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

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

-- $34,867,000 Class A-1 Notes rated R-1 (high) (sf)
-- $178,550,000 Class A-2 Notes rated AAA (sf)
-- $15,109,000 Class B Notes rated A (sf)
-- $26,586,000 Class C Notes rated BBB (sf)

CREDIT RATING RATIONALE/DESCRIPTION

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

(1) Morningstar DBRS' respective stressed CNL hurdle rates of 22.97%, 16.35%, and 11.14% in the cash flow scenarios, commensurate with the AAA (sf), A (sf), and BBB (sf) ratings. Morningstar DBRS assessed the stressed CNL hurdle rates at each rating level by blending the stressed net loss assumptions for the concentrated portion of the collateral pool (i.e., the 25 largest obligors) and the more granular portion of the collateral pool based on their share of the Securitization Value.
--Morningstar DBRS' stressed CNL hurdle rate for the concentrated portion of the collateral pool was derived using the CLO Insight Model based on the opinion of the credit quality of the underlying obligors and a review of the obligor-specific expected recoveries in a recessionary scenario commensurate with the relevant target rating.
-- Morningstar DBRS' stressed CNL assumption for the granular portion of the collateral pool reflects the composition and characteristics of the underlying assets, the performance to date of portfolios managed by Capteris, LLC (Capteris) and the performance of comparable portfolios originated by other large-ticket lessors. Stressed CNL assumptions applicable to the granular portion of the collateral pool were derived by applying target multiples of 5.10 times (x), 3.30x, and 2.40x, respectively, to the base case CNL assumption of 5.50% in an AAA (sf), A (sf), and BBB (sf) cash flow scenarios.

(2) Morningstar DBRS' cash flow analysis tested the ability of the transaction to generate cash flows sufficient to service the interest and principal payments under three different default timing scenarios and during zero conditional prepayment rate (CPR) and five CPR prepayment environments.

(3) The transaction's exposure to unguaranteed booked residuals is rather limited at 3.62% of the Aggregate Securitization Value as of the Initial Cut-Off Date. Morningstar DBRS assigned credit to residual realization proceeds, with such credit ranging from 50.00% to 80.00% in its AAA (sf) to BBB (sf) cash flow scenarios, respectively, applied to the base case residual realization assumption of 99.00%.

(4) The transaction's capital structure and the 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 ratings for each class of notes.

(5) The initial overcollateralization (OC) as of the closing date will be equal to 12.20%, with a target OC of 12.20% of the Securitization Value of the outstanding collateral, subject to a floor equal to 1.00% of the initial Securitization Value of the collateral as of the Initial Cut-Off Date.

(6) The replenishable cash reserve account will be funded at 1.00% of the initial Securitization Value of the collateral pool and will remain at 1.00% of the Aggregate Securitization Value as of the Initial Cut-Off Date for the life of the transaction.

(7) The weighted-average (WA) yield for the collateral pool is approximately 9.36%. The Securitization Value of the collateral pool is determined by discounting all leases and loans at either the implied or actual applicable contract rate, thus creating excess spread that may be available to the transaction.

(8) The transaction is the first 144A term securitization to be sponsored by Capteris, which has been operating since 2022. Nevertheless, the Company's senior management team has extensive experience in the equipment industry, originating, underwriting, and managing credit to middle-market and large companies in the United States through multiple market cycles. In addition, the Company is majority-owned by a fund managed by an entity controlled by Apollo Global Management and in which Athene Holdings Ltd. is a majority limited partner. Finally, Capteris has minority investments from Donlen LLC (parent of Wheels, Inc.), MidCap Financial, and the Capteris executive management team.

(9) Morningstar DBRS performed an operational risk review and deems Capteris to be an acceptable originator and servicer of equipment-backed leases and loans. Capteris will be the Sponsor, Servicer, and Administrator of this transaction. In addition, Morningstar DBRS performed an operational risk review of Vervent Inc. and deems them to be an acceptable backup servicer of equipment-backed leases and loans. Finally, ECS Financial will act as a subservicer on the transaction responsible for certain administrative and back-office duties, such as contract booking, invoicing/billing, payment posting, sales, use and property tax administration, and various reporting activities.

(10) Approximately 45.30% of the collateral pool is serviced on a retained basis by predominantly high credit quality equipment lease and loan originators/fiscal agents.

(11) Since inception, Capteris has experienced no defaults or losses.

(12) The collateral pool exhibits relatively high obligor concentrations, with the largest, five largest and 10 largest obligors accounting for approximately 7.69%, 34.46% and 56.74% of the Aggregate Securitization Value as of the Initial Cut-Off Date. Morningstar DBRS deemed the credit quality of the largest obligors to be in the CCC (low) to B (high) range, based on public ratings and internal assessments. The financed assets are of essential use to the applicable obligor, with the value of such assets, in some cases, supported by independent third-party appraisals. According to the Company's classifications, the largest obligor industries are represented by support activities for oil and gas operations (approximately 9.94% of the Aggregate Securitization Value at closing), general line grocery merchant wholesalers (7.70%), inland water freight transportation (7.69%), construction, mining, and forestry machinery and equipment rental and leasing (7.50%), plastic materials and resin manufacturing (6.52%), all other specialty trade contractors (5.41%), and other specialty trade contractors (5.01%). The largest financed equipment categories comprise vocational equipment (12.08%), vessels (7.69%), construction equipment (7.51%), oil field services and transportation equipment (7.51%), thermal oxidizer remediation systems (6.52%), construction and material handling equipment (5.79%), food processing equipment (5.16%), storage tanks (5.10%), and tractor/trailers (5.01%).

(13) The legal structure and expected presence of legal opinions that will address the true sale of the assets to the Issuer, the nonconsolidation of the special-purpose vehicle with Capteris, that the Indenture Trustee has a valid first-priority security interest in the assets, and the consistency with the Morningstar DBRS Legal Criteria for U.S. Structured Finance

(14) The transaction assumptions consider Morningstar DBRS' baseline macroeconomic scenarios for rated sovereign economies, available in its commentary, Baseline Macroeconomic Scenarios For Rated Sovereigns: June 2024 Update published on June 28, 2024. These baseline macroeconomic scenarios replace Morningstar DBRS' moderate and adverse COVID-19 pandemic scenarios, which were first published in April 2020.

Morningstar DBRS' credit ratings on the Notes referenced herein address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the principal amounts of and interest on the Class A-1, Class A-2, Class B, and Class C Notes, including any unpaid interest from the prior month.

Morningstar DBRS' credit ratings do not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations. The associated contractual payment obligations that are not financial obligations are interest on the unpaid Class A-1, Class A-2, Class B, and Class C Note interest.

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 US Dollars unless otherwise noted.

The principal methodology applicable to the credit ratings is Rating U.S. Equipment Lease and Loan Securitizations (July 1, 2024), https://dbrs.morningstar.com/research/435347

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 did have 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 the final credit ratings on the above-mentioned securities are 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://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

Global Methodology for Rating CLOs and Corporate CDOs and the CLO Insight Model v1.0.1.2 (February 23, 2024), https://dbrs.morningstar.com/research/428544/global-methodology-for-rating-clos-and-corporate-cdos

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