Fitch Ratings today published an updated Asset-Backed sector specific criteria report titled 'Criteria for Rating U.S. Equipment Lease and Loan ABS.' There have been no material changes from the previous version; therefore, Fitch expects no impact on outstanding ratings.
This report updates and replaces the prior criteria report with the same name, dated Dec. 19, 2013.
The report presents Fitch's analytical approach to rating U.S. equipment lease and loan asset-backed securities (ABS) and outlines the unique features of these transactions. Additionally, the report details key rating drivers associated with equipment lease and loan ABS as detailed below.
Key Ratings Drivers
Collateral/Obligor Performance/Concentration Risk: Delinquencies, defaults, net losses, recoveries (if applicable), residual values (if applicable), prepayments and the associated timing of each are key rating drivers in equipment lease/loan ABS. Fitch analyzes historical managed static pool and prior securitization data, as well as collateral concentrations, when deriving a base case proxy and performance assumptions for use in the stressed loss approach. Fitch expects historical data to be split into homogenous subsets where appropriate.
Fitch may also examine industry data to compare originator performance trends; however, the focus of Fitch's analysis is based on originator-specific data that are generally robust (i.e. minimum of five years, detailed and granular) in nature.
Large obligor concentrations pose a risk, as cash flow could be greatly impacted if the largest obligors default. Fitch also incorporates an obligor concentration analysis to compare credit enhancement (CE) levels relative to obligor concentrations. Ultimately, the approach that yields the more conservative results will be considered the primary rating analysis and will be noted as such in the applicable transaction rating report.
Structural Analysis: Structural features and collateral attributes have a significant impact on equipment ABS performance. Fitch uses an internal, proprietary Microsoft Excel-based cash flow model to evaluate transaction structures by stressing the various performance assumptions mentioned above and assessing their impact on payments to noteholders.
Legal Risks: The performance of equipment ABS is largely dependent on a sound legal framework. Fitch reviews the legal structure and the opinions furnished to confirm that cash flow derived from the assets will not be impaired or diminished. This could potentially occur due to the bankruptcy or insolvency of the originator or any other transaction party, the trustee's lack of a first-priority-perfected security interest in the assets or taxation, if legal mitigants are absent.
Counterparty Analysis: The performance of equipment ABS can rely heavily on the originator/seller/servicer and other counterparties. Fitch conducts a review, and certain findings of the originator, seller and servicer may result in qualitative adjustments to assumptions used to generate base case gross default and net loss proxies.
Economic Risks: The economic environment can have a material impact on the performance of U.S. equipment lease/loan ABS. Fitch takes into consideration the strength of the U.S. economy, as well as future expectations. To account for the potentially weak U.S. economy, adjustments may be made to the base case proxy or other assumptions, as detailed herein.