DBRS Morningstar Finalizes Provisional Ratings on OneMain Financial Issuance Trust 2022-S1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes to be issued by OneMain Financial Issuance Trust 2022-S1 (OMFIT 2022-S1 or the Issuer):

-- $433,460,000 Series 2022-S1, Class A at AAA (sf)
-- $58,340,000 Series 2022-S1, Class B at AAA (sf)
-- $36,500,000 Series 2022-S1, Class C at AA (sf)
-- $71,700,000 Series 2022-S1, Class D at BBB (high) (sf)

The ratings are based on a review by DBRS Morningstar of the following analytical considerations:

-- Transaction capital structure, proposed ratings, and form and sufficiency of available credit enhancement.
-- Credit enhancement in the form of OC, subordination, amounts held in the reserve fund, and excess spread. Credit enhancement levels are sufficient to support DBRS Morningstar’s stressed projected finance yield, principal payment rate, and charge-off assumptions under various stress scenarios.
-- 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 rating addresses the payment of timely interest on a monthly basis and principal by the legal final maturity date.
-- OneMain Finance Corporation (OneMain or OMFC)’s capabilities with regard to originations, underwriting, and servicing.
-- DBRS Morningstar has performed an operational review of OneMain and considers the OneMain entities that are party to this transaction acceptable originators and OMFC an acceptable servicer of personal loans.
-- OneMain’s senior management team has considerable experience and a successful track record within the consumer loan industry.
-- OneMain is a routine issuer in the ABS market.
-- The credit quality of the collateral and performance of OneMain’s consumer loan portfolio. DBRS Morningstar has used a hybrid approach in analyzing the OneMain portfolio that incorporates elements of static pool analysis, employed for assets such as consumer loans, and revolving asset analysis, employed for such assets as credit card master trusts.
-- The weighted-average (WA) remaining term of the collateral pool is approximately 47 months.
-- OneMain’s finance yield was relatively stable from 2005 through 2010, ranging from 18.00% to 21.00%. Beginning in 2011, finance yield has increased, averaging over 24.00% since 2014. The WA coupon of the initial pool is approximately 24.82% and the transaction includes a reinvestment criteria event if the WA coupon, as billed, is less than 22.00%.
-- The DBRS Morningstar base-case assumption for the finance yield is 22.00%.
-- DBRS Morningstar applied a finance yield haircut of 10.00% for the AAA rated tranche, 8.00% for the AA rated tranche and 4.89% for the BBB (high) rated tranche. These haircuts are lower than the range described in the DBRS Morningstar methodology Rating U.S. Credit Card Asset-Backed Securities. DBRS Morningstar also used its Rating U.S. Structured Finance Transactions methodology when determining the assumptions. In addition, the fixed-rate nature of the underlying loans, lack of interchange fees, and historical yield consistency support these stressed assumptions.
-- Principal payment rates for OneMain’s portfolio, as estimated by DBRS Morningstar, have generally averaged between 2.00% and 5.00%.
-- The DBRS Morningstar base-case assumption for the monthly principal payment rate is 2.80%.
-- DBRS Morningstar applied a payment rate haircut of 35.00% for the AAA rated tranche, 30.00% for the AA rated tranche, and 22.22% for the BBB (high) rated tranche. These haircuts are lower than the range described in the DBRS Morningstar “Rating U.S. Credit Card Asset-Backed Securities” methodology. DBRS Morningstar also used its “Rating U.S. Structured Finance Transactions” methodology when determining the assumptions. In addition, the fixed term of the loans (no more than a 58-month weighted average remaining term) and OneMain’s payment rate behavior over the 2008–10 period support these stressed assumptions.
-- Charge-off rates on the OneMain portfolio have generally ranged between 4.00% and 10.00%. Charge-offs increased significantly during the 2008–10 economic stress but have since returned to pre-recession levels. DBRS Morningstar assumed a 5.0% credit to recoveries for the hard secured portion of the portfolio and assumed no recoveries in the unsecured portion of the portfolio.
-- The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary Baseline Macroeconomic Scenarios For Rated Sovereigns - March 2022 Update, published on March 24, 2022. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse COVID-19 pandemic scenarios, which were first published in April 2020. Despite several new or increasing risks including Russian invasion of Ukraine, rising inflation and new COVID-19 variants, the overall outlook for growth and employment in the United States remains relatively positive.
-- The DBRS Morningstar expected charge-off rate based on the worst-case pool concentrations is 9.16%. DBRS Morningstar's CNL assumption does not incorporate additional stress for potential negative impact resulting from the coronavirus pandemic.
-- The legal structure and presence of legal opinions which address the true sale of the assets to the depositor, the nonconsolidation of the special-purpose vehicle with OneMain and that the trust has a valid first-priority security interest in the assets and is consistent with the 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 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 methodologies are Rating U.S. Structured Finance Transactions (April 4, 2022) and Rating U.S. Credit Card Asset-Backed Securities (August 9, 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.

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

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