Morningstar DBRS Assigns Provisional Credit Ratings to Auxilior Term Funding 2024-1, LLC

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following classes of notes to be issued by Auxilior Term Funding 2024-1, LLC (XCAP 2024-1, or the Issuer):

-- $32,500,000 Class A-1 Notes at R-1 (high) (sf)
-- $112,110,000 Class A-2 Notes at AAA (sf)
-- $112,100,000 Class A-3 Notes at AAA (sf)
-- $15,900,000 Class B Notes at AA (sf)
-- $19,070,000 Class C Notes at A (sf)
-- $8,740,000 Class D Notes at BBB (sf)
-- $7,150,000 Class E Notes at BB (sf)

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

-- Subordination, OC, amounts held in the Reserve Account, and excess spread create credit enhancement levels that can support Morningstar DBRS' expected cumulative net loss (CNL) of 2.50% under various stress scenarios using multiples of 5.20 times (x) of the expected CNL assumption with respect to the Class A Notes, 4.40x with respect to the Class B Notes, 3.40x with respect to the Class C Notes, 2.50x with respect to the Class D Notes, and 1.80x with respect to the Class E Notes. Seasoning credit was not given as the collateral pool is only very slightly seasoned, on a weighted-average (WA) basis, by less than 5 months.
-- The initial OC as of the Closing Date will be equal to 3.25%, expected to build up to 8.25% of the current Securitization Value subject to a floor of 1.00% of the original Aggregate Securitization Value as of the Initial Cut-Off Date.
-- A nonamortizing cash Reserve Account equal to 1.00% of the Aggregate Securitization Value as of the Initial Cut-Off Date.
-- The WA annual percentage rate for the collateral pool is approximately 8.58%. The Securitization Value of the collateral pool is determined by discounting all leases and loans at 8.80%, thus, creating excess spread that may be available to XCAP 2024-1.
-- Given the relatively short operating history of Auxilior, Morningstar DBRS 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 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 2023, the highest static pool annual vintage cumulative gross default (CGD) and CNL rates experienced by Auxilior in its overall managed portfolio were 1.30% and 0.57%, respectively. The overall CGD and CNL rates experienced for the managed portfolio through 2023 were 0.51% and 0.24%, respectively, on the aggregate financed amount of approximately $1.63 billion.
-- In its assessment of the CNL assumption for the transaction's cash flow scenarios, Morningstar DBRS 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 Morningstar DBRS.
-- In addition, Morningstar DBRS referenced the proxy data for ABS collateral pools originated and securitized by several comparable captive lessors focused on transportation and construction equipment. Furthermore, Morningstar DBRS reviewed information available in the respective Franchise Disclosure Documents for the majority of franchisors represented in the Contract Pool. Morningstar DBRS also considered the relevant market data on the static pool performance of franchisee obligors.
-- Morningstar DBRS' 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 2024-1 allows inclusion of booked residuals in the Aggregate Securitization Value for the transaction, the residuals were given only a limited credit in Morningstar DBRS' cash flow scenarios. As of the Initial Cut-Off Date, the discounted balance of booked residuals accounted for approximately 2.85% of the Aggregate Securitization Value.
-- The transaction is the second 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.
-- Morningstar DBRS deems Auxilior to be an acceptable originator and servicer of equipment backed leases and loans. Auxilior will be the Servicer and Administrator, and GreatAmerica Portfolio Services will be the Backup Servicer.
-- XCAP 2024-1 is collateralized by small- to mid-ticket equipment contracts, participation interests in master lease agreements (which account for approximately 2.88% of the aggregate securitization value) and related assets, and the transaction exhibits modest obligor concentrations, with the largest 10 obligors collectively accounting for 11.51% of the Aggregate Securitization Value as of the Initial Cut-Off Date. The collateral is diversified geographically, with obligors located in Texas, Florida and Pennsylvania accounting for 12.8%, 8.0% and 8.0% of the Aggregate Securitization Value. The contracts originated through Auxilior's CIG origination industry segment accounted for 64.4% of the Aggregate Securitization Value as of the Initial Cut-Off Date. The contracts originated by FFG and TLG origination industry segments accounted for 22.5% and 13.1%, respectively. Approximately, 79% of the highway transportation collateral associated with TLG industry 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 44.2% of collateral associated with TLG industry segment was represented by motorcoach.
-- 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.
-- The transaction is supported by an established structure and is consistent with Morningstar DBRS' Legal Criteria for U.S. Structured Finance methodology. Legal opinions covering true sale and nonconsolidation will also be provided.

Morningstar DBRS' 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 are the related Noteholders' Monthly Accrued Interest, related Noteholders' Interest Carryover Shortfall, and the related Note Balance.

Morningstar DBRS' 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.

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 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.

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.
140 Broadway, 43rd Floor
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 (April 15, 2024),
https://dbrs.morningstar.com/research/431204/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 (April 15, 2024),
https://dbrs.morningstar.com/research/431205

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.