DBRS Morningstar Finalizes Provisional Ratings on Auxilior Term Funding 2023-1, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by Auxilior Term Funding 2023-1, LLC (XCAP 2023-1, or the Issuer):

-- $63,000,000 Class A-1 Notes at R-1 (high) (sf)
-- $196,360,000 Class A-2 Notes at AAA (sf)
-- $50,000,000 Class A-3 Notes at AAA (sf)
-- $19,666,000 Class B Notes at AA (high) (sf)
-- $17,307,000 Class C Notes at A (high) (sf)
-- $14,550,000 Class D Notes at BBB (high) (sf)
-- $17,700,000 Class E Notes at BB (high) (sf)

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

-- Subordination, overcollateralization (OC), amounts held in the Reserve Account, and excess spread create credit enhancement levels that can support DBRS Morningstar’s expected cumulative net loss (CNL) of 2.50% under various stress scenarios using multiples of 5.25 times (x) of the expected CNL assumption with respect to the Class A Notes, 4.75x with respect to the Class B Notes, 3.75x with respect to the Class C Notes, 2.75x with respect to the Class D Notes, and 2.00x with respect to the Class E Notes. Seasoning credit was not given even though the collateral pool is seasoned, on a weighted-average (WA) basis, by approximately 12 months.
• The initial OC as of the Closing Date is equal to 3.75%, expected to build up to 8.75% of the current Securitization Value subject to a floor of 1.00% of the original Aggregate Securitization Value (calculated using the Discount Rate of 9.35%), as of the Initial Cut-Off Date.
• A non-amortizing cash Reserve Account equal to 1.00% of the Aggregate Securitization Value (calculated using the Discount Rate), as of the Initial Cut-Off Date.
• The WA annual percentage rate for the collateral pool is approximately 7.73%. The Securitization Value of collateral pool is determined by discounting all leases and loans at the Discount Rate of 9.35%, thus, creating excess spread that may be available to XCAP 2023-1.
-- Given the relatively short operating history of Auxilior Capital Partners, Inc. (Auxilior or the Company), DBRS Morningstar supplemented its review of the actual performance by the Company to date in its assessment of the expected CNL for the transaction with the review of (1) the performance of static collateral pools originated by the equipment lease and loan originator, which had been managed by the current Auxilior management team in the past, and of (2) the proxy data related to comparable asset-backed securities (ABS) transactions. Proxy data and the current market information on equipment values were similarly referenced in the assessment of the stressed recovery rate assumption.
• Auxilior has experienced, since inception, a relatively small amount of delinquencies, gross defaults and losses in each of its three primary origination industry segments. Thus, since inception in 2020 through the first half of 2023, the highest static pool annual vintage cumulative gross default (CGD) and CNL rates experienced by Auxilior in its overall managed portfolio were 0.75% and 0.30%, respectively. The overall CGD and CNL rates experienced for the managed portfolio through the first half of 2023 were 0.27% and 0.11%, respectively, on the aggregate financed amount of $1.12 billion.
• In its assessment of the CNL assumption for the transaction’s cash flow scenarios, DBRS Morningstar also referenced the performance for the similar industry segments at the equipment finance entity managed by the current Auxilior’s management team in the past, which then had been reviewed by DBRS Morningstar.
• In addition, DBRS Morningstar referenced the proxy data for ABS collateral pools originated and securitized by several comparable captive lessors focused on transportation and construction equipment. Furthermore, DBRS Morningstar reviewed information available in the respective Franchise Disclosure Documents for the majority of franchisors represented in the Contract Pool. DBRS Morningstar also considered the relevant market data on the static pool performance of franchisee obligors.
-- DBRS Morningstar’s cash flow scenarios tested the ability of the transaction to generate cash flows sufficient to service the interest and principal payments under three different net loss timing scenarios and during zero conditional prepayment rate (CPR) and 12 CPR prepayment environments.
-- While XCAP 2023-1 allows inclusion of booked residuals in the Aggregate Securitization Value for the transaction, the residuals were given only a limited credit in DBRS Morningstar's cash flow scenarios. As of the Initial Cut-Off Date, the discounted balance of booked residuals accounted for approximately 4.55% of the Aggregate Securitization Value (calculated using the Discount Rate).
-- The transaction is an inaugural term ABS sponsored by Auxilior, which has been operating since 2020. Nevertheless, the Company’s senior management team includes seasoned professionals with a long history of founding and growing successful commercial financing businesses including equipment finance groups at DLL, Element Financial/ECN Capital and PNC Financial Services.
• Auxulior primarily originates small and middle-ticket equipment leases and equipment loan contracts through strategic marketing alliances and other program relationships with equipment vendors and directly with end users of commercial equipment. Its top relationships include well-known and established equipment vendors and franchisors.
-- DBRS Morningstar deems Auxilior to be an acceptable originator and servicer of equipment backed leases and loans. Auxilior is the Servicer and Administrator, and GreatAmerica Portfolio Services is the Backup Servicer.
-- XCAP 2023-1 is collateralized by small- to mid-ticket equipment contracts and related assets, and the transaction exhibits modest obligor concentrations, with the largest 10 obligors collectively accounting for 12.74% of the Aggregate Securitization Value as of the Initial Cut-Off Date (all percentages in this bullet are calculated using the Statistical Discount Rate of 10.20%). The collateral is diversified geographically, with obligors located in Texas, Illinois, and Pennsylvania accounting for 12.4%, 7.8%, and 7.7% of the Aggregate Securitization Value. The contracts originated through Auxilior’s Construction and Infrastructure (CIG) origination industry segment accounted for 50.3% of the Aggregate Securitization Value as of the Initial Cut-Off Date. The contracts originated by Transportation and Logistics (TLG) and Franchise Finance (FFG) origination industry segments accounted for 30.0% and 19.7%, respectively. Approximately, 56.9% of the highway transportation collateral associated with TLG segment could be considered small fleet size, with the remainder related to medium and large fleets. Also, as of the Initial Cut-Off Date, approximately 36.7% of collateral associated with TLG segment was represented by motorcoach and school buses and minivans.
-- 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.
-- 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 nonconsolidation have been provided.

DBRS Morningstar’s credit rating on the Class A-1, Class A-2, Class A-3, Class B, Class C, Class D, and Class E Notes 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, related Noteholders’ Interest Carryover Shortfall, 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 financial obligations that are not financial obligations are the related interest on the 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 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/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 (October 22, 2023; https://www.dbrsmorningstar.com/research/422275/rating-us-equipment-lease-and-loan-securitizations).

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.
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New York, NY 10005 USA
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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 (October 30, 2023)
https://www.dbrsmorningstar.com/research/422592/rating-us-structured-finance-transactions

Operational Risk Assessment for U.S. ABS Services (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, 2023)
https://www.dbrsmorningstar.com/research/425081/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].