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Rating action

The ratings are as follows:

Class A-1: PLN 1,290.0m: assigned new AAA_SF

Class A-2: PLN 545.0m: assigned new AAA_SF

Class B: PLN 640.0m: assigned new BB-_SF

Transaction overview

The transaction consists of the securitisation of a PLN 2.5bn portfolio of fully amortising lease receivables with no residual value risk, which PKO Leasing Spółka Akcyjna (PKOL) originated and granted mainly to Polish SMEs. The leases were granted to finance the acquisition of light vehicles (new or used), trucks and trailers, machinery and equipment, and other vehicles. The transaction features a two-year replenishment period, subject to performance and asset-eligibility covenants.

The structure comprises two classes of notes (A and B) and junior funding, which finance the PLN 2.5bn securitised portfolio. A subordinated loan granted by the originator provides funds to the junior funding and the PLN 58.8m reserve fund. The floating-rate notes amortise pro-rata but would switch to fully sequential amortisation when certain amortisation triggers are hit. All note classes benefit from the interconnected principal and interest priorities of payment. The reserve fund provides liquidity and credit enhancement for classes A and B. Credit enhancement for the rated notes is provided via subordination, the reserve fund, as well as excess spread. The notes pay quarterly and have legal final maturity on 28 December 2029.

Rating rationale

The ratings reflect: 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, PKOL; and iv) the counterparty exposure to Elavon Financial Services DAC, as account bank and paying agent.

Class A-1 and class A-2 (together, class A) benefit from 28.9% credit enhancement at closing and protection against portfolio losses provided by excess asset interest compared to the fees and expenses together with the interest due on the rated notes. Class A is expected to amortise over a weighted average life of 1.1 years from the end of the two-year revolving period. Following the revolving period, the class A rating will benefit from sequential-amortisation triggers which protect it against portfolio performance deterioration during the amortisation period.

Class B benefits from 3.3% credit enhancement at closing and pro-rata amortisation as long as sequential-amortisation triggers are not hit. The class B is expected to amortise over a weighted average life of 2.5 years from the end of the revolving period.

Furthermore, the interest and principal priorities of payment are interconnected, ensuring liquidity support beyond the reserve fund for the payment of interest to all rated classes of notes. All rated notes benefit from a mechanism linked to portfolio defaults, which traps excess spread to ensure sufficient collateralisation.

The risk of portfolio performance deterioration is mitigated partly by early-amortisation triggers. Asset- and portfolio-level covenants limit qualitative changes to the portfolio’s composition.

The short-term outlook for the Polish economy is positive for the transaction’s expected asset performance. Scope has determined that sovereign risk does not constrain the ratings over the notes’ expected life.

The rating also factors in the transaction’s counterparty risk. The transaction is exposed to PKOL as servicer, PKO Bank Polski S.A. (PKO BP) as back-up servicer facilitator and Elavon Financial Services DAC as account bank and paying agent. The counterparty risk is mitigated by the credit quality of the counterparties, mechanisms in the structure such as regular cash sweeps and back-up arrangements, as well as the limited time exposure. In addition, the back-up servicer facilitator and the account bank are subject to replacement triggers upon a deterioration of their credit quality. We assessed the credit quality of PKO BP and Elavon Financial Services DAC using public information, taking the bank’s public credit ratings into consideration. Scope maintains a private rating on PKO BP.

Key rating drivers

Credit enhancement (positive). Class A benefits from 28.9% credit enhancement provided by subordination and the reserve fund.

Robust Polish economy (positive). The Polish economy will have a positive effect on portfolio performance and thus the rated notes. The solid economic environment is demonstrated by strong GDP growth and rising employment in combination with sound support from the private sector.

Short lifetime exposure (positive). Once the replenishment period is over the class A notes have an expected weighted average life of 1.1 years at a 0% constant prepayment rate. This limits the exposure to both counterparty risk and possible macroeconomic deterioration.

Liquidity coverage (positive). Liquidity is protected via the two separate, but fully interconnected priorities of payment, ensuring the timely payment of class A interest. The structure also features an amortising reserve fund of 2.35% of the notes’ balance plus the subordinated loan principal amount, with a PLN 4m floor. The reserve fund can absorb loses at maturity but cannot be used to provision for defaults during the life of the transaction.

No residual value risk (positive). Receivables from the residual value of leased objects are 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, i.e. two years after the closing date. This risk is mitigated by the originator’s expertise and by the adequate single-asset, portfolio and performance covenants in the structure.

Unhedged interest reset-risk (negative). The structure is not hedged against reset risk – the issuer receives one-month Wibor on the assets while it has to pay pay three-month Wibor on the notes. We have stressed the assets’ margin to accommodate temporary margin compression during a possible sharp rise in interest rates and along the life of the transaction. This risk is mitigated by excess spread triggers which would start the early-amortisation of the transaction as well as protecting the class A by switching to fully sequential amortisation.

Back-up servicer (negative). Operational risk arising from servicer default is only partially mitigated by the appointment of PKO BP as back-up servicer facilitator. No back-up servicer was appointed at the closing of the transaction.

Excess spread (negative). The asset portfolio will generate only moderate spread in excess of interest due on the rated notes and transaction fees. Applying a stress of 1% senior fees, we estimate an excess spread at closing of 1.1%. Excess spread decreases to 0.3% when accounting for a minimum portfolio covenant of 3.0% over a one-month Wibor and a further 0.5% stress related to margin compression and interest rate mismatch.

Positive rating-change drivers

Faster-than-expected portfolio amortisation may benefit the class B rating if credit enhancement builds up before credit losses crystallise.

Better-than-expected portfolio quality at the end of the revolving period combined with a continued robust Polish economy would drive stronger deal performance and could positively impact the class B rating.

Negative rating-change driver

Worse-than-expected asset performance showing in a higher-than-expected default rate or lower-than-expected recovery upon asset default would negatively impact the ratings.

Quantitative analysis and assumptions

A cash flow analysis was performed considering the collateral portfolio’s characteristics and the transaction’s main structural features. Scope applied a large homogenous portfolio approximation approach when analysing the collateral pool and projecting cash flows over the expected amortisation period. The cash flow analysis used a probability distribution of the portfolio’s default rate, following an inverse Gaussian distribution, to calculate the expected loss of each rated tranche. The analysis also provides the expected weighted average life of each tranche.

A portfolio mean default rate of 3.5% and a coefficient of variation of 70.0% were applied over the portfolio’s expected weighted average life of 1.7 years after the end of the revolving period. Scope adjusted default rates using the cure rates observed from historical data, which reflect PKOL’s business model (focus on helping defaulted obligors to resume making regular payments). For the class A analysis, Scope considered a base case recovery rate of 22.0%, which, after a 40% haircut on the AAA level is applied, gives a rating-conditional recovery rate of 13.2%. For the class B analysis, Scope considered the recovery proceeds from the sale of the leased assets. This results in a base case recovery rate of 67.7%, which gives a rating-conditional recovery rate of 62.3% after an 8% haircut on the BB level is applied. A 3.0% portfolio yield further stressed by 0.5% to account for margin compression and interest rate mismatch was also assumed. We also assumed defaults for 0.25% of the portfolio by the end of the revolving period, i.e. assets that are neither performing nor provisioned with excess spread. This share corresponds to the early-amortisation trigger linked to the principal deficiency ledger (PDL) and is debited to the PDL. In addition, for the analysis of the class A notes only, the maximum allowance for the 1.5% dynamic delinquency ratio (corresponding to the early-amortisation trigger linked to the dynamic delinquency ratio) is considered to default two months after the amortisation period begins (before the cure rate is applied).

Scope has taken into account default rate and recovery vintage data on the securitised portfolio, which cover the periods 2011-17 and 2008-18, respectively, and reflect the performance of the lease book originated by PKOL. Scope made no long-term adjustments to the default rate and coefficient of variation, given the historically stable economic expansion in Poland.

Sensitivity analysis

Scope tested the resilience of the ratings against deviations of the main input parameters: the mean-default rate and the recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the ratings 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 mean default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

• Class A: sensitivity to default rate, two notches; sensitivity to recovery rate, zero notches
   
• Class B: sensitivity to default rate, one notch; sensitivity to recovery rate, one notch

Stress testing
Stress testing was performed by applying rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope performed a cash flow analysis of the transaction with the use of Scope Cash Flow SF EL Model Version 1, incorporating default and recovery rate assumptions over the portfolio’s amortisation period, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for the ratings, the ‘SME ABS Rating Methodology’, the ‘General Structured Finance Rating Methodology’ and the ‘Methodology for Counterparty Risk in Structured Finance’ ’are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.

Solicitation, key sources and quality of information
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 Ratings GmbH has received a third-party asset audit. The external asset audit was considered when preparing the rating and it has no impact on the credit rating.
Prior to the issuance of the rating or outlook action, 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.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst: Martin Hartmann, Associate Director
Person responsible for approval of the rating: David Bergman, Managing Director
The final ratings were first released by Scope on 26 September 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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