DBRS Morningstar Finalizes Provisional Ratings on Flagship Credit Auto Trust 2023-3

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by Flagship Credit Auto Trust 2023-3 (FCAT 2023-3 or the Issuer):

-- $35,800,000 Class A-1 Notes at R-1 (high) (sf)
-- $145,000,000 Class A-2 Notes at AAA (sf)
-- $46,260,000 Class A-3 Notes at AAA (sf)
-- $31,130,000 Class B Notes at AA (high) (sf)
-- $41,330,000 Class C Notes at A (high) (sf)
-- $31,480,000 Class D Notes at BBB (high) (sf)
-- $19,000,000 Class E Notes at BB (high) (sf)

CREDIT RATING RATIONALE/DESCRIPTION
(1) Transaction capital structure, proposed ratings, and form and sufficiency of available credit enhancement.
-- Credit enhancement is in the form of overcollateralization (OC), subordination, amounts held in the reserve account, and excess spread. Credit enhancement levels are sufficient to support the DBRS Morningstar-projected cumulative net loss (CNL) assumption under various stress scenarios.

(2) The DBRS Morningstar CNL assumption is 10.50%, based on the expected Cut-Off Date pool composition.

(3) 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 COVID-19 pandemic scenarios, which were first published in April 2020.

(4) The consistent operational history of Flagship Credit Acceptance, LLC (Flagship or the Company) and the strength of the overall Company and its management team.
-- The Flagship senior management team has considerable experience and a successful track record within the auto finance industry.

(5) The capabilities of Flagship with regard to originations, underwriting, and servicing.
-- DBRS Morningstar performed an operational review of Flagship and considers the entity an acceptable originator and servicer of subprime automobile loan contracts with an acceptable backup servicer.

(6) The Company indicated it may be subject to various consumer claims and litigation seeking damages and statutory penalties. Some litigation against Flagship could take the form of class-action complaints by consumers; however, the Company indicated there is no material pending or threatened litigation.

(7) The legal structure and presence of legal opinions that will address the true sale of the assets to the Issuer, the nonconsolidation of the special-purpose vehicle with Flagship, that the trust has a valid first-priority security interest in the assets, and the consistency with the DBRS Morningstar “Legal Criteria for U.S. Structured Finance.”

Flagship is an independent, full-service automotive financing and servicing company that provides (1) financing to borrowers who do not typically have access to prime credit-lending terms to purchase late-model vehicles and (2) refinancing of existing automotive financing.

This transaction is structured as a Rule 144A transaction of the Securities Act of 1933. There are seven classes of Notes—Class A-1, Class A-2, Class A-3, Class B, Class C, Class D, and Class E—included in FCAT 2023-3. Initial credit enhancement for the Class A-1, Class A-2, and Class A-3 Notes is 36.45% and includes a 1.00% reserve account (funded at inception and nondeclining), initial overcollateralization (OC) of 0.50%, and subordination of 34.95% of the initial pool balance. Initial Class B enhancement is 27.60% and includes a 1.00% reserve account (funded at inception and nondeclining), initial OC of 0.50%, and subordination of 26.10% of the initial pool balance. Initial Class C enhancement is 15.85% and includes a 1.00% reserve account (funded at inception and nondeclining), initial OC of 0.50%, and subordination of 14.35% of the initial pool balance. Initial Class D enhancement is 6.90% and includes a 1.00% reserve account (funded at inception and nondeclining), initial OC of 0.50%, and subordination of 5.40% of the initial pool balance. Initial Class E enhancement is 1.50% and includes a 1.00% reserve account (funded at inception and nondeclining) and initial OC of 0.50%.

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 Accrued Note Interest and the related 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 obligation that is not a financial obligation is the interest on unpaid Accrued Note Interest for each of the rated notes.

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 at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings) (July 4, 2023).

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

The principal methodology applicable to the ratings is Rating U.S. Retail Auto Loan Securitizations (May 09, 2023; https://www.dbrsmorningstar.com/research/413731).

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

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.
140 Broadway, 43rd Floor
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.

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, 2023) https://www.dbrsmorningstar.com/research/417416/operational-risk-assessment-for-us-abs-originators

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

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

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/410863.

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