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Rating Action: Moody's assigns definitive ratings to Element's new series of fleet lease-backed notes
Global Credit Research - 22 Jul 2020
New York, July 22, 2020 -- Moody's Investors Service (Moody's) has assigned definitive ratings of Aaa (sf) to the Class A, Aa2 (sf) to the Class B, A2 (sf) to the Class C, and Baa2 (sf) to the Class D, Series 2020-1 asset backed notes issued by Chesapeake Funding II LLC (CF II or the issuer), a bankruptcy-remote special purpose entity and an indirect wholly-owned subsidiary of Element Fleet Management Corp. (Element, formerly known as Element Financial Corporation). Element is North America's largest publicly traded fleet management company, which offers fleet management services, including acquisition, financing, program management, and remarketing services. Element Fleet Corporation (EFC), an indirect wholly-owned subsidiary of Element, is the originator and servicer of the assets backing the transaction.
The collateral backing the notes primarily consists of special units of beneficial interests (SUBIs) in a revolving pool of fleet leases and related vehicles, as well as fleet loans, originated and serviced by Element. The weighted average credit quality of the top 200 lessees, which constitute about 85% of the pool, is Ba3 when we assume B2 for all non-rated lessees.
In addition, Moody's announced today that the issuance of the Series 2020-1 notes would not, in and of itself and as of this time, result in a reduction or withdrawal of the ratings currently assigned to any outstanding series of notes issued by the issuer.
The complete rating actions are as follows:
Issuer: Chesapeake Funding II LLC, Series 2020-1
Series 2020-1 Fixed Rate Asset Backed Notes, Class A-1, Definitive Rating Assigned Aaa (sf)
Series 2020-1 Floating Rate Asset Backed Notes, Class A-2, Definitive Rating Assigned Aaa (sf)
Series 2020-1 Fixed Rate Asset Backed Notes, Class B, Definitive Rating Assigned Aa2 (sf)
Series 2020-1 Fixed Rate Asset Backed Notes, Class C, Definitive Rating Assigned A2 (sf)
Series 2020-1 Fixed Rate Asset Backed Notes, Class D, Definitive Rating Assigned Baa2 (sf)
The ratings are based on (1) the strong credit quality of the underlying collateral, (2) the strong historical performance of the managed portfolio and that of the CF II master trust, (3) the pool's limited residual value risk, owing to the negligible portion of closed-end leases, (4) the interest rate hedging arrangement, (5) the strength of the transaction structure, including the sequential pay structure and the amount of credit enhancement supporting each class of notes, and (6) the legal aspects of the transaction.
In its analysis, Moody's considered the difficult operating environment for corporate obligors in the pool stemming from the coronavirus pandemic through additional model sensitivity testing. We stressed the rating of obligors that operate in industries particularly vulnerable to the coronavirus-induced economic shock, including automotive, retail and durable consumer goods, to assess the potential negative impact of the pandemic on obligors' ability to meet near-term contract payments and the increased propensity to default and incur losses.
Key credit strengths of the transaction include low historical net loss rates for EFC's managed portfolio, the strong credit quality of the underlying collateral pool, the pool's limited residual value risk, and the experience of Element as the transaction sponsor, and EFC as the originator and servicer of the collateral. The key credit challenges include a difficult operating environment owing to the coronavirus pandemic, a recent increase in delinquency rates of the managed portfolio, an unrated sponsor and servicer, and a potential release of excess collections ahead of any payment date for the notes during the revolving period.
The Series 2020-1 has hard credit enhancement of 12.00% for the Class A notes, 9.25% for the Class B notes, 7.00% for the Class C notes and 4.75% for the Class D notes. The revolving period for the Series 2020- 1 is one month.
The rapid spread of the coronavirus outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the performance of corporate assets from the collapse in US economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
The principal methodology used in these ratings was "Fleet Lease Securitizations Methodology" published in April 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1221168. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Factors that would lead to an upgrade or downgrade of the ratings:
Credit protection greater than what Moody's considers necessary to protect investors against then-current expectations of loss could lead to an upgrade of the ratings. Moody's then-current expectations of loss could be better than its original expectations because of an improvement in the creditworthiness of the underlying obligors or lower than expected depreciation in the value of the vehicles or equipment that secure the obligors' promise of payment. As the primary drivers of credit performance, positive changes in the US macro economy and the performance of the sectors in which the obligors operate could also positively affect the ratings.
Credit protection insufficient to protect investors against then-current expectations of loss could lead to a downgrade of the ratings. Moody's then-current expectations of loss could be worse than its original expectations because of deterioration in the creditworthiness of the underlying obligors or greater than expected deterioration in the value of the vehicles or equipment that secure the obligors' promise of payment. Other reasons for worse-than-expected performance could include poor servicing or error on the part of transaction parties. As the primary drivers of credit performance, negative changes in the US macro economy and the performance of the sectors in which the obligors operate could also negatively affect the ratings.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1238136.
The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Corina Teodora Bot Associate Lead Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Tracy Rice VP - Senior Credit Officer Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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