Class A1 (ISIN XS1701862143), PLN 1,057.0m: final rating AAA_SF

Class A2 (ISIN XS1701862499), PLN 741.0m: final rating AAA_SF

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The transaction is a true-sale cash securitisation with a three-year revolving period. The Polish lease receivables are originated by Europejski Fundusz Leasingowy S.A. (EFL) in its ordinary course of business. The portfolio at closing comprises of leases mainly to Polish SMEs (98.2%), and a smaller amount to larger corporate borrowers (1.8%). Leases finance new and used light vehicles (26.6% / 11.7%), new and used trucks and trailers (7.3% / 14.7%) and new and used machinery and equipment (26.5% / 13.3%). This transaction does not securitise receivables related to the leased objects´ residual value.

Rating rationale

The rating reflects: i) the legal and financial structure of the transaction; ii) the quality of the underlying collateral in the context of the robust Polish macroeconomic environment; iii) the ability of the originator and servicer, Europejski Fundusz Leasingowy S.A. (EFL); and iv) the counterparty exposure to Citibank N.A. London Branch (Citibank) as the account bank and paying agent.

Class A1 and Class A2 (together, Class A) benefit from 20.6% overcollateralisation at closing and protection from excess assets interest against losses from the portfolio. Portfolio performance deterioration is mitigated partly by early-amortisation triggers. Asset- and portfolio-level covenants limit qualitative changes to the portfolio’s composition. Scope expects the Class A to amortise over a weighted average life of 1.3 years from the end of the three-year revolving period based on the closing portfolio characteristics.

The stable short-term outlook on the Polish economy reflects positively on the expected portfolio performance. Scope has determined that sovereign risk does not constrain the notes’ ratings over its expected life.

The transaction bears counterparty exposures to EFL as servicer and Citibank as account bank and paying agent. Scope assessed EFL’s credit quality using public information and Citibank’s using public credit ratings. Counterparty risks are mitigated by the credit quality of the counterparties and by mechanisms in the structure such as regular cash sweeps, contingent reserves and back-up arrangements. In addition, the account bank is subject to a replacement trigger upon a deterioration of its credit quality.

Key rating drivers

Credit enhancement (positive). The Class A benefits from 20.6% credit enhancement from overcollateralisation including a funded cash reserve, which protects against losses from the portfolio.

Excess spread (positive). The portfolio will generate substantial spread, trapping up to 0.5% of the performing lease balance to cover temporary collection shortfalls for the payment of senior expenses and interest.

Robust Polish economy (positive). Scope expects a positive effect on portfolio performance as a result of the Polish economic environment, supported by robust GDP growth and rising employment.

Liquidity coverage (positive). The structure provides liquidity protection via a fully interconnected separate priority of payments, ensuring the timely payment of Class A interest. Additionally, the structure features an amortising cash reserve of 2% of the Class A notes’ principal amount, floored at PLN 1m. The cash reserve is available to absorb loses at maturity but cannot be used to provision for defaults during the life of the transaction.

Servicer commingling risk (positive). Servicer commingling losses are mitigated by available credit enhancement. Furthermore, the transaction features a commingling reserve funded upon a deterioration in the servicer’s credit quality.

No residual value risk (positive). The residual value of the leased objects is not securitised. All contracts amortise via constant annuities (French amortisation).

Revolving portfolio (negative). The characteristics and credit quality of the portfolio may migrate during the replenishment period, which is three years after the closing date. This risk is mitigated by the originator’s expertise and by asset, portfolio and performance covenants in the structure.

Unsecured recoveries (negative). The originator’s commitment to transfer disposal proceeds from leased objects is generally unenforceable should the originator become insolvent. Scope has analysed this transaction as a purely unsecured transaction.

Unhedged interest reset-risk (negative). The structure does not hedge against reset risk – at least 90% of the assets pay one-month Wibor while notes receive three-month Wibor. Scope has stressed the margin of the assets to accommodate temporary margin compression during a possible sharp rise in interest rates and along the life of the transaction.

Negative rating-change driver. A higher-than-expected default rate or lower-than-expected recovery upon asset default would negatively impact the ratings.

Quantitative analysis and assumptions

Scope applied its large homogenous portfolio approximation approach when analysing the highly granular collateral pool and projecting cash flows over its amortisation period. Scope analysed the transaction through the six distinct segments in the portfolio: i) new light vehicles, ii) used light vehicles, iii) new trucks and trailers, iv) used trucks and trailers, v) new machinery and equipment, and vi) used machinery and equipment.

Scope assumed an aggregate portfolio point-in-time default rate of 5.3%, a coefficient of variation of 54.4% and a recovery rate of 2.9% after applying a AAA-conditional recovery rate haircut considering the respective asset segments default rates. Scope adjusted default rates by the cure rates observed from vintage data and reflecting EFL’s business model (which focuses on turning defaulted obligors back to making regular payments). A long-term adjustment of the default rate and coefficient of variation is not justified in Scope’s view, given the historically stable economic expansion in Poland.

Scope used default rate vintages from 2008 to 2017 and recovery vintages from 2009 to 2017 for the six portfolio segments, which reflects the performance of EFL’s lease book.

For the segments new light vehicles, used light vehicles, new trucks and trailers, used truck and trailers, new machinery equipment, and used machinery and equipment, Scope assumed point-in-time default rates of respectively 3.0%, 4.0%, 5.5%, 6.0%, 6.5%, and 6.5% and coefficients of variation of 45.0%, 60.0%, 60.0%, 70%, 40% and 60.0%. The respective segments’ base case recovery rates are 3.0%, 1.0%, 13.5%, 4.0%, 4.0% and 10.5%, subject to a AAA-conditional recovery rate haircut of 40%.

Scope did not consider liquidation proceeds from leased objects. This is because recovery proceeds would be commingled with the originator’s insolvency estate should it default.

Scope considered the assets’ amortisation characteristics and assumed a default timing with a constant default intensity. Scope incorporated 50 bps margin and interest rate stresses in its cash flow analysis to address: i) lower excess spread via prepayments, amortisation and defaults; ii) flexibility available to the servicer to modify the lease; and iii) interest rate mismatches between assets and liabilities.

Rating sensitivity

Scope tested the resilience of the rating against deviations of the main input parameters: the portfolio mean default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the quantitative results change when the portfolio’s expected default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

• Class A1: sensitivity to probability of default, five notches; sensitivity to recovery rates, zero notches.
• Class A2: sensitivity to probability of default, five notches; sensitivity to recovery rates, zero notches.

Methodology

The methodologies applied for this preliminary rating were the General Structured Finance Methodology, dated August 2017, and the Auto ABS Rating Methodology, dated August 2017. Scope also applied the principles contained in the Rating Methodology for Counterparty Risk in Structured Finance Transactions, dated August 2017. All documents are available on www.scoperatings.com.

Scope analysts are available to discuss all the details of the rating analysis and the risks to which this transaction is exposed.

Regulatory and legal disclosures

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr Stefan Bund.

The rating analysis has been prepared by Martin Hartmann, Lead Analyst. Guillaume Jolivet is responsible for approving the rating.

Rating history
The rating concerns newly-issued financial instruments, which were evaluated for the first time by Scope Ratings AG.

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the issuer of the investment.

As of the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG nor any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of information for the rating
The rated entity and/or its agents participated in the rating process.

The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents, third parties and Scope internal sources.

Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.

Scope has not undertaken any assessment of agreed upon procedure reports carried out at the level of underlying financial instruments or other assets of structured finance instruments. Scope has relied on a third-party assessment and the use of such third-party assessment had no negative impact on the credit rating.

Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodology applicable for the ratings is ‘General Structured Finance Rating Methodology’, dated August 2017, ‘Auto ABS Rating Methodology’, dated August 2017, and the ‘Methodology for Counterparty Risk in Structured Finance’, dated August 2017. All files are available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

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