DBRS Morningstar Finalizes Provisional Ratings to GMF Canada Leasing Trust’s Asset-Backed Notes, Series 2023-1

DBRS Limited (DBRS Morningstar) finalized the provisional ratings to the Class A-1 Asset-Backed Notes, Series 2023-1 (Class A-1 Notes); Class A-2 Asset-Backed Notes, Series 2023-1 (Class A-2 Notes); Class A-3 Asset-Backed Notes, Series 2023-1 (Class A-3 Notes; together with the Class A-1 and Class A-2 Notes, the Class A Notes or the Offered Notes); Class B Asset-Backed Notes, Series 2023-1 (Class B Notes); and Class C Asset-Backed Notes, Series 2023-1 (Class C Notes; together with the Offered Notes and the Class B Notes, the Series 2023-1 Notes). The Subordinated Asset-Backed Notes, Series 2023-1 (Subordinated Trust Note; together with the Series 2023-1 Notes, the Notes) are not rated. The Subordinated Trust Note, the Class B Notes and the Class C Notes will be retained by the Borrower. The Notes will be issued by GMF Canada Leasing Trust on the Closing Date:

-- Class A-1 Notes at AAA (sf)
-- Class A-2 Notes at AAA (sf)
-- Class A-3 Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (sf)

The Notes are supported by Senior and Subordinated Borrower Notes (together, the 2023-1 Borrower Notes), which are supported by a first-priority security interest in a portfolio of closed-end lease contracts of new automobiles, light-duty trucks, and utility vehicles (the Designated Pool). The lease contracts were originated through authorized General Motors dealers in Canada.

The collections from the Designated Pool will be used to repay the 2023-1 Borrower Notes, and the proceeds from the 2023-1 Borrower Notes will be used to repay the Notes. No payments of interest or principal will be made on the Subordinated Borrower Note or the Subordinated Trust Note until all principal and interest on the Senior Borrower Note and the Series 2023-1 Notes has been paid in full. The Subordinated Borrower Note is fully subordinated to the Senior Borrower Note, and the Subordinated Trust Note is fully subordinated to the Series 2023-1 Notes. Collections from the Designated Pool generally include scheduled monthly and biweekly lease payments (including residual value payments in the case of customer-retained vehicles) as well as proceeds from vehicle sales, either at the end of the lease term or earlier in the case of prepayments and defaults. Proceeds from excess mileage and wear-and-tear charges, if any, also form part of the collections from the Designated Pool.

The Series 2023-1 Notes will be repaid in sequential order with the Class A-1 Notes repaid first, followed by the repayment of the Class A-2 Notes, Class A-3 Notes, Class B Notes, and finally the Class C Notes. The finalized provisional ratings are based on the full repayment of the Series 2023-1 Notes by their respective Final Scheduled Payment Dates.

The provisional ratings incorporate the following considerations:

1. High level of Credit Enhancement (CE)
   Initially, hard CE of 19.55%, 15.70%, and 12.15% (as a percentage of Initial SV) is available to the Class A Notes, Class B Notes, and Class C Notes, respectively, and consists of a cash reserve not less than 0.50%, OC of 7.00%, and subordination of 12.05%, 8.20%, and 4.65% to the Class A Notes, the Class B Notes, and the Class C Notes, respectively. By using excess monthly collections to repay the outstanding principal of the Series 2023-1 Notes, the OC amount will build to 8.75% of SV at closing. No cash will be released to the Issuer until the target OC amount is met, which is expected by month five, based on scheduled payments (assuming no losses, delinquencies, or prepayments). In addition, an estimated 2.83% (annualized) of excess spread, net of the cost of funds of the Series 2023-1 Notes and monthly servicing fees, is available to offset any collection shortfalls on a monthly basis.

2. Non-amortizing CE
   The requirement to maintain the cash reserve account and OC amounts at their target levels provides a deleveraging structure as principal on the Series 2023-1 Notes is repaid. Residual values represent the largest risk in closed-end auto lease securitizations, and exposure to such risk is at its highest at the maturities of the lease contracts. Non-amortizing CE ensures that an increasing level of protection is available to offset potential vehicle disposition losses.

3. Conservative advance rate on residual values
   The Base Residual Value of each vehicle in the pool is determined by using the lowest of the contract residual value, ALG value at lease inception, and updated ALG value as of ALG's March-April 2023 edition. The reference to the ALG values in setting the Base Residual Value eliminates the funding of potential embedded losses (negative equity in relation to residual values) on the Closing Date, effectively reducing residual value risk in the Designated Pool. The ALG values at origination and updated ALG values have been provided for each of the vehicles in the Designated Pool. As ALG projects its residual values primarily based on auction proceeds, ALG values represent an independent and conservative estimate of the expected wholesale value of the vehicles in the portfolio at maturity.

4. Securitization experience and parent strength
   GMFC has demonstrated its ability to manage successful public and private securitization transactions supported by auto leases in Canada. GM and its related entities were upgraded to BBB (high) with a Stable trend by DBRS Morningstar on June 22, 2022. GM Financial's rating reflects its strategic importance in facilitating the sale of GM vehicles by providing financing to GM customers and dealers. Hence, the Company’s success is highly reliant on the Parent’s success. Furthermore, GM Financial’s ratings consider the support agreement with its Parent that requires GM to make a capital contribution should the Company’s leverage ratio breach certain established thresholds. Given the high level of interconnectedness between GM and GM Financial, the ratings of GMF are closely linked and move in tandem with its Parent.

5. Strong obligor profile
   The obligors of the underlying lease contracts represent high-credit quality customers, evidenced by the weighted-average credit bureau score of 785. The strong credit profile is also supported by low credit losses, consistently low delinquency levels of GMFC's owned and managed portfolio, and 10 months of seasoning. In addition, contract term pool mix results in lower expected losses as 24- and 36-month terms (61.95% of the pool) typically have lower credit losses than 48- and 60-month contracts.

The DBRS Morningstar cash flow analysis includes a conservative base-case cumulative net loss estimate. Available credit enhancement is able to withstand the stresses at levels commensurate with the assigned ratings.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (May 17, 2022).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology applicable to the ratings is Rating Canadian Auto Retail Loan and Lease Securitizations (October 26, 2022; https://www.dbrsmorningstar.com/research/404314).

Other methodologies referenced in this transaction are listed at the end of this press release.

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/413218.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

Operational Risk Assessments for Canadian Structured Finance (April 4, 2023)
https://www.dbrsmorningstar.com/research/412270/operational-risk-assessments-for-canadian-structured-finance

Legal Criteria for Canadian Structured Finance (June 22, 2022)
https://www.dbrsmorningstar.com/research/398729/legal-criteria-for-canadian-structured-finance

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