DBRS Morningstar Finalizes Provisional Ratings on M&T Equipment (2023-LEAF1), LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by M&T Equipment (2023-LEAF1), LLC (the Issuer):

-- $115,620,000 Class A-1 Notes rated R-1 (high) (sf)
-- $207,030,000 Class A-2 Notes rated AAA (sf)
-- $175,790,000 Class A-3 Notes rated AAA (sf)
-- $51,560,000 Class A-4 Notes rated AAA (sf)
-- $26,641,000 Class B Notes rated AA (sf)
-- $23,972,000 Class C Notes rated A (sf)
-- $23,971,000 Class D Notes rated BBB (sf)
-- $13,317,000 Class E Notes rated BB (sf)

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

(1) Subordination, OC, amounts held in the Reserve Fund, and excess spread create credit enhancement levels that can support DBRS Morningstar’s expected cumulative net loss (CNL) of 1.75% under various stress scenarios using multiples of 5.40 times (x) of the expected CNL assumption with respect to the Class A Notes, 4.40x with respect to the Class B Notes, 3.50x with respect to the Class C Notes, 2.55x with respect to the Class D Notes, and 2.00x with respect to the Class E Notes.
--The structure includes credit enhancement in the form of subordination of junior classes of Notes. The principal payments on the Class A-2, A-3 and A-4 Notes are subordinated to the Class A-1 Notes. Consequently, the Class B, Class C, Class D, and Class E Notes are subordinated to the Class A Notes. Each subordinated class of the Notes will not receive principal payments until the more senior classes of Notes are paid in full. Payments of interest on subordinate classes of the Notes on any Payment Date will only be made to the extent that available funds remain after making all distributions of interest on the more senior classes of Notes and paying all fees, expenses, and reimbursements due to the Servicer, the Indenture Trustee, and the Custodian, as well as, in some cases, reducing the principal amount of the more senior classes of the Notes. Interest payments on the Class A Notes will be paid pro rata and pari passu.
--Sequential amortization of the Notes, subordination of junior classes, targeted build-up in OC and the non-declining reserve amount are expected to increase credit enhancement over time for the Notes.

(2) Annual vintage static pool CNL to date for LEAF Commercial Capital’s (LEAF) overall portfolio from 2013 to 2022 have ranged between 0.70% and 2.09%. In addition, DBRS Morningstar reviewed annual vintage static pool CNL for LEAF’s portfolios by originating business unit, Small Business Scoring Service (SBSS) score, and original term.

(3) LEAF maintains a strong and visible position in the small-ticket equipment leasing space, providing financing to vendors of commercial equipment to small- through large-sized businesses. Many of LEAF’s management team members have been involved in the equipment leasing industry since the 1980s and have been working together for over 30 years.
--LEAF primarily originates loans and leases through program agreements with equipment vendors and dealers. LEAF maintains systems and infrastructure to effectively penetrate the highly diversified equipment leasing market.

(4) LEAF and its predecessor entities have been sponsoring secured financing facilities since 2003 including twelve term ABS securitizations and multiple funding facilities.

(5) DBRS Morningstar conducted operational review of LEAF, as a subsidiary of M&T Bank Corporation. As a result, LEAF continues to be an acceptable originator and servicer of equipment loans/leases.
--M&T Bank has entered into a servicing performance guarantee, for the benefit of the Issuer and the Trustee, whereby M&T Bank has guaranteed the performance and observance of all terms, covenants, conditions, agreements, obligations and undertakings on the part of the initial servicer under the servicing agreement.

(6) The MTLRF 2023-1 transaction includes a more diverse set of collateral, compared to LEAF's previous transactions. The top three equipment types in the collateral pool are industrial equipment, office equipment, and software which make up 22.77%, 21.63%, and 14.76%, respectively, while approximately 47% of the Series 2017-1 transaction consisted of office equipment.

(7) The Contract Assets do not contain any significant concentrations of obligors, industries or geographies and are similar to those included in other small-ticket lease and loan securitizations rated by DBRS Morningstar. Only 4.20% of the Contract Assets have the original term of 67 months or longer. The weighted average (WA) SBSS score is 202, and the average Statistical Discounted Pool Balance is $26,134.

(8) While the transaction allows for a limited credit for booked residuals, the residual realization risk is mitigated by the following considerations:
--Booked residuals are given only a limited credit in DBRS Morningstar’s cash flow modeling scenarios for investment grade rating categories, even though the historical residual realizations by LEAF have regularly exceeded 100%. Moreover, the transaction allows only 60% of the discounted balance of pledged residual payments to be included in the Aggregate Statistical Discounted Pool Balance.
--LEAF’s generally conservative approach to residual setting has historically resulted in relatively high residual realizations from dispositions.

(9) The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary Baseline Macroeconomic Scenarios For Rated Sovereigns June 2023 Update, published on June 30, 2023. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

(10) The legal structure and presence of legal opinions that address the true sale of the assets to the issuing entity, the non-consolidation of the issuing entity, that the issuing entity has a valid first-priority security interest in the assets and the consistency with the DBRS Morningstar Legal Criteria for U.S. Structured Finance.

DBRS Morningstar’s credit rating on the securities referenced herein addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated notes are the related Note Current Interest and the related Outstanding Note Balance.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. The associated contractual payment obligations that are not financial obligations are interest on unpaid Note Interest for each of the rated notes and the related Optional Redemption Price.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The DBRS Morningstar short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 (July 4, 2023; https://www.dbrsmorningstar.com/research/416784/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 applicable to the credit rating is Rating U.S. Equipment Lease and Loan Securitizations (June 29, 2023; https://www.dbrsmorningstar.com/research/416587/rating-us-equipment-lease-and-loan-securitizations).

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/384482.

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

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

This is a solicited credit rating.

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

DBRS, Inc.
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New York, NY 10005 USA
Tel. +1 212 806-3277

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

Rating U.S. Structured Finance Transactions (February 6, 2023) https://www.dbrsmorningstar.com/research/409449/rating-us-structured-finance-transactions

Operational Risk Assessment for U.S. ABS Servicers (July 20, 2023) https://www.dbrsmorningstar.com/research/417415/operational-risk-assessment-for-us-abs-servicers

Operational Risk Assessment for U.S. ABS Originators (July 20, 2022) https://www.dbrsmorningstar.com/research/417416/operational-risk-assessment-for-us-abs-originators

Legal Criteria for U.S. Structured Finance (December 7, 2022) https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance

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