Rating Action: Moody's assigns definitive ratings to Metro Finance's first prime commercial auto and equipment ABS transaction for 2020
Global Credit Research - 09 Jul 2020
Metro Finance 2020-1 Trust -- AUD291.30 million of debt securities rated
Sydney, July 09, 2020 -- Moody's Investors Service has assigned definitive ratings to notes issued by Perpetual Corporate Trust Limited, as trustee of Metro Finance 2020-1 Trust.
"IMPORTANT NOTICE: MOODY'S RATINGS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS. SUCH USE WOULD BE RECKLESS AND INAPPROPRIATE. SEE FULL DISCLAIMERS BELOW."
Issuer: Metro Finance 2020-1 Trust
....AUD109.00 million Class A-S Notes, Assigned Aaa (sf)
....AUD138.20 million Class A-L Notes, Assigned Aaa (sf)
....AUD18.60 million Class B Notes, Assigned Aa2 (sf)
....AUD11.10 million Class C Notes, Assigned A2 (sf)
....AUD5.10 million Class D Notes, Assigned Baa2 (sf)
....AUD9.30 million Class E Notes, Assigned Ba2 (sf)
The AUD4.95 million Class GA Notes and the AUD3.75 million Class GB Notes are not rated by Moody's.
The transaction is a cash securitisation of a portfolio of Australian prime commercial auto and equipment loans and leases originated by Metro Finance Pty Limited (Metro Finance). This is Metro Finance's first auto and equipment asset backed securities (ABS) transaction for 2020.
Metro Finance was established in 2011 as a commercial auto/equipment lender. It targets prime borrowers, for small-ticket auto and equipment assets in low volatility industries. Metro Finance originates its lending through the commercial auto and equipment broker and aggregator industry nationally. Significant origination growth began in 2014.
The definitive ratings take into account, among other factors:
- The limited amount of historical loss data. The static loss data used for our extrapolation analysis, which reflects Metro Finance's short origination history, was limited to the origination vintages between Q3 2014 and Q3 2018.
- The evaluation of the underlying receivables and their expected performance;
- The fact that 69.7% of the receivables were extended to prime commercial obligors on a no-income verification basis, referred to as "streamlined". This streamlined product allows obligors who meet certain stringent requirements to access the loan without providing financial statements. See below for further information on Metro's Streamlined product;
- The 50.2% exposure to loans with a balloon payment at the end of the receivable term. The aggregate balloon exposure as a percentage of current portfolio balance is 16.6%. Loans with a balloon payment are subject to higher refinancing and, consequently, default risk;
- The evaluation of the capital structure;
- The availability of excess spread over the life of the transaction;
- The liquidity facility in the amount of 3.00% of the note balance subject to a floor of AUD1,000,000;
- The interest rate swap provided by National Australia Bank Limited (Aa3/P-1/Aa2(cr)/P-1(cr)). The notional balance of the swap will follow a schedule based on the amortisation of the portfolio, assuming no prepayments. Any prepayments or defaults will result in the transaction becoming over-hedged. The prepayment risk is mitigated by the fact that break costs are charged to the obligors and these funds will flow through to the trust as collections; and
Initially, the Class A-S, Class A-L, Class B, Class C, Class D, and Class E Notes benefit from 17.60%, 17.60%, 11.40%, 7.70%, 6.00% and 2.90% of note subordination, respectively. The notes will initially be repaid on a sequential basis until the credit enhancement of the Class A Notes is at least 30%.
The notes will also be repaid on a sequential basis if there are any unreimbursed charge-offs on the notes or if the first call option date has occurred. At all other times, the structure will follow a pro-rata repayment profile (assuming pro-rata conditions are satisfied).
MAIN MODEL ASSUMPTIONS
Moody's base case assumptions are a default rate of 3.25%, a recovery rate of 35.0% and a portfolio credit enhancement of 20.00%. After accounting for the seasoning of the initial portfolio (7.3 months), Moody's mean default rate assumption was adjusted to 3.50%. Moody's assumed default rate and recovery rate are stressed compared to the historical levels of 1.44% and 57.77% respectively.
The difference between the historical and assumed default rate and recovery rate is in part explained by the additional stresses assumed by Moody's to address the lack of a full economic cycle in the historical data, and by exposure to balloon loans in the portfolio.
To address the limited historical loss data on Metro Finance's portfolio, we have benchmarked the short historical data for Metro Finance to data from comparable Australian commercial auto and equipment ABS originators. We have also overlaid additional stresses into our default and PCE assumptions.
The streamlined product offering has been originated for almost twelve years in the Australian auto and equipment loan space. However, through-the-cycle historical data on the performance of this product is limited. To address this risk and the fact that the portfolio has a very high proportion of streamlined (69.7%), we have applied further qualitative stresses in our analysis.
Risks arising from the lack of income verification for these borrowers are partly mitigated by the stringent requirements to access this product. These requirements include property ownership with confirmed equity greater than the loan amount or a 30% deposit for non-property owners, a satisfactory credit reference from a reputable finance company running at least 12 months, no adverse credit history, and the business being registered for the goods-and-services tax for at least 2 years continuously.
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 small businesses from the collapse in Australia 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.
Methodology Underlying the Rating Action
The principal methodology used in these ratings was "Moody's Global Approach to Rating Auto Loan- and Lease-Backed ABS" published in May 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1225845. 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
Factors that could lead to an upgrade of the notes include a rapid build-up of credit enhancement, due to sequential amortization or better-than-expected collateral performance. The Australian job market is a primary driver of performance.
A factor that could lead to a downgrade of the notes is worse-than-expected collateral performance. Other reasons that could lead to a downgrade include poor servicing, error on the part of transaction parties, a deterioration in the credit quality of transaction counterparties, or lack of transactional governance and fraud.
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.
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. 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.
John Paul Truijens Vice President - Senior Analyst Structured Finance Group Moody's Investors Service Pty. Ltd. Level 10 1 O'Connell Street Sydney NSW 2000 Australia JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077 Ilya Serov Associate Managing Director Structured Finance Group JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Pty. Ltd. Level 10 1 O'Connell Street Sydney NSW 2000 Australia JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077
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