DBRS Morningstar Finalizes Provisional Ratings on Crossroads Asset Trust 2024-A

DBRS, Inc. (Morningstar DBRS) finalized its provisional ratings on the following classes of notes (the Notes) issued by Crossroads Asset Trust 2024-A:

-- $39,770,000 Class A-1 Notes at R-1 (high) (sf)
-- $153,000,000 Class A-2 Notes at AAA (sf)
-- $19,280,000 Class B Notes at AA (sf)

CREDIT RATING RATIONALE/DESCRIPTION
The provisional credit ratings are based on a review by Morningstar DBRS of the following analytical considerations:

(1) The transaction assumptions consider Morningstar DBRS’s 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.

(2) The baseline cumulative net loss (CNL) assumption considered the deterioration in cumulative gross loss (CGL) for the recent static pool annual vintages in conjunction with the volatility in performance data historically exhibited by portfolios concentrated in transportation industry. At the same time, Crossroads has been able to achieve the higher recovery rates compared to some of its peers. Morningstar DBRS examined the historical CGL data, which was further adjusted to incorporate the performance of recent vintages and the expectation with regard to length of continuing recession in the transportation sector. Morningstar DBRS applied a haircut (relative to an expected case) recovery rate to determine the CNL assumption. The CNL assumption also takes into consideration a mix in the expected collateral portfolio (including certain limits applied to collateral to be funded during the prefunding period) of such attributes as risk grade, fleet size, and new/used vehicles.

(3) Transaction’s capital structure and form and sufficiency of available credit enhancement. The subordination, overcollateralization (OC), cash held in the Reserve Account, available excess spread, and other structural provisions create credit enhancement levels that are commensurate with the respective credit ratings for each class of the Notes. Under various cash flow scenarios, the credit enhancement available to the Transaction can withstand the stressed expected loss using target multiples of 5.15 times (x) with respect to the Class A Notes and 4.15x with respect to the Class B Notes.
-- The initial overcollateralization is equal to 8.00%, expected to build up to 9.75% of Securitization Value of the outstanding collateral (subject to a floor equal to 2.00% of Securitization Value of initial collateral, including initial Securitization Value of collateral to be funded during the prefunding period).
-- The non-declining, replenishable cash reserve account is funded at 1.00% of the initial Securitization Value of collateral pool, including initial Securitization Value of collateral to be funded during the prefunding period.
-- The weighted-average (WA) contract rate for the expected collateral pool is approximately 12.24% (with the minimum requirement of 12.25% following the prefunding period), resulting in a substantial expected excess spread at closing.

(4) Sequential amortization of the Notes; subordination; the nondeclining, replenishable reserve amount; and the OC floor are expected to create credit enhancement for the Notes that increases over time.

(5) Morningstar DBRS’ cash flow analysis tested the ability of the transaction to generate cash flows sufficient to service the interest and principal payments on the Notes under four different net loss timing scenarios and during slow (zero conditional prepayment rate (CPR)) and fast (8 CPR) prepayment environments.

(6) The expected amount to be funded during the funding period is limited at approximately 13% of the Aggregate Securitization Value, with the risk further mitigated by limits on certain collateral characteristics, which will apply during the funding period.

(7) The related financing contracts for the units contributed to collateral pool will be entirely in electronic form. Also, Crossroads installs GPS tracking devices on all trucks and trailers it finances and can block the vehicle, once it comes to a stop.

(8) Crossroads is an established originator and servicer of equipment loan and lease contract receivables, which has been operating since 2006. Crossroads managed a portfolio of approximately $756 million in outstanding receivables as of March 31, 2024. Crossroads’ financing and syndication partners include such established, large industry participants as Daimler Truck Finance and BMO Transportation Finance.
-- On April 1, 2023 Crossroads suffered a ransomware cyber-attack in which an unauthorized third party encrypted its data. In response to the attack, Crossroads hired a third party firm to recover the data, rebuilt the front end of their systems, enhanced the security and access controls, and hired a vendor to monitor future attack attempts.

(9) Morningstar DBRS performed an operational risk review and deems Crossroads to be an acceptable originator and servicer of equipment-backed leases and loans. GreatAmerica Portfolio Services Group, LLC, an experienced servicer of equipment-backed collateral, will be the Back-up Servicer for the Transaction.

(10) The expected collateral pool is granular but has approximately 39% obligor concentration in California. As of the Statistical Cut-Off Date, approximately 13% of collateral had corporate guarantors. In addition, approximately 38%, 10%, 23% and 29% of collateral, respectively, was represented individual owner-operators (IOO), large fleets, mid-size fleets and small fleets.

(11) 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 were provided.

Morningstar DBRS’ credit rating on the securities referenced herein 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 Accrued Note Interest and Initial Note Balance.

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. For example, the interest on unpaid Noteholders’ 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 https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (January 23, 2024).

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 https://dbrs.morningstar.com/research/422275/rating-us-equipment-lease-and-loan-securitizations (October 22, 2023).

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

The Morningstar DBRS Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. Morningstar DBRS analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/430189.

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.

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://dbrs.morningstar.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/legal-criteria-for-us-structured-finance

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].