KBRA assigns preliminary ratings to four classes of notes issued by VFI ABS 2023-1, LLC (VFI 2023-1), an equipment ABS transaction.

Varilease Finance (VFI or the Company), founded in 2001 and headquartered in Salt Lake City, Utah, is an independent equipment finance company focused on leasing industrial and commercial equipment to upper- and middle-market businesses. VFI 2023-1 represents the Company’s second equipment ABS transaction. VFI provides funding in two phases: progress funding while equipment is being setup and delivered and then base term leases when the equipment is in place. Originations reached about $244.5 million and $140.0 million for full year 2022 and the six months ending June 2023, respectively. VFI has grown its managed portfolio while employing a consistent underwriting policy.

VFI finances a variety of equipment types and focuses on equipment that is essential to the business operations of the equipment user. The majority of VFI’s leases include terminal rental adjustment clauses (TRC) of several types which typically result in most of equipment being retained by the customer at the end of term. The end of lease payments are payment obligations of the lessee therefore VFI does not have significant unguaranteed residual risk in its portfolio.

As of the September 10, 2023 statistical cut-off date, the pool of equipment contracts backing VFI 2023-1 (Statistical Pool) has an aggregate discounted receivable balance of $153.27 million, across 51 receivables that pay monthly. The pool balance is based on the projected cash flows for each contract discounted at each contract’s discount rate. The weighted average discount rate for the Statistical Pool is 16.37%. The Statistical Pool has an average lease discounted receivable balance of $3.01 million, with a weighted average number of original scheduled payments of 41.8 months across 51 obligors. As of the initial cut-off date, the pool balance will equal at least $149.54 million and is expected to have characteristics substantially similar to the Statistical Pool. The total collateral may increase by up to $30.24 million through the addition of equipment contracts during the four-month prefunding period.

VFI 2023-1 will issue four classes of notes. Credit enhancement is comprised of overcollateralization (O/C), a cash reserve, a capitalized interest account, subordination benefiting senior classes and excess spread. The O/C is subject to a target equal to 5.75% of the current pool balance and a floor equal to 1.25% of the initial pool balance. The reserve account is funded at 1.50% of the initial note balance (1.46% of the pool balance as of the initial cut-off date) and is non-amortizing.