Morningstar DBRS Finalizes Provisional Credit Ratings on volofin Finance (Ireland) Designated Activity Company

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on the following classes of notes to be issued by volofin Finance (Ireland) Designated Activity Company (DAC) (VFIN 2024-1 or 2024-1):

-- $387,081,000 Class A Notes at AAA (sf)
-- $56,060,000 Class B Notes at AA (sf)
-- $48,051,000 Class C Notes at A (sf)
-- $16,017,000 Class D Notes at BBB (sf)

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

-- The transaction assumptions consider Morningstar DBRS' 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 Morningstar DBRS' moderate and adverse COVID-19 pandemic scenarios, which were first published in April 2020.
-- Transaction capital structure and sufficiency of available credit enhancement to withstand stressed cash flow assumptions for the applicable credit ratings and repay investors in accordance with the transaction terms and documents under which they have invested:
-- Credit enhancement (CE) is composed of overcollateralization (OC) as measured by two levels of LTV measurement, subordination and an initial temporary reserve account.
-- The provisional credit ratings address the payment of (1) timely interest, and (2) ultimate principal repayment of the Class A and Class B Notes by the Stated Final Maturity; and for the Class C and D Notes the (1) ultimate interest and (2) ultimate principal repayment by the Legal Final Stated Maturity. Accrued and unpaid interest on the Class B - D Notes is deferred and is due and payable only when amounts are available through the transaction's priority of payments, when Notes are redeemed, or by the Stated Legal Final Maturity.
-- The transaction is backed by 22 Aviation Loan Facilities and ultimately, on a look-through basis, by a highly diversified pool of aircraft, engines and parts (APUs) with the Issuer having senior first liens on the assets. The underlying collateral consists of 22 Loan Facilities backed by 225 Assets across 107 Loans including:
-- 48 narrowbody passenger aircraft with a majority composed of assets (9 - 15 years old), comprised of A320 family (16 aircraft/9.3% of loan balance), A319 family (13/7.6%), and Boeing B737-800 family (12/9.0%). Most of the narrowbody assets are currently in-demand, highly marketable aircraft due to their large operator bases and Morningstar DBRS expects they will remain workhorse aircraft through the maturity of the transaction.
-- 12 widebody passenger aircraft comprised of the A330 and B777 family aircraft totaling 21.6%. While Morningstar DBRS considers these as relatively liquid widebody aircraft due to large operator bases and production sizes, these WB variants have experienced significant fluctuation in valuations during COVID,
-- 85 aircraft engines total 16.4% and 62 APUs 3.1%.

-- The transaction is supported by strong cash generation from the loan principal and interest and future Asset dispositions. The portfolio is comprised of mostly liquid mid-aged aircraft assets with the WA age of 15.6 years old, liquid stage one and two engines, and parts (APUs), overall exhibiting a marketable pool if required to sell Assets at any point in time:
-- Younger aircraft (<10 years of age) total 12%, which is a credit positive; a meaningful portion (25%) of the pool is mid-life aircraft aged on average 15.6 years.
-- Aircraft parts (APUs) total 3.1% of the total loan balance.
-- Based on an assumed economic useful life of 25 years for the underlying passenger aircraft, the pool has approximately 9.2 years of WA remaining economic useful life.
-- Asset disposition proceeds were assessed based on proposed credit rating-level stress assumptions within stated methodology ranges.

-- Morningstar DBRS used its proprietary CLO Insight Model to derive various credit rating pool-level scenario default rates. The model accounts for lessee concentration risk based on the number of lessees, lessees' default probabilities, and collateral tenor.
-- Underlying assets in the 225-Asset pool are leased to 51 airlines, MROs and OEMs (credit counterparties) across 27 countries, and thus is significantly more diversified based on lessee count and distribution, versus traditional smaller aviation asset securitized pools.
-- Approximately 52% of the pool is supported by credit counterparties with Morningstar DBRS-equivalent corporate default ratings in the B credit rating category or higher. The large majority of the nonrated credit counterparties were assigned CCC-category credit ratings totaling 34%.
-- Based on the overall credit profiles of the credit counterparties and tenor of the corresponding loans, Morningstar DBRS assumes approximately 71% of lessees will default under the AAA stress scenario, ~69% under AA (high) stress, ~63% under "A" stress, and ~53% under BBB (low) stress.

-- The transaction's structural features are generally consistent with those seen in other loan transactions (i.e., collateralized loan obligation (CLO) transactions and prior issued loan ABS). Cash flow is protected via several mechanics and provisions:
-- Performance triggers (covenant tests including an Interest Coverage Ratio and Asset Coverage tests which force the transaction into rapid amortization when tripped.
-- Two waterfalls, one for interest proceeds and one for principal and disposition proceeds.
-- Notes paydown quickly building the equity cushion protecting Noteholders, with no release of residual interests with all proceeds remaining within the structure paying the Notes down.

-- volofin Capital Management Ltd.'s (VFIN) / volofin Capital Management (US) LLC (VCMUS) adequate capabilities as the Investment Advisor and Servicer / Sub-Advisor. Morningstar DBRS conducted a VFIN operational review in September 2024 and considers them to be an adequate aircraft aviation loan servicer. Despite having a limited history as a platform established in Jan. 2019, VFIN has originated or acquired interest across aviation financing and debt totaling over $1.6 bill, and its senior management has solid experience managing loan facilities through multiple historical economic and aviation cycles (including during the COVID-19 pandemic), with adequate platform and servicing capabilities experience historically, along with servicing its managed fleet.
-- VFIN and Delaware Life Insurance Company's (DLI's) (the Asset Seller; Seller and Sponsor) strategic partnership across the platform and loan origination activity, as well as VFIN's loan and asset management. This includes 100% retention of the Residual Interest Notes, as Sponsor, and servicing as second loss on each underlying Asset; credit counterparties serves as first loss. Thus, there is alignment of interests with investors (class A - D noteholders).
-- VFIN's historical credit portfolio performance since 2019 with cumulative net losses totaling 0% each year as a percentage of originations.
-- Consideration of the two separate potential repayment sources on a Aviation Loan Facility¿the borrower under such ALF, payments under leases on the Underlying Collateral, and, ultimately, Assets (or metal) disposition proceeds.
-- Morningstar DBRS assessed jurisdictional risk across the 27 countries represented in the pool. Such risk is mitigated by (1) the pool diversification with more than 22 facilities and 225 Assets; (2) the fact that VFIN has historically repossessed less than zero aircraft over 5+ years; (3) strong historical performance with minimal defaults and net losses from 2019-2024 (i.e., zero loss events in 5+ years and cumulative net losses of 0.0%); (4) the two layers of protection¿(A) facility borrowers and (B) the aircraft and related leases thus containing losses to the very low levels described above; and (5) VFIN's robust origination, underwriting, and servicing capabilities to manage its book across global jurisdictions (being adequately able to locate, secure, and repossess assets historically including in challenging jurisdictions). Along with the inherent diversification, Morningstar DBRS views the repossession prospects for the jurisdictions reviewed as adequate in the context of the other protective mechanisms present.
-- Notwithstanding the foregoing mitigants, Morningstar DBRS reviewed and assessed jurisdiction risk in the pool by reviewing the information and historical events mentioned above, including across jurisdictions with which Morningstar DBRS has had prior credit rating experience (including all types of aviation-secured debt transactions such as enhanced equipment trust certificates (EETCs), aircraft ABS and diversified hybrid secured aircraft loan / lease backed debt), jurisdictional questionnaires, other publicly available information (e.g., the Pillsbury World Aircraft Repossession Index (WARI)), and the aforementioned information provided by VFIN.

-- Although this transaction has a small additional interest reserve account, there is no traditional dedicated interest reserve account (which is a common feature of ABS transactions), though less common in a CLO transaction, with which this transaction could be, at a high level, compared. This is further mitigated by (A) an insulated legal structure where all cash remains within the transaction, (B) the fact that key transaction parties are bankruptcy-remote special purpose entities, (C) the inclusion of numerous legal opinions with respect to the structure and its parties, (D) during the first three months, the presence of other cash in the form of a temporary reserve account, and (E) trapped monthly equity distributions (payable, instead, on a quarterly basis).
-- Morningstar DBRS reviewed multiple factors and features that are rarely seen together in transactions in considering a AAA (sf) credit rating for Class A: (A) the adequate experience of VFIN, highly experienced management team with over 20+ years of experience across aviation financing and fleet management; (B) managed fleet performance since 2019 with zero cumulative net losses over the past 5+ years, including through stressed periods (e.g., COVID-19; (C) close partnership with DLI since inception with equity support and Asset investments along with co-management of Assets for the insurance company partner; (D) the significant pool diversification across borrowers, lessees, aircraft/engines/parts-APUs, and jurisdictions that is unmatched across recent aviation debt transactions; (E) the nature of the assets and credit enhancement on the loan portfolio as well as the Underlying Assets, resulting in a look-through LTV of near 42% for the Class A Notes; and (F) additional features included in the transaction for which no quantitative credit was given but that provide qualitative benefit.
-- Morningstar DBRS materially deviated from its Rating Structured Aircraft Transactions methodology by (A) applying assumptions for a credit rating that is not delineated therein and (B) applying certain published assumptions for a non-aircraft asset type (engines). See the Cash Flow Analysis section for more information on the transaction cash flow analysis. These deviations are consistent with those applied in two recent 2024 transactions rated by Morningstar DBRS.

Morningstar DBRS' credit rating on the securities referenced addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the Interest Distribution Amount and the Outstanding Balance for the related 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, the related unpaid Interest Distribution Amount and Redemption Price.

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 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 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 Structured Aircraft Transactions (August 6, 2024) https://dbrs.morningstar.com/research/437544

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 notes by (a) applying assumptions for a rating that is not delineated therein and (b) applying certain published assumptions for a non-aircraft asset type (engines):

Specifically, with respect to (a), a AAA rating was assigned to the Class A Notes by applying the following assumptions that were outside of the methodology-defined ranges:

-- An 18-month Cash Flow Delay Period was assumed for the AAA rating; the range defined in the Methodology is shown as 4-14 months
-- MVDs assumptions were derived for the AAA rating; no specific ranges are included in the Methodology
-- Haircut assumptions were derived for the AAA rating; no specific ranges are included in the Methodology

Second, with respect to (b), Morningstar DBRS utilized published aircraft ranges and considerations in setting assumptions and analyzing engine collateral (including AAA assumptions immediately above).

The material deviation is warranted given (a) consideration of the published assumption ranges in conjunction with additional value analysis and the specific features of this transaction, (b) consideration of the volatility of the given non-aircraft collateral being perceived no greater than that for the corresponding aircraft assumption ranges.

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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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

CLO Insight Model v1.0.1.4
https://dbrs.morningstar.com/research/443207/global-methodology-for-rating-clos-and-corporate-cdos

Rating U.S. Structured Finance Transactions (November 18, 2024), https://dbrs.morningstar.com/research/443136/rating-us-structured-finance-transactions

Operational Risk Assessment for U.S. ABS Originators and Servicers (December 5, 2024) https://dbrs.morningstar.com/research/444162/operational-risk-assessment-for-us-abs-originators-and-servicers

Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064/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.