Morningstar DBRS Assigns Provisional Credit Ratings to CNH Capital Canada Receivables Trust’s Receivable-Backed Notes, Series 2024-1

DBRS Limited (Morningstar DBRS) assigned the following provisional credit ratings to the Receivable-Backed Notes, Series 2024-1 to be issued by CNH Capital Canada Receivables Trust (the Trust):

-- Class A-1 Receivable-Backed Notes, Series 2024-1 (the Class A-1 Notes) at AAA (sf)
-- Class A-2 Receivable-Backed Notes, Series 2024-1 (the Class A-2 Notes) at AAA (sf)

On closing, the Trust will acquire a portfolio of retail instalment sales contracts secured by new and used agricultural equipment (AG) and construction equipment (CE; collectively, the Portfolio of Assets) originated by CNH Industrial Capital Canada Ltd. (CNH Capital) in Canada. The Class A-1 Notes and Class A-2 Notes (collectively, the Series 2024-1 Notes) are structured as sequential-pay pass-through securities with principal and interest paid on a monthly basis from collections on the Portfolio of Assets.

The credit ratings incorporate the following considerations:

OBLIGOR PROFILE
Consistent with previous transactions, the current transaction benefits from a granular portfolio of obligors, mainly from the AG sector. The AG sector is on track for another strong year with farm cash receipts on track to surpass the record achieved last year, totalling $72.5 billion over the first three quarters of 2023, up 7.9% over the same period in 2022. Normalizing production levels have helped push up crop receipts despite lower prices over the first three quarters of 2023. Livestock receipts also rose over the same period because of increases in the cattle and supply-managed sectors. Total direct payments declined slightly, primarily due to lower crop insurance payments. Every province recorded an increase in total cash receipts over the first three quarters of 2023. The sector’s overall health provides favourable conditions for performance of agricultural equipment loans. Further, a weak Canadian dollar relative to the U.S. dollar will help support farm incomes even if agricultural commodity prices continue to fall.

COLLATERAL VALUES
AG collateral values have remained robust in Canada, supported by strong demand because of record farm cash receipts. The easing of supply chain constraints means new equipment inventory levels rebounded in 2023 as manufacturers caught up on deliveries of new equipment orders, helping supply meet demand. As the strong sales from 2023 slow down, inventory levels should continue to rise, providing some downward pressure on equipment prices. However, the weak Canadian dollar should help support used equipment values. Most new tractors and combines sold in Canada are manufactured south of the border, and the weak Canadian dollar makes this equipment relatively more expensive. Additionally, brand loyalty is strong in the AG and CE industries and provides support to the continued strength in recoveries. The vast majority of assets are remarketed through CNH Capital's in-house sales channel, which has historically resulted in greater disposition proceeds than third-party auctions.

CREDIT ENHANCEMENT STRUCTURE
The credit enhancement provides a deleveraging structure (after considering the cash step-downs) as the Series 2024-1 Notes are repaid sequentially. The Spread Account of 2.00%, non-declining overcollateralization to the Series 2024-1 Notes of 2.10%, and excess interest rate spread of 2.02% at closing (net of the indicative cost of funds and before replacement servicer fees) satisfy the minimum 4.0 times (x) to 6.0x base-case expected loss coverage for the Series 2024-1 Notes.

EXPERIENCED SELLER/SERVICER
CNH Capital (an indirect wholly owned subsidiary of CNH Industrial N.V. (not rated by Morningstar DBRS)) has significant experience in the origination and servicing of equipment loans and leases. This experience includes a successful track record in the issuance and management of private and public securitization programs in Canada, including 18 transactions since 2011, which performed (or are performing) well within base-case expectations.

Morningstar DBRS’ credit ratings on the Series 2024-1 Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the Series 2024-1 Notes.

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

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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 Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

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

The principal methodology applicable to the credit ratings is Rating Canadian Equipment Finance Securitization Transactions (October 22, 2023), https://dbrs.morningstar.com/research/422277.

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

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 info-DBRS@morningstar.com.

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.

Morningstar DBRS had access to the accounts 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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

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://dbrs.morningstar.com/about/methodologies.

-- Operational Risk Assessments for Canadian Structured Finance (April 4, 2023), https://dbrs.morningstar.com/research/412270
-- Legal Criteria for Canadian Structured Finance (June 20, 2023), https://dbrs.morningstar.com/research/416101

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

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.