DBRS Morningstar Finalizes Provisional Ratings on Encina Equipment Finance 2022-1, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of asset-backed notes (the Notes) issued by Encina Equipment Finance 2022-1, LLC:

-- $119,810,000 Class A-1 Notes at AAA (sf)
-- $60,000,000 Class A-2 Notes at AAA (sf)
-- $12,043,000 Class B Notes at AA (sf)
-- $14,844,000 Class C Notes at A (sf)
-- $21,285,000 Class D Notes at BBB (sf)
-- $18,482,000 Class E Notes at BB (sf)

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

(1) 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 coronavirus pandemic scenarios, which were first published in April 2020. The baseline macroeconomic scenarios reflect the view that, despite several new or increasing risks including the Russian invasion of Ukraine, rising inflation, and new coronavirus variants, the overall outlook for growth and employment in the United States remains relatively positive.

(2) DBRS Morningstar’s respective stressed cumulative net loss (CNL) hurdle rates of 31.10%, 26.68%, 22.37%, 15.74%, and 11.18% in the cash flow scenarios commensurate with the AAA (sf), AA (sf), A (sf), BBB (sf), and BB (sf) ratings did not assign any credit to seasoning of the collateral of approximately 6.5 months as of the Cut-Off Date.

(3) DBRS Morningstar assessed the stressed CNL hurdle rates at each rating level by blending the respective stressed net loss assumptions for the concentrated (including 23 obligors) and more granular portions of the collateral pool based on their share of the Aggregate Securitization Value.

(4) 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 Notes.

(5) The weighted-average (WA) yield for the collateral pool is approximately 7.55%. The securitization value of the collateral pool is determined by discounting all leases and loans at either implied or actual applicable contract rate, thus creating excess spread that may be available to the Notes.

(6) The transaction is the second 144A term securitization sponsored by Encina Equipment Finance, LLC (Encina EF), which has been operating since 2017. The company’s senior management team has extensive experience in the equipment industry, originating, underwriting, and managing credit to small- and middle-market companies in the United States through multiple market cycles.

(7) Since inception, Encina EF has experienced a limited number of obligor defaults and a low and intermittent amount of charge-offs. Moreover, as of the May 2022 reporting date, there were no delinquencies and zero CNL reported for its inaugural term asset-backed securitization, Encina Equipment Finance 2021-1, LLC, Series 2021-1 (Series 2021-1). Approximately 37% (by the Aggregate Securitization Value as of the Cut-Off Date) of the collateral pool is represented by obligors that were also included in the Series 2021-1.

(8) The legal structure and presence of legal opinions that address the true sale of the assets to the Issuer, the non-consolidation of the special-purpose vehicle with Encina EF, that the trustee has a valid first-priority security interest in the assets, and the consistency with the DBRS Morningstar Legal Criteria for U.S. Structured Finance.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

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

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