Rating Action: Moody's downgrades rating on $18.9 million note issued by Small Business Lending Trust
Global Credit Research - 27 Aug 2020
New York, August 27, 2020 -- Moody's Investors Service, ("Moody's") has downgraded the rating of one note and confirmed the ratings of two notes issued by Small Business Lending Trust. The notes are backed by loans granted to small-and medium-sized enterprises (SMEs) and sponsored by FC Marketplace, LLC (Funding Circle).
The complete rating actions are as follows:
Issuer: Small Business Lending Trust 2019-A
Class B Notes, Confirmed at Baa3 (sf); previously on Apr 20, 2020 Baa3 (sf) Placed Under Review for Possible Downgrade
Class C Notes, Downgraded to B1 (sf); previously on Apr 20, 2020 Ba3 (sf) Placed Under Review for Possible Downgrade
Issuer: Small Business Lending Trust 2020-A
Class B Notes, Confirmed at Baa3 (sf); previously on Apr 20, 2020 Baa3 (sf) Placed Under Review for Possible Downgrade
Today's actions conclude the rating reviews initiated in April 2020 resulting from the uncertainty around the possible further deterioration of the portfolio due to the current macroeconomic environment.
Moody's has downgraded the ratings on the Cl. C note from Small Business Lending Trust 2019-A as a result of further deterioration in collateral performance. Further, Moody's concluded that the expected losses on the Cl. B notes in Small Business Lending Trust 2019-A and Small Business Lending Trust 2020-A remain consistent with their current ratings as the structural features of the transactions mitigate the collateral deterioration.
The performance of collateral backing both transactions has deteriorated as reflected in the increase in the total 30+ days delinquent loans and cumulative defaults. The total 30+ days delinquent loans increased 9.2% on average between the April 2020 and August 2020 payment dates and cumulative defaults, as a percentage of original pool balance, increased by 7.7% on average across both transactions. The increase in defaults has led to deterioration in overcollateralization ("OC") for both transactions. As of the August 2020 payment date, OC for the 2019-A transaction decreased to 0.6%, as compared to 9.0% in the April 2020 payment date, and for the 2020-A transaction it decreased to 9.8% in August as compared to 12.3% in April.
As a result of the collateral performance deterioration, Moody´s has increased its base case default probability assumptions to 21.75% of current balance for both transactions and has maintained the portfolio credit enhancement assumptions at 55%.
In its base case, Moody's assumed elevated cumulative gross default rates on the underlying portfolios to reflect the deterioration in the portfolios' performance. In estimating the higher defaults, we took into account the characteristics of the portfolio including exposure of the pools to sectors classified as 'High exposure' and 'Moderate exposure' in our Nonfinancial corporates -- North America -- Heatmap, the utilization of the force majeure policy made available to borrowers who have been impacted by the pandemic, as well as the current economic environment and its potential impact on the portfolios' future performance. The 'High exposure' and 'Moderate exposure' sectors include Business Services, Healthcare & Pharma, Construction & Home building, Lodging/Leisure & Restaurants, and Non-food retail. We also took into account transaction structural features such as overcollateralization, reserve fund targets, availability of excess spread and the likelihood that the notes would be locked out of receiving future payments due to the priority of payments waterfall.
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 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 "Moody's Global Approach to Rating SME Balance Sheet Securitizations" published in May 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1225856. 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:
Levels of credit protection that are greater than necessary to protect investors against our expectations of loss could lead to an upgrade of the ratings of the notes. Moody's expectation of pool losses could decline as a result of a lower number of obligor defaults, or a higher than expected recovery rate. As a primary driver of performance, positive changes in the US macro economy could also affect the ratings, as can changes in servicing practices.
Levels of credit protection that are insufficient to protect investors against our expectations of loss could lead to a downgrade of the ratings of the notes. Moody's expectation of pool losses could increase as a result of a higher number of obligor defaults or a lower than expected recovery rate. As a primary driver of performance, negative changes in the US macro economy could also affect the ratings. Other reasons for worse-than-expected performance include poor servicing, error on the part of transaction parties, inadequate transaction 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.
Chaitali Bharucha 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 Inga Smolyar 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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