Scope affirms class A and upgrades class B notes issued by Polish Lease Prime 1 DAC
Scope Ratings GmbH (Scope) has reviewed the performance of notes issued by Polish Lease Prime 1 DAC and has taken the following rating actions:
Class A-1 (XS2052182206), PLN 753.1m outstanding: affirmed at AAASF
Class A-2 (N/A), PLN 318.0m outstanding: affirmed at AAASF
Class B (XS2052182545), PLN 468.6m outstanding: upgraded to BB+SF from BB-SF
Transaction overview and performance
The transaction is a securitisation of fully amortising lease receivables with no residual value risk, which closed on 26 September 2019. The leases were originated and granted by PKO Leasing Spółka Akcyjna (PKOL) mainly to Polish SMEs to finance the acquisition of light vehicles (new or used), trucks and trailers, machinery and equipment, and other types of vehicles.
The structure comprises two classes of notes (classes A and B) and junior funding, which provide financing for the securitised portfolio. A subordinated loan granted by the originator provides funds for the junior funding and the reserve fund. Credit enhancement for the rated notes is provided via subordination, the reserve fund, and excess spread. As of reporting date 25 May 2022, the notes’ combined outstanding nominal balance was PLN 1,539.7m (PLN 2,475m at closing).
The transaction featured a two-year replenishment period, which ended in September 2021.The floating-rate notes are pro-rata but switch to fully sequential when certain triggers are hit. Since the 31 May 2022 payment date, the notes amortise on a sequential basis. The increased differential between the one-month and three-month Wibor rates reduced the excess spread trigger calculation to 0.7%, below the curable 0.9% sequential amortisation trigger. The reduction is not a result of portfolio underperformance. Performance triggers have not been breached and remain far from their thresholds.
As of May 2022, the transaction´s performance was better than expected. The outstanding portfolio has amortised to 63% of its closing balance. The cumulative default ratio is at 0.63%, with loans in excess of 120 days in arrears classified as defaulted. Late-stage delinquencies in the 60 to 120 days past due bucket have been relatively stable and at low levels since closing, never exceeding 0.70% of the outstanding portfolio balance.
The notes pay quarterly with a legal maturity on 18 December 2029.
The ratings reflect: i) the legal and financial structure of the transaction; ii) the quality of the underlying collateral in the context of the 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.
The rated classes benefit from credit enhancement build-up due to the start of the amortisation period in September 2021. As of 16 May 2022, credit enhancement on rated classes A and B respectively increased to 34.3% and 4.6% from the closing levels of 28.9% and 3.4%.
Furthermore, the interest and principal priorities of payment are interconnected, ensuring liquidity support beyond the debt service reserve 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.
Despite the current macroeconomic uncertainty, Scope does not expect Polish economic developments to significantly impact transaction performance. Scope has also determined that sovereign risk does not constrain the ratings over the notes’ expected life.
The rating also factors in the transaction’s counterparty risk to PKOL as servicer, PKO Bank Polski S.A. 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. Scope assessed the credit quality of PKO Bank Polski and Elavon Financial Services DAC using public information.
Key rating drivers
Increased credit enhancement (positive)1,2. Credit enhancement on classes A and B has respectively increased to 34.3% and 4.6% from the closing levels of 28.9% and 3.4%.
Asset performance (positive)1. As of May 2022, the pool’s reported defaults are below Scope’s expectations. Overall portfolio performance has been positive. Since the closing date, transaction triggers related to asset performance have never been breached and the observed delinquency rates in the pool have been relatively stable and low.
Short lifetime exposure (positive)1,2. 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 counterparty risk and possible macroeconomic deterioration.
Liquidity coverage (positive)2. 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 cash reserve of 2.35% of the notes’ balance plus the subordinated loan principal amount, with a PLN 4m floor. The cash reserve can absorb loses at maturity but cannot be used to provision for defaults during the life of the transaction.
No residual value risk (positive)2. Receivables from the residual value of leased objects are not securitised. All contracts amortise via constant annuities (French amortisation).
Unhedged interest reset risk (negative)2. The assets pay one-month Wibor while the notes receive three-month Wibor. This risk is mitigated by excess spread triggers that would protect the class A through a switch to fully sequential amortisation. The trigger has been hit; thus, increasing levels of credit enhancement will cover the basis losses for the senior notes and there is still excess spread remaining.
Positive. Faster-than-expected amortisation may benefit the class B rating if credit enhancement builds up before credit losses crystallise.
Negative. A worsening of the geopolitical tensions in Central and Eastern Europe as well as high sustained inflation may negatively impact the Polish economy, asset performance and the ratings.
Quantitative analysis and assumptions
Scope has performed a cash flow analysis, considering the portfolio's characteristics and the transaction's main structural features, such as the notes’ priorities of payments, note size, the coupon on the notes, credit enhancement mechanisms, as well as servicing fees.
Scope assumed that portfolio defaults follow an inverse Gaussian distribution to analyse the highly granular collateral pool and to calculate the expected loss of the rated notes. The analysis also provided the expected weighted average life of each class of notes.
Based on the pool composition as of May 2022, Scope established a 120-days-past-due revised mean default rate of 2.6% for the remaining pool over a weighted average life of 1.3 years and a revised pool default coefficient of variation of 93.0%. Scope maintained a recovery rate of 22.0% for the class A and 67.0% for the class B.
Scope tested the resilience of the ratings to deviations in the main input parameters: the mean default rate and the portfolio 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 results for each rated tranche change compared to the assigned ratings when the assumed mean default rate increases by 50% or the portfolio’s expected recovery rate decreases by 50%:
Class A: sensitivity to mean default rate, three notches; sensitivity to recovery rate, zero notches.
Class B: sensitivity to mean default rate, two notches; sensitivity to recovery rate, two notches.
Rating driver references
1. Investor reports (Confidential)
2. Transaction documentation (Confidential)
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.
The methodologies used for these Credit Ratings, (General Structured Finance Rating Methodology, 17 December 2021; Consumer and Auto ABS Rating Methodology, 3 March 2022; Methodology for Counterparty Risk in Structured Finance, 13 July 2021), are available on https://www.scoperatings.com/ratings-and-research/structured-finance/methodologies.
The model used for these Credit Ratings is (Cash Flow SF EL Model Version 1.1), available in Scope Ratings’ list of models, published under https://www.scoperatings.com/ratings-and-research/structured-finance/methodologies.
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, Ancill