DBRS Morningstar Finalizes Provisional Ratings on Ford Auto Securitization Trust II 2023-B

DBRS Limited (DBRS Morningstar) finalized the following provisional credit ratings on the Asset-Backed Notes, Series 2023-B (the Notes) issued by Ford Auto Securitization Trust II:

-- AAA (sf) to the Asset-Backed Notes, Series 2023-B, Class A-1 (the Class A-1 Notes)
-- AAA (sf) to the Asset-Backed Notes, Series 2023-B, Class A-2 (the Class A-2 Notes)
-- AAA (sf) to the Asset-Backed Notes, Series 2023-B, Class A-3 (the Class A-3 Notes; collectively with the Class A-1 Notes and the Class A-2 Notes, the Class A Notes)
-- AA (sf) to the Asset-Backed Notes, Series 2023-B, Class B (the Class B Notes)
-- A (sf) to the Asset-Backed Notes, Series 2023-B, Class C (the Class C Notes; collectively with the Class A Notes and Class B Notes, the Notes)

CREDIT RATING RATIONALE/DESCRIPTION
The Notes are supported by a portfolio of prime retail auto loan contracts originated by Ford Credit Canada Company (Ford Credit Canada or the Seller; rated BBB (low) and R-2 with a Stable trend by DBRS Morningstar) and secured by new and used light trucks (including sport-utility vehicles) and passenger cars (the Portfolio of Assets).

Repayment of the Notes will be made from collections from the Portfolio of Assets, including scheduled monthly and biweekly loan payments, prepayments, and proceeds from vehicle sales in the case of defaults. Principal repayment of the Notes will be sequential in the order of the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes, the Class B Notes, and the Class C Notes. The credit ratings are based on the full repayment of the Notes by their respective Final Scheduled Payment Dates.

The credit ratings incorporate the following considerations:

1. High Level of Credit Enhancement (CE)
   The high level of CE provided by subordination (5.00% to the Class A Notes and 2.00% to the Class B Notes of the Initial Adjusted Pool Balance); overcollateralization (OC) (initially $5,129.99 on the Closing Date building to 2.00% of the Initial Adjusted Pool Balance plus the amount by which 1.50% of the current Pool Balance exceeds the original Cash Reserve Account balance as principal on the Notes is repaid); a Cash Reserve Account (at least 0.25% of the Initial Adjusted Pool Balance); and annual excess spread of 2.98%, net of cost of funds and the Replacement Servicer Fee of 1.00% (plus applicable taxes), which will be available to offset collection shortfalls on a monthly basis.

2. Credit Enhancement Structure (Nonamortizing)
   The level of subordination, OC (after it reaches the floor of 2.00%), and the Cash Reserve Account remain at their initial levels even as principal on the Notes is repaid. This deleveraging structure results in increased CE as the Portfolio of Receivables amortizes.

3. Transaction Structure
   The transaction structure ensures that excess collections are not released to the Seller until the Targeted OC Amount is met. The Targeted OC Amount is calculated as the sum of the Yield Supplement OC Account (YSOA) on each payment date, 2.00% of the Initial Adjusted Pool Balance, and the excess of 1.50% of the current pool balance over 0.25% of the Initial Adjusted Pool Balance. The YSOA schedule is fixed as of the Cut-Off Date and is equal to the aggregate excess of (1) the present value of all payments on each receivable discounted at the annual percentage rate of each contract over (2) the present value of all payments on each receivable discounted at the Discount Rate of 10.16%. It was set based on an amortization of the portfolio under a zero-prepayment and no-loss scenario and under which additional yield from discounting the Receivables at the Discount Rate would result in initial excess spread of 2.98%. As some prepayments are likely to occur, increasing the rate of amortization while the YSOA schedule remains fixed, DBRS Morningstar expects that the yield generated from the OC would increase against the Notes in such scenario.

4. Obligor Profile
   The obligors of the underlying loan contracts represent high-credit-quality customers as the WA FICO score is 774. Commercial obligors, which, on average, have outperformed the overall retail portfolio based on dynamic managed portfolio data over the last five years, constitute 25.1% of the pool balance, while obligors with a FICO score below 600 constitute 1.8% of the pool balance. Approximately 58.4% of the pool has a FICO score greater than or equal to 700, and 87.8% of the pool is in the top two credit tiers. The strong credit profile is also supported by the low and consistent historical credit losses and delinquency levels of prior Ford Auto Securitization Trust (FAST) and FAST II transactions and the Seller’s owned and managed portfolio.

5. Experienced, Investment-Grade Seller/Servicer
   Ford Credit Canada has significant experience in administrating, servicing, and managing securitizations, as demonstrated by its long track record, all of which performed or are performing within expectations. As a subsidiary of Ford Motor Credit Company LLC (FMCC), Ford Credit Canada benefits from its parent’s strong franchise and global presence, allowing it to leverage FMCC’s experience and expertise to ensure sound and consistent underwriting standards and efficient servicing operations. On June 14, 2023, DBRS Morningstar upgraded its long-term credit ratings on Ford Motor Company (Ford), FMCC, and the Seller to BBB (low) from BB (high) and changed the trends to Stable from Positive. The upgrades reflect Ford's strong franchise underpinned by its substantial scale of operations, long-standing relationships with dealers, deep industry expertise, strong earnings generation, and sound risk profile. The Stable trends reflect the expectation that credit fundamentals and earnings will remain strong over the near term, benefitting from an increase in originations as supply constraints continue to improve and used vehicle values remain relatively high. According to its commentary titled "UAW Launches Unprecedented Strike Against the Detroit 3," DBRS Morningstar does not currently anticipate taking negative credit rating actions on the Detroit 3 given the companies' robust liquidity positions. Further, in the subsequent commentary "UAW Strike: Are the Detroit 3 at Risk Of Losing Market Share?," DBRS Morningstar notes that, despite the production disruptions, the Detroit 3—General Motors, Ford, and Stellantis—are unlikely to lose market share.

DBRS Morningstar’s credit ratings on the Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

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 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

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

The principal methodology applicable to the credit ratings is Rating Canadian Auto Retail Loan and Lease Securitizations (September 29, 2023) https://www.dbrsmorningstar.com/research/421298.

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/421227/baseline-macroeconomic-scenarios-for-rated-sovereigns-september-2023-update.

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 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 Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit 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 20, 2023), https://www.dbrsmorningstar.com/research/416101/legal-criteria-for-canadian-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].