Morningstar DBRS Finalizes Provisional Credit Ratings on Crockett Partners Equipment Company IIA LLC

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on the following classes of notes issued by Crockett Partners Equipment Company IIA LLC (the Issuer):

-- $368,830,000 Class A Notes at A (sf)
-- $18,840,000 Class B Notes at BBB (sf)
-- $17,950,000 Class C Notes at BB (sf)

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

-- The issuance of the Notes represents the inaugural asset-backed security (ABS) issuance of equipment managed by EQS. The ratings address payment of timely interest and ultimate principal.
-- The transaction capital structure, credit ratings, and form and sufficiency of available credit enhancement.
-- The Notes benefit from credit enhancement consisting of overcollateralization, subordination, and cash reserves. A cash reserve account established for the transaction and sized at four months' of interest plus fees and expenses is meant to ensure that an appropriate amount of senior expense and interest can be covered during the assumed liquidation period.
-- The collateral quality and historical value volatility performance.
-- Morningstar DBRS conducted an operational risk review of EQS and, as a result, considers the company to be an acceptable Equipment Manager and Servicer.
-- Borrowing Base Test: The Aggregate Portfolio Value (APV) will be the lower of the equipment's aggregate net orderly liquidation value (NOLV) and the its aggregate net book value (NBV), calculated on a monthly basis. If the APV is less than the aggregate Note balance divided by 82.78%, then one or more cures would need to be applied to keep the borrowing base in compliance.
-- Consideration of increased depreciation rate (versus historical experience) in the transaction that provides for accelerated paydown of Notes in the context of the relationship between decreasing note balances and aggregate NBV.
-- Consideration of the relatively young age of the equipment. Generally, younger equipment would be expected to produce somewhat higher sales proceeds, a credit positive with respect to the subject portfolio.
-- Consideration of monthly dynamic adjustment provisions, specifically (1) inclusion of updated disposition expense estimates in monthly appraisals, (2) inclusion of updated expense estimates in calculation of the reserve account requirement, and (3) inclusion of updated equipment values vis-à-vis book value.
-- 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.
-- Specific proceeds haircuts on equipment built by non-investment grade manufacturers were not applied since (1) the historical data used covered the industry as a whole and (2) construction equipment brands are fairly well known and values are less driven by credit quality of the manufacturer. Notwithstanding the foregoing, a large proportion of the portfolio was built by investment grade manufacturers.
-- Morningstar DBRS materially deviated from its principal methodology when determining the ratings assigned to the Notes by adjusting certain cash flow assumptions to better align them with the rental equipment assets being securitized. These adjustments, and the resulting material deviation are warranted given the unique aspects of the transaction, the adequacy and analysis of historical data from reliable sources specific to the industry, similarity of the equipment rental space vis-à-vis the car rental space, and comparable transaction legal structure.
-- The legal structure and its consistency with Morningstar DBRS' Legal Criteria for U.S. Structured Finance methodology, the provision of legal opinions that address the treatment of the operating lease as a true lease, a true sale, the non-consolidation of the special-purpose vehicles (SPVs) with Crockett Partners Equipment Company II LLC and its affiliates, and that the Issuer has a valid first-priority security interest in the assets.

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 interest on the associated note balance of each of the Class A Notes, Class B Notes, and Class C Notes, and the note balance 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. For example, interest on any unpaid interest on 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. Rental Car Securitizations (August 6, 2024) https://dbrs.morningstar.com/research/437564.

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

Morningstar DBRS materially deviated from its principal methodology when determining the credit ratings assigned to the Class A Notes, Class B Notes, and Class C Notes by applying the following assumptions that vary from those designated in the Rating U.S. Rental Car Securitizations methodology.

-- Bankruptcy Stay Period
-- Liquidation Period Following Stay
-- Values During a Liquidation
-- Transaction Funding Costs and Expenses

The material deviation is warranted given the unique aspects of the transaction and legal structure, the adequacy and analysis of historical data from reliable sources specific to the industry, similarity of the equipment rental space vis-à-vis the car rental space, and comparable transaction legal structure.

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

Rating U.S. Equipment Lease and Loan Securitizations (August 6, 2024) https://dbrs.morningstar.com/research/437575

Rating U.S. Structured Finance Transactions (August 6, 2024) https://dbrs.morningstar.com/research/437571

Operational Risk Assessment for U.S. ABS Originators and Servicers (August 06, 2024) https://www.dbrsmorningstar.com/research/437545

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 dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.