Morningstar DBRS Finalizes Provisional Credit Ratings on Equify ABS 2024-1, LLC

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on the following classes of notes (the Notes) to be issued by Equify ABS 2024-1, LLC (the Issuer):

-- $111,728,000 Class A Notes rated AAA (sf)
-- $15,337,000 Class B Notes rated AA (sf)
-- $14,018,000 Class C Notes rated A (sf)
-- $12,286,000 Class D Notes rated BBB (sf)

CREDIT RATING RATIONALE/DESCRIPTION

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

(1) The Notes are collateralized by mid- to large-ticket equipment contracts and related assets ("structured financings") originated primarily by building direct client relationships through Equify Financial, LLC (Equify) sales network as well as by the smaller application-only ("app-only") contracts originated primarily through vendors. The Transaction exhibits moderate obligor concentrations, with seven out of 612 obligors each accounting for more than 2.0% of the aggregate Securitization Value (SV) and top 10 and 15 obligors accounting for 27.3% and 34.0% of the collateral pool as of 8/31/2024, respectively.

(2) Morningstar DBRS applied the stressed cumulative net loss (CNL) hurdle rates of 33.07%, 25.09%, 18.37%, and 10.23% in the cash flow scenarios commensurate with the AAA (sf), AA (sf), A (sf), and BBB (sf) ratings, respectively. Seasoning credit was not given since the collateral pool is seasoned, on a weighted average (WA) basis, by approximately six payments made. In addition, Morningstar DBRS assigned no credit to any expected potential build-up in collateral coverage in the mid-ticket structured financings over the life of the transaction. The stressed assumptions were derived by applying target multiples of 5.00 times (x), 4.15x, 3.30x, and 2.40x, respectively, in an AAA (sf), AA (sf), A (sf), and BBB (sf) cash flow scenarios.

(3) Morningstar DBRS' stressed CNL hurdle rate for the collateral pool was derived using the cumulative gross default (CGD) rate proxies and estimated recovery rates for the larger balance structured financings and the app-only contracts because of (a) the low and intermittent historical gross defaults and, in particular, net losses experienced by Equify on structured financings over its operational history and (b) the limited actual performance data available for app-only originations.
-- Morningstar DBRS' respective CGD rate assumptions of 11.10% and 16.31% for the structured financing and app-only portions of collateral pool reflect the composition and characteristics of the underlying assets, the performance to date of portfolio managed by Equify, as well as the performance of comparable portfolios, which had been originated by other independent lessors focusing on a similar collateral and customer credit tier.
-- The stressed recovery rates at each rating level were assessed based on the review of internal credit memoranda and the orderly liquidation value (OLV) curves developed by Equify for the 20 largest obligors representing the higher balance structured financings in the collateral pool. Morningstar DBRS also considered the historical actual recoveries realized by Equify with regard to defaults on its structured financings.
-- Since inception until the end of 2023, Equify's managed portfolio has experienced only approximately $11.3 million in cumulative net losses or 0.43% of the aggregate original financed amount of approximately $2.6 billion. The WA recovery rate for the annual static pool vintages between 2012 and 2021 was approximately 81.0%, and the WA CGD rate for the annual static pool vintages between 2012 and 2022 was approximately 2.26%.

(4) 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 12 CPR prepayment environments.

(5) Transaction's capital structure and available credit enhancement. Subordination, overcollateralization (OC), cash held in the Reserve Account, and available excess spread, as well as other structural provisions create credit enhancement levels that are commensurate with the respective ratings for each class of notes.
-- The initial OC as of the closing date will be equal to 7.00%, expected to build up to 10.50% of the initial SV as of the Initial Cut-Off Date.
-- A non-amortizing cash reserve account equal to 1.50% of the initial SV.

(6) The WA yield for the collateral pool is approximately 13.716%. The SV of collateral pool is determined by discounting all leases and loans at 13.750%, thus, creating excess spread estimated by Morningstar DBRS to be 6.69% at closing.

(7) The collateral for the transaction as of 8/31/24 included de minimis amount of booked residuals, which will be pledged by the Issuer as additional collateral, with no credit given to booked residuals in determination of the SV for the Series 2024-1 or in cash flow scenarios run by Morningstar DBRS.

(8) The transaction is the second 144A term securitization sponsored by Equify, which has been operating since 2011. The Company's senior management team includes seasoned professionals with significant experience in the equipment finance industry, including former roles at Financial Federal Credit, Inc and Crossroads Equipment Lease & Finance.

(9) Morningstar DBRS performed an operational risk review update of Equify and, as a result, continues to deem them to be an acceptable originator and servicer of equipment backed leases and loans. Equify will be the Servicer and Administrator, and U.S. Bank National Association will be the Back-Up Servicer.

(10) The collateral pool exhibits moderate obligor concentrations, with the largest, five largest and 10 largest obligors accounting for approximately 4.6%, 17.6% and 27.3% of the aggregate SV as of 8/31/24. The collateral is also concentrated geographically, with obligors located in Texas accounting for 46.0% of the aggregate SV as of the same date. The financed assets are of essential use to the applicable obligor and generally could be used in variety of business applications. The largest obligor industries are represented by transportation (approximately 60.8% of the aggregate SV; and approximately 92.5% of the app-only portion of the collateral) and construction (36.0%). The collateral pool as of 8/31/24 also included (approximately 2.6% of the aggregate SV) loans to the existing, long-standing customers of Equify, which are secured by the first lien on commercial property (vacant land) with high coverage by the appraised value for such properties.

(11) The transaction assumptions consider DBRS Morningstar's baseline macroeconomic scenarios for rated sovereign economies, available in its commentary, Baseline Macroeconomic Scenarios For Rated Sovereigns September 2024 Update published on September 25, 2024. These baseline macroeconomic scenarios replace DBRS Morningstar's moderate and adverse COVID-19 pandemic scenarios, which were first published in April 2020.

(12) The transaction is supported by an established structure and is consistent with DBRS Morningstar's Legal Criteria for U.S. Structured Finance methodology. Legal opinions covering true sale and non-consolidation will also be provided.

DBRS Morningstar's 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 Noteholders' Monthly Accrued Interest and the related Note Balance.

DBRS Morningstar's 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 contractual payment obligations that are not financial obligations are the related 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.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factors 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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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 (August 6, 2024) https://dbrs.morningstar.com/research/437575.

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.

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
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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 (August 6, 2024) https://dbrs.morningstar.com/research/437571/rating-us-structured-finance-transactions

Operational Risk Assessment for U.S. ABS Originators and Servicers (August 6, 2024) https://dbrs.morningstar.com/research/437545/operational-risk-assessment-for-us-abs-originators-and-servicers

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 info-DBRS@morningstar.com.