is non-declining) and overcollateralization (9.10%, Initial OC is calculated as the excess of (1) the Initial Discounted Pool Balance over (2) the aggregate Initial Note Balance less the amount on deposit in the Prefunding Account. OC shown is a pro forma amount assuming that the amount on deposit in the Prefunding Account is fully utilized). The ratings on the Class B, Class C, and Class D Notes reflect 21.28%, 15.58%, and 10.28% of initial hard credit enhancement, respectively.

-- The concentration limits mitigating the risk of material migration in the collateral pool’s composition during the four-month prefunding period.

-- DBRS Morningstar conducted a telephone operational risk review of Commercial Equipment Finance, Inc. (the Servicer) and considers it to be an acceptable originator and servicer of equipment-backed leases and loans. In addition, Vervent, Inc., which is an experienced servicer of equipment lease-backed securitizations, is the Backup Servicer for the transaction.

-- The legal structure and presence of legal opinions that address the true sale of the assets to the Issuer, the non-consolidation of CEFI with the Seller, that the indenture trustee has a valid first-priority security interest in the assets. DBRS Morningstar also reviewed the transaction terms for consistency with DBRS Morningstar Legal Criteria for U.S. Structured Finance.

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 Rating U.S. Equipment Lease and Loan Securitizations (June 30, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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