Rating action

The rating actions are as follows:

Class A1 (ISIN XS2360018225), PLN 890.0m: rated AAA_SF

Class A2 (ISIN XS2360025279), PLN 800.0m: rated AAA_SF

Transaction overview

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. At closing, the portfolio mainly comprises leases to Polish retailers and SMEs (99.5%), with a small amount to large corporate borrowers (0.5%). The leases finance new and used: i) light vehicles (21.7% and 13.9%); ii) trucks and trailers (5.8% and 12.7%); and iii) machinery and equipment (27.5% and 18.6%). This transaction does not securitise the leased objects’ residual value.

Rating rationale

The rating reflects: i) the legal and financial structure of the transaction; ii) the quality of underlying collateral in the context of the robust Polish macroeconomic environment; iii) the exposure to and ability of the originator and servicer, EFL; and iv) 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 a 23.1% credit enhancement from overcollateralisation and cash reserve at closing and excess spread from the portfolio. Moreover, asset and portfolio covenants, along with early amortisation triggers, protect Class A against adverse portfolio migration and asset under-performance during the three-year revolving period. Class A is expected to amortise over a weighted average life of 1.3 years from the end of the revolving period.

The Stable Outlook on the Polish economy reflects positively on expected portfolio performance. Scope has determined that sovereign risk does not constrain the notes’ ratings over their expected life.

The transaction bears counterparty exposures to EFL as servicer and Citibank as account bank and paying agent. The counterparty risks in this transaction are mitigated by the credit quality of the counterparties, 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 credit quality deterioration. Scope has assessed EFL’s and Citibank’s credit qualities using public information.

 Key rating drivers

Credit enhancement (positive)¹. Class A benefits from a 23.1% credit enhancement from overcollateralisation including a funded cash reserve, which also protects against portfolio losses at maturity.

Excess spread (positive)¹. At closing, the portfolio will generate a substantial spread of up to 4.4% of the performing lease balance available to provision for collection shortfalls and protect the payment of senior expenses and interest.

Robust Polish economy (positive)². The Polish economy has proved more resilient than euro area countries during the Covid-19 pandemic. Scope expects a supportive Polish economic environment for the life of this transaction.

Liquidity coverage (positive)¹. The structure provides liquidity protection via a fully interconnected priority of payments, ensuring timely payment of Class A interest. Additionally, the structure features an amortising liquidity reserve of 2% of the Class A notes’ principal amount, floored at PLN 1.0m, which can also be used to cover principal shortfalls at maturity.

No residual value risk (positive)¹. The residual value of the leased objects is not securitised. All contracts amortise via constant annuities (French amortisation).

Revolving portfolio (negative)¹. The characteristics and credit quality of the portfolio may deteriorate during the three-year replenishment period. This risk is partially mitigated by the originator’s expertise and by asset, portfolio and performance covenants in the structure.

Unsecured recoveries (negative)¹. The originator’s commitment to transfer disposal proceeds from leased objects is generally unenforceable should the originator become insolvent. Therefore, Scope’s recovery analysis has only considered historical recovery rates that do not account for the sale of the leased objects.

Servicer commingling exposure (negative)¹. Servicer commingling exposes the transaction to EFL’s credit quality. The available credit enhancement and a commingling reserve, which will be funded if the servicer’s credit quality deteriorates, partially mitigate this risk.

Unhedged interest reset risk (negative)¹. The structure does not hedge against reset risk – at least 90% of the assets pay a spread over one-month Wibor while the notes are indexed to three-month Wibor. Scope stressed the margin of the assets to accommodate temporary margin compression during a possible sharp rise in interest rates during the life of the transaction. Additionally, the significant correlation between the two Wibor reference rates that are involved, along with the high excess spread and the cash reserve, partially mitigate this risk.

Downside rating-change drivers

A higher-than-expected default rate or lower-than-expected recovery upon asset default could negatively impact the ratings.

Quantitative analysis and assumptions

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

Scope assumed a portfolio mean default rate of 5.5%, a coefficient of variation of 50.0% and a recovery rate of 11.0% after applying a AAA conditional recovery rate haircut.

Scope used default rate vintages from 2008 to 2020 and recovery vintages from 2009 to 2020, which reflect the performance of EFL’s lease book during that period.

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 interest rate stresses in its cash flow analysis to address: i) a potential reduction in excess spread through prepayments, amortisation and defaults; ii) the flexibility available to the servicer to modify lease contracts; and iii) interest rate mismatches between assets and liabilities.

Sensitivity analysis

Scope tested the resilience of the ratings to deviations in 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 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: four notches; sensitivity to recovery rates: zero notches.
   
• Class A2: sensitivity to probability of default: four notches; sensitivity to recovery rates: zero notches.

Rating driver references
1. Internal information and documents from the issuer, the originator and the arranger. (Confidential)
2. Central and Eastern European Sovereign Outlook: GDP to fully recover crisis losses by 2022.

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

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ Cash Flow SF EL Model Version 1.1 incorporating the relevant asset assumption, 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 these Credit Ratings, (Scope’s General Structured Finance Rating Methodology, 14 December 2020; Consumer and Auto ABS Rating Methodology, 3 March 2021; Methodology for Counterparty Risk in Structured Finance, 13 July 2021) are available on https://www.scoperatings.com/#!methodology/list.
The model used for these Credit Ratings is (Scope Cash Flow SF EL Model Version 1.1), available in Scope Ratings’ list of models, published under https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

Solicitation, key sources and quality of information
The Rated Entity and its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party asset due diligence assessment/asset audit. The external due diligence assessment/asset audit was considered when preparing the Credit Ratings and it had no impact on the Credit Ratings.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Sebastian Dietzsch, Director.
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director.
The final Credit Ratings were first released by Scope Ratings on 27 October 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures 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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