Morningstar DBRS Assigns Provisional Credit Ratings to Commercial Equipment Finance 2024-1, LLC

DBRS, Inc (Morningstar DBRS) assigned provisional credit ratings to the following classes of notes to be issued by Commercial Equipment Finance 2024-1, LLC (CEFI 2024-1 or the Issuer):

-- $96,837,000 Class A Notes at AAA (sf)
-- $7,828,000 Class B Notes at A (sf)
-- $5,335,000 Class C Notes at BBB (sf)

CREDIT RATING RATIONALE/DESCRIPTION

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

(1) The transaction’s capital structure and form and sufficiency of available credit enhancement. The subordination, overcollateralization, cash held in the Reserve Account, available excess spread, and other structural provisions create credit enhancement levels that support the cumulative net loss (CNL) assumption projected by Morningstar DBRS under various stressed cash flow scenarios at levels commensurate with the respective credit ratings for each class of the Notes. Under various cash flow scenarios, the credit enhancement levels can withstand the expected loss using Morningstar DBRS multiples of 5.55 times (x) for the Class A Notes, 3.55x for the Class B Notes, and 2.50x for the Class C Notes.

(2) Expected CNL of 3.00% used by Morningstar DBRS in its cash flow scenarios was estimated using CEFI's actual performance data and accounting for the expected Asset Pool’s equipment mix. Morningstar DBRS assigned no credit to seasoning of collateral.

(3) The transaction assumptions consider Morningstar DBRS’ baseline macroeconomic scenarios for rated sovereign economies, available in its commentary Baseline Macroeconomic Scenarios for Rated Sovereigns March 2024 Update, published on March 27, 2024. These baseline macroeconomic scenarios replace Morningstar DBRS’ moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

(4) Morningstar DBRS has given no credit to the residual proceeds in its cash flow scenarios.

(5) Since inception through February 2024, CEFI has originated over 5,700 contracts to over 2,250 unique customers. As of December 2023, CEFI serviced $303 million in gross receivables from over 2,550 contracts to 1,280 unique customers.

(6) Puerto Rico has a special statute that governs the commercial and consumer leasing of personal property. This special statute provides the rights and remedies of the lessor and the lessee but defers to Article 9 of the UCC (which has been adopted in Puerto Rico) to govern the filing and perfection of liens over personal property, including commercial equipment.

(7) The inclusion of a CNL Trigger, which, if breached, will switch the payment priority to direct all available funds after fees and interest on the bonds to principal allocation to the notes to amortize the Notes sequentially in order of priority until paid in full. The CNL Trigger is curable if the CNL falls below the trigger level for six consecutive months.

(8) The Statistical Asset Pool primarily consists of loans and leases funding the essential-use equipment. In addition, 100% of the Contracts in the Statistical Asset Pool as of the Statistical Cut-Off Date were supported by personal guarantees with a weighted-average (WA) non-zero guarantor FICO score of about 700.

(9) As of the Statistical Cut-Off Date, the Statistical Asset Pool contained 1,165 Contracts with 745 obligors, which represent approximately $107.1 million in the Aggregate Discounted Contract Balance with the WA contract seasoning of approximately eight months. The largest Discounted Contract Balance was $873,777.

(10) The top 10 obligors as of the Statistical Cut-Off Date accounted for 13.2% of the Statistical Asset Pool.

(11) The structure allows for an approximately four-month Prefunding Period, during which the Issuer is permitted to acquire new Contracts into the Asset Pool, subject to compliance with the concentration limits which are expected to mitigate the risk of material migration in the Asset Pool’s composition or risk profile.
-- Amount to be deposited into the Prefunding Account will be approximately 11.5% of the Initial Note Balance.
-- Amounts raised at closing will be held in the Prefunding Account, which will be established and controlled by the Trustee. Funds will also be deposited into the Capitalized Interest Account at closing, which should be sufficient to cover interest accrued on the amounts on deposit in the Prefunding Account during the Prefunding Period. Any cash remaining in the Prefunding Account at the end of the Prefunding Period will be distributed to the Noteholders in accordance with the transaction documents.

(12) Morningstar DBRS conducted an operational risk review of the Company and considers CEFI an acceptable originator and servicer of equipment-backed leases and loans. In addition, Vervent, which is an experienced servicer of equipment lease-backed securitizations, will be the Back-up Servicer for the transaction.

(13) The legal structure and presence of legal opinions which are expected to address the true sale of the assets to the Issuer, the non-consolidation of CEFI with the Seller, that the indenture trustee has a valid first-priority security interest in the assets. The transaction terms will also be reviewed for consistency with Morningstar DBRS' Legal Criteria for U.S. Structured Finance.

Morningstar DBRS’ credit ratings on the Class A Notes, Class B Notes, and Class C Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the Note Current Interest and Outstanding Note Balance for each of the Class A Notes, Class B Notes, and Class C Notes.

Morningstar DBRS’ credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. Contractual payment obligations that are not financial obligations are the interest on any unpaid Note Interest on each of the Class A Notes, Class B Notes, and Class C Notes.

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 factor(s) 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 (January 23, 2024; https://dbrs.morningstar.com/research/427030).

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

The principal methodology applicable to the credit ratings is Rating U.S Equipment Lease and Loan Securitizations (October 22, 2023; https://dbrs.morningstar.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.

Morningstar DBRS 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.

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, 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 (February 22, 2024), https://dbrs.morningstar.com/research/428503/rating-us-structured-finance-transactions

Operational Risk Assessment for U.S. ABS Servicers (March 21, 2024), https://dbrs.morningstar.com/research/430003/operational-risk-assessment-for-us-abs-servicers

Operational Risk Assessment for U.S. ABS Originators (March 21, 2024), https://dbrs.morningstar.com/research/430004/operational-risk-assessment-for-us-abs-originators

Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

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