Morningstar DBRS Finalizes its Provisional Credit Ratings on Island Finance Trust 2025-1

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on the following classes of notes (collectively, the Notes) to be issued by Island Finance Trust 2025-1 (ISLN 2025-1):

-- $227,500,000 Class A Notes at A (sf)
-- $34,930,000 Class B Notes at BBB (sf)
-- $30,070,000 Class C Notes at BB (high) (sf)

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

(1) Transaction capital structure and form and sufficiency of available credit enhancement.
(A) Credit enhancement is in the form of overcollateralization, subordination, amounts held in the reserve fund, and excess spread. Credit enhancement levels are sufficient to support Morningstar DBRS' stressed projected finance yield, principal payment rate, and charge-off assumptions under various stress scenarios.

(2) The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested. For this transaction, the credit ratings address the timely payment of interest on a monthly basis and principal by the legal final maturity date.

(3) Island Finance, LLC (Island Finance) is a private company founded in 1959. The Company's primary business is providing unsecured loans to near-prime and subprime consumers (average FICO score of 668) through direct mail, its branch network, and company website.

(4) Island Finance is regulated by the Office of the Commissioner of Financial Institutions of the Commonwealth of Puerto Rico (OCFI) and the Consumer Financial Protection Bureau (CFPB). To date, the CFPB has deferred to OCFI as local regulator, effectively reducing the bureau's focus on Puerto Rico. OCFI has regulated that "no maximum interest rate should be set" for any of the three financial products Island Finance is licensed to offer. In addition, OCFI states that "interest rates should be determined by competition in the marketplace."
(A) As a result of the obligor base being subprime, the average interest rate of 34.65% charged to such obligors is generally higher than the average charged to prime obligors.
(B) About 47.7% of the principal balance has interest rates greater than 36.00%. The weighted-average (WA) annual percentage rate for the pool is currently 34.65%. These rates, on average, have existed in this relative range for a number of years.
(C) Island Finance uses a risk-based framework when it determines interest rates for loans.
(D) Per the regulatory framework in Puerto Rico, entities operating under Act No. 106 are required to publish the minimum interest rates, the WA interest rates, and the maximum interest rates for small personal loans charged at their organizations every Wednesday in two newspapers.

(5) Island Finance is in Puerto Rico. This presents a unique geographic risk because, as an island, Puerto Rico is subject to systemic barriers. In addition, Puerto Rico's location in the Caribbean Sea makes it especially susceptible to extreme weather events like hurricanes. The warm ocean waters provide optimum conditions for developing tropical storms and hurricanes. Although the season is longer, the peak of the tropical storms and hurricane season in Puerto Rico generally occurs in the months of August and September.
(A) The impact of tropical storms and hurricanes has led to a more resilient company. Since Hurricanes Irma and Maria in 2017, Island Finance transitioned to cloud-based technology and established redundancies that enable this resiliency.
(B) Historically, charge-offs dropped after Hurricane Maria although the main drivers of the dip in charge-offs were the deferment programs and government aid provided by the Federal Emergency Management Administration and other governmental efforts.

(6) Receivables are generated through 48 Island Finance branches. Cash and check payments are received at these branches. They currently represent approximately 17.4% of collections on an 11-month basis ended November 2024. In a decentralized operation, this can introduce risks that are hard to quantify.

(7) Island Finance's relationship-driven business model includes late-stage collections and servicing that are handled at the branches, while early-stage collections are performed at the centralized servicing center. This is opposite from other branch-based consumer loan lenders that manage early-stage collections at the branches and more specialized and late-stage collections are performed at centralized servicing centers.
(A) Field collectors are a common technique in Puerto Rico. Door knockers are used to remind obligors of their past due balances and are common to the way competitors pursue delinquencies too. The Island Finance field collectors conduct collection efforts on approximately 10% of accounts by offering borrowers the ability to make payments through digital or centralized channels or in the branches. Ultimately, the cash or checks collected by field collectors amounted to diminimus levels. Starting on October 1, 2024, field collectors are no longer collecting cash or checks and are now counseling or assisting customers to process their payments through the web, phone, the collection center, or the branch.

(8) Many of Island Finance's personal loan borrowers make payments in cash and in-person at Island Finance branches. Branch collections have been steadily decreasing because of electronic payment options. This trend could reverse itself during the two-year revolving period. As of November 2024, on average, approximately 33.3% (by dollar amount and excluding payoff) of Island Finance's loan payments were received in branches and made by cash (16%), check (1%), or debit card (16%).
(A) On a related basis, the servicer is obligated to deposit collections received into the Collection Account no later than the second business day after processing. Once deposited they are part of the trust estate. The trust may not have a perfected interest in collections commingled by the servicer or with funds such as cash and checks received at branches that are not yet deposited in the Collection Account. The exposure to branch payments effectively means these funds may be subject to automatic stay risk in an unlikely scenario where the sponsor files bankruptcy.

(9) Charge-off rates on the portfolio have generally ranged between 8.00% and 10.00% over the past several years.
(A) The Morningstar DBRS base-case assumption for the charge-off rate is 12.29%, based on the ISLN 2025-1 reinvestment criteria and recent credit performance.
(B) For the ISLN 2025-1 transaction, recovery rates of 5.00% and 4.00% were assumed for the consumer small loans and consumer intermediate loans products, respectively, based on recovery data provided by the company.

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

(11) The legal structure and presence of legal opinions that address the true sale of the assets from the Seller to the Depositor, the nonconsolidation of the special-purpose vehicle with the Seller, 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."

Morningstar DBRS' credit ratings on the Class A, Class B, 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 for each of the rated Notes are the related Monthly Interest Amount and the related Note Balance.

Morningstar DBRS' credit ratings does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. The associated contractual payment obligation that is not a financial obligation for each of the rated Notes is the related interest on any unpaid Monthly Interest Amount.

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 methodologiesapplicable to the credit ratings are

Rating U.S. Credit Card Asset-Backed Securities (August 06, 2024)
https://dbrs.morningstar.com/research/437551.

Rating U.S. Structured Finance Transactions (Appendix I: U.S. Consumer Loan ABS Transactions) (November 18, 2024) https://dbrs.morningstar.com/research/443136.

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
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 (November 18, 2024),
https://dbrs.morningstar.com/research/443136

-- Operational Risk Assessment for U.S. ABS Originators and Servicers (December 5, 2024), https://dbrs.morningstar.com/research/444162

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

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