Rating Action: Moody's assigns definitive ratings to John Deere Owner Trust 2020-B
Global Credit Research - 22 Jul 2020
New York, July 22, 2020 -- Moody's Investors Service, (Moody's) has assigned definitive ratings to the notes issued by John Deere Owner Trust 2020-B (JDOT 2020-B or the issuer), sponsored by John Deere Capital Corporation (JDCC; A2/P-1 stable), an indirect, wholly owned subsidiary of Deere & Company (Deere; A2/P-1 stable). JDCC also acts as the servicer of the receivables backing the transaction and as the administrator for the issuer.
The notes are backed by a pool of agricultural and construction equipment retail installment sale and loan contracts secured by new and used agricultural and construction equipment (the receivables). The securitized pool was originated by JDCC. The credit profile of the collateral pool is largely consistent with that of the JDOT 2020 pool.
The complete rating actions are as follows:
Issuer: John Deere Owner Trust 2020-B
Class A-1 Asset Backed Notes, Definitive Rating Assigned P-1 (sf)
Class A-2 Asset Backed Notes, Definitive Rating Assigned Aaa (sf)
Class A-3 Asset Backed Notes, Definitive Rating Assigned Aaa (sf)
Class A-4 Asset Backed Notes, Definitive Rating Assigned Aaa (sf)
The ratings are based on (1) the quality of the underlying equipment receivables and the pool's expected credit performance, (2) the strength of the structural and legal aspects of the transaction, and (3) the ability, experience and expertise of JDCC as the originator and servicer of the securitized pool. Additionally, we base our P-1 (sf) rating of the Class A-1 notes on the cash flows that we expect the underlying receivables to generate during the collection periods prior to the Class A-1 notes' legal final maturity date on July 15, 2021.
Moody's cumulative net loss expectation for the JDOT 2020-B collateral pool is 0.75% and the loss at a Aaa stress is 6.25%.
Moody's based its net loss expectation and the loss at a Aaa stress for the JDOT 2020-B transaction on an analysis of the credit quality of the securitized pool; the historical performance of similar collateral, including credit performance of prior JDCC sponsored securitizations, as well as JDCC managed portfolio performance of similar collateral; the ability, experience and expertise of JDCC to perform the servicing functions; and our current expectations for the macroeconomic environment and the agriculture industry during the life of the transaction. Moody's took into account the difficult operating environment for obligors in the pool stemming from the coronavirus pandemic through additional sensitivity testing and stress scenarios. Specifically, Moody's overweighted the performance of historical recessionary periods in determining its expected loss.
Additionally, in assigning a P-1 (sf) rating to the Class A-1 notes, Moody's considered the cash flows that it expects the underlying receivables to generate during the collection periods prior to the Class A-1 notes' legal final maturity date. At current size, assuming no prepayment and our stressed default assumption, the A-1 tranche can withstand a reduction in expected cashflows of roughly 30% prior to maturity without incurring a loss.
At closing, the hard credit enhancement available to support the Class A notes equals 3.50% of the initial discounted pool balance, and consists of a fully-funded non-declining reserve account of 1.00% and subordination of 2.50% provided by the unrated certificates. Excess spread may be available as additional credit protection for the notes. The transaction's sequential-pay structure, locked-out subordination and the non-declining reserve account will result in a build-up of credit enhancement to support the notes.
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 US agriculture sector is deemed essential for food supply and is expected to be more resilient to economic downturns than many sectors, as the spread of the coronavirus outbreak widens and the global economic outlook deteriorates. Moody's does not anticipate reduced demand in the agriculture sector because of a weakening US economy. Contraction in economic activity could hurt loan performance for small farms or construction obligors that generally have less liquidity, financial flexibility or wherewithal to weather such an event. Disruptions in supply chains could strain liquidity for farming operations, pointing to a re-calibration of distribution channels and relaying on farmers' ability to re-deploy production to match demand. However, recent federal assistance programs and distribution partnerships with regional and local distributors are intended to assist farmers' net cash incomes.
While construction activity improved after the re-opening of the economy and with better weather conditions, we still expect an overall negative impact on the construction and homebuilding sector. Historically, during recessionary periods, construction and homebuilding experienced weakness, higher losses. In addition, the servicer may offer borrower assistance programs to affected borrowers, such as extensions, which may adversely impact scheduled cash flow and the speed of repayment of the money market tranche.
The principal methodology used in these ratings was "Moody's Approach to Rating ABS Backed by Equipment Leases and Loans" published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1236206. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Factors that would lead to a downgrade of the ratings:
Moody's could downgrade the ratings on the notes if levels of credit enhancement are insufficient to protect investors against current expectations of loss. Losses could rise above Moody's original expectations as a result of a higher number of obligor defaults or a greater than expected deterioration in the value of the equipment that secure the obligors' promise of payment. As the primary drivers of performance, negative changes in the US macro economy or the condition of the agriculture and construction sectors could also negatively affect the ratings.
Additionally, Moody's could downgrade the short-term rating of the Class A-1 notes if there is a significant slowdown in principal collections in the first year of the transaction, which could result from, among other reasons, high delinquencies or a servicer disruption that impacts obligors' payments.
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_1238130.
The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each 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. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.
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 Giyora Eiger 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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