DBRS Morningstar Finalizes Provisional Ratings on Equify ABS 2023-1, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes to be issued by Equify ABS 2023-1, LLC (the Issuer):

-- $115,497,000 Class A Notes rated AA (sf)
-- $13,256,000 Class B Notes rated A (sf)
-- $29,238,000 Class C Notes rated BBB (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: September 2023 Update published on September 28, 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.

(2) The Series 2023-1 are collateralized by mid- to large-ticket equipment contracts and related assets, and the Transaction exhibits moderate obligor concentrations, with 17 out of 166 obligors each accounting for more than 2.0% of the Aggregate Securitization Value and, together, for 49.0% of the collateral pool as of August 31, 2023.

(3) DBRS Morningstar applied the stressed cumulative net loss (CNL) hurdle rates of 28.97%, 21.41%, and 10.46% in the cash flow scenarios commensurate with the AA (sf), A (sf), and BBB (sf) ratings, respectively. Seasoning credit was not given even though the collateral pool is seasoned, on a weighted average (WA) basis, by 13 payments made. In addition, DBRS Morningstar assigned no credit to any expected potential build-up in collateral coverage over the life of the Transaction.
-- DBRS Morningstar's stressed CNL hurdle rate for the collateral pool was derived using the cumulative gross default (CGD) rate proxy because of the low and intermittent historical gross defaults and, in particular, net losses experienced by Equify Financial, LLC (Equify) over its operational history. The stressed recovery rates at each rating level were assessed based on the review of internal credit memoranda and the orderly liquidation value (OLV) curves developed by Equify for the 20 largest obligors in the collateral pool.
-- DBRS Morningstar's CGD rate assumption of 18.50% for the collateral pool reflects the composition and characteristics of the underlying assets, the performance to date of portfolio managed by Equify, as well as the performance of comparable portfolios, which had been originated by other independent lessors focusing on a similar collateral and customer credit tier. The stressed assumptions were derived by applying target multiples of 4.40 times (x), 3.60x, and 2.70x, respectively, in an AA (sf), A (sf), and BBB (sf) cash flow scenarios.

(4) Since inception through the first quarter of 2022 (no losses since then), Equify’s managed portfolio has experienced only approximately $8.7 million in cumulative net losses or 0.46% of the aggregate original financed amount of approximately $1.9 billion.

(5) DBRS Morningstar’s cash flow analysis tested the ability of the transaction to generate cash flows sufficient to service the interest and principal payments under three different default timing scenarios and during zero conditional prepayment rate (CPR) and six CPR prepayment environments.

(6) Transaction’s capital structure and available credit enhancement. Subordination, Overcollateralization (OC), cash held in the Reserve Account, and available excess spread, as well as other structural provisions create credit enhancement levels that are commensurate with the respective ratings for each class of notes.
-- The initial OC as of the closing date is equal to 13.00%, building to 14.50% of the initial Aggregate Securitization Value.
-- A nonamortizing cash reserve account equal to 1.50% of the initial Aggregate Securitization Value.
-- The WA yield for the collateral pool is approximately 12.227%. The Securitization Value of collateral pool is determined by discounting all leases and loans at 12.377%, thus, creating excess spread that may be available to service payments on the Notes.

(7) Even though, as of the Initial Cut-Off Date, the collateral for the transaction included approximately $2.9 million in booked residuals, which will be pledged by the Issuer as additional collateral, no credit was given to booked residuals in determination of the Securitization Value for the Series 2023-1 or in cash flow scenarios by DBRS Morningstar.

(8) The transaction is an inaugural 144A term securitization sponsored by Equify, which has been operating since 2011. Nevertheless, the Company’s senior management team includes seasoned professionals with significant experience in the equipment finance industry, including former roles at GE Capital and Financial Federal Credit, Inc.

(9) DBRS Morningstar performed an onsite operational risk review and deems Equify to be an acceptable originator and servicer of equipment backed leases and loans. Equify is the Servicer and Administrator, and U.S. Bank National Association is be the Back-Up Servicer.

(10) The collateral pool exhibits moderate obligor concentrations, with the largest, five largest, and 10 largest obligors accounting for approximately 5.1%, 20.5%, and 33.8% of the Aggregate Securitization Value on the Initial Cut-Off Date. The collateral is also concentrated geographically, with obligors located in Texas accounting for 62.8% of the Aggregate Securitization Value as of the same date. The financed assets are of essential use to the applicable obligor and generally could be used in variety of business applications. The largest obligor industries are represented by construction (approximately 51.7% of the Aggregate Securitization Value) and transportation (38.5%). The collateral pool as of August 31, 2023, also included (approximately 4.5% of the Aggregate Securitization Value) loans to the existing higher quality/long-standing customers of Equify which are secured by the first lien on commercial property with high coverage by the appraised value for such properties.

(11) The transaction is supported by an established structure and is consistent with DBRS Morningstar's Legal Criteria for U.S. Structured Finance methodology. Legal opinions covering true sale and non-consolidation are also provided.

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 Noteholders’ Monthly Accrued 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 obligations that are not financial obligations are the related interest on unpaid Noteholders’ Interest Carryover Shortfall 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 (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 (September 25, 2023) https://www.dbrsmorningstar.com/research/421053/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, 2023) 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].