DBRS Morningstar Finalizes Provisional Ratings on Gracie Point International Funding 2022-3

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes (the Notes) issued by Gracie Point International Funding 2022-3 (the Issuer):

-- $162,182,000 Class A Notes at AA (sf)
-- $28,330,000 Class B Notes at AA (low) (sf)
-- $8,519,000 Class C Notes at A (low) (sf)
-- $4,208,000 Class D Notes at BBB (low) (sf)

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

-- The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios For Rated Sovereigns: September 2022 Update,” published on September 19, 2022. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

-- While the ongoing coronavirus pandemic has had an adverse effect on the U.S. borrower in general, DBRS Morningstar expects the performance of the underlying loans in the transaction to remain resilient because the life insurance premium loans are fully collateralized by the cash surrender value from highly rated life insurance companies and other acceptable collateral that is mostly either cash or letters of credit from highly rated banking institutions. Therefore, the payment sources for the Notes will be either the life insurance companies or cash held at a trust account or at an Eligible Account Bank/Eligible Account Firm. DBRS Morningstar does not expect the economic stress caused by the pandemic to adversely affect an insurance company's ability to pay in the short to medium term.

-- Excess spread, a fully funded Reserve Account, and subordination provide credit enhancement levels that are commensurate with the ratings of the Offered Notes. Credit enhancement levels are sufficient to support DBRS Morningstar-projected expected cumulative loss assumptions under various stress scenarios.

-- DBRS Morningstar deems Gracie Point, LLC (Gracie Point) an acceptable originator and servicer of life insurance premium finance receivables. However, Gracie Point has incurred operating losses and may continue to incur net losses as it grows its business. If Gracie Point is unable to fulfill its duties because of an Administrative Agent Replacement Event or a Servicer Default, repayment of the Notes would rely on the ability of Vervent Inc. (Vervent), as the Backup Administrative Agent and Backup Servicer, to fulfill the duties of Administrative Agent and Servicer under the Transaction Documents. DBRS Morningstar deems Vervent as an acceptable backup administrator and backup servicer.

-- The payment sources of the loans underlying the Participations are life insurance companies that issue the pledged life insurance policy contracts securing the loans. A potential insolvency of such life insurance company can adversely impact the collectability of the cash surrender value or death benefits payable by the life insurance company. The transaction limits that only Eligible Life Insurance Companies may issue life insurance policies to be included in the collateral securing the underlying loans. A portion of the underlying collateral can be cash collateral that is held at depository institutions, and the transaction requires them to be either an Eligible Account Bank or Eligible Account Firm with minimum required ratings.

-- The collateral pool consists of 31 life insurance companies, with the top five insurance companies representing approximately 49.46% of the collateral pool. To account for potential losses from exposure to the largest insurance companies in the collateral pool, DBRS Morningstar simulated the default of the five largest insurance companies with rating equivalents lower than the targeted rating for a tranche.

-- During the Replacement Period, the Issuer may purchase additional Participations using cash surrender proceeds from defaulted loans or proceeds from prepaid loans or retained collections. Therefore, the credit quality of the underlying loans could change during the Replacement Period. The transaction, however, only allows a new Participation in a loan that meets the Replacement Criteria to maintain a similar collateral pool mix as the closing pool and ensure the related life insurance company or depository institution of the replacement loan are highly rated.

-- The transaction is exposed to basis risk that will stem from the mismatch in the rate benchmark between the loans and the Notes until April 1, 2023. After April 1, 2023, the transaction will be exposed to the basis risk due to the underlying floating-rate benchmark for the loans being 90-Day Average Secured Overnight Financing Rate (SOFR) and the Note rate being 30-Day Average SOFR.

-- Gracie Point was established in 2010 and issued its first loan in June 2013, so the Company does not have significant historical performance data of the loans originated through its platform. Each underlying loan in the collateral pool, however, is fully collateralized by a minimum cash surrender value, a letter of credit, and/or cash collateral, which, coupled with the highly rated insurance companies and depository institutions, partially mitigate uncertainty regarding the underlying loans' future performance.

-- All of the life insurance premium loans have longer maturity dates than the Scheduled Maturity Date of the Notes. Therefore, if the Issuer is not able to refinance or liquidate its Participations, it may not be able to repay such Notes on the Scheduled Maturity Date. Under each Designated Finance Loan Agreement, however, the Finance Lender will have the right to call a loan as fully due and payable upon the occurrence of a Maturity Acceleration Event, which will ensure ultimate payments of principal to the Notes by the Scheduled Maturity Date.

-- The legal structure and legal opinions that address the true sale of the assets to the Issuer, the nonconsolidation of the special-purpose vehicle with Gracie Point, the trustee has a valid first-priority security interest in the assets, and are consistent with DBRS Morningstar’s “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 (May 17, 2022).

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

The principal methodologies are Rating U.S. Structured Finance Transactions - Appendix V: Obligations Backed by Insurance Policy (Financial Guarantee) (April 4, 2022) and Rating U.S. Structured Settlements Asset-Backed Securitizations (January 27, 2022), 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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