Rating action

Scope Ratings GmbH (Scope) has performed the following rating actions:

Class A-1 (XS2052182206), PLN 419.2m outstanding: affirmed at AAA_SF

Class A-2 (N/A), PLN 177.0m outstanding: affirmed at AAA_SF

Class B (XS2052182545), PLN 260.8m outstanding: upgraded to BBB_SF from BB+_SF

Transaction overview

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 28 February 2023, the notes’ combined outstanding nominal balance was PLN 857m (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.

As of February 2023, the transaction´s performance was better than expected. The outstanding portfolio has amortised to 34% of its closing balance. The cumulative default ratio is at 0.8%, 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 0.7% of the outstanding portfolio balance.

The notes pay quarterly with a legal maturity on 18 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 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 28 February 2023, credit enhancement on rated classes A and B respectively increased to 36% and 7% from the closing levels of 29% and 3%.

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.

Despite the current macroeconomic uncertainty, Scope does not expect that a potential deterioration of the Polish economy will significantly impact the transaction performance.

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

The key rating drivers continue to be aligned with those disclosed on our rating action release:

Increased credit enhancement (positive)¹. Credit enhancement on classes A and B has respectively increased to 36% and 7% from the closing levels of 29% and 3%.

Asset performance (positive)¹. As of February 2023, the pool’s reported defaults are below Scope’s expectations. 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 low and stable.

Short lifetime exposure (positive)¹. The class A notes have an expected weighted average life of 0.5 years at a 0% constant prepayment rate. This limits the exposure to counterparty risk and possible macroeconomic deterioration.

Liquidity coverage (positive)¹. 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 is currently not in breach, thus class A1 class A2 and class B amortise pro-rata.

Key rating-change drivers

All else equal, the following factors may constitute upside rating drivers:

• Continued deleveraging of the capital structure and a reduction of the transaction’s risk horizon.

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 stressed servicing fees.

Scope assumed that portfolio defaults follow an inverse Gaussian distribution to analyse the still 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 February 2023, Scope established a 120-days-past-due revised mean default rate of 1.1% for the remaining pool over a weighted average life of 0.5 years and a revised pool default coefficient of variation of 100%. Scope considered recovery rates of 13.2% for the class A ratings and 56.0% for the class B rating.

Sensitivity analysis

Scope tested the resilience of the credit rating against deviations in 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 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%, respectively:

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

References
1. Investor Reports (Confidential)
2. Transaction documentation (Confidential)

Stress testing
Stress testing was considered in the quantitative analysis by considering scenarios that stress factors, like defaults and Credit-Rating-adjusted recoveries, contributing to sensitivity of Credit Ratings and consider the likelihood of severe collateral losses or impaired cash flows. The impact on the rated instruments is weighted by the assumptions of the likelihood of the events in such scenarios occurring.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Rating’s Cash Flow SF EL Model Version 1.1, 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 instruments based on the generated cash flows.

Methodology
The methodologies used for these Credit Ratings, (General Structured Finance Rating Methodology, 25 January 2023; Counterparty Risk Methodology, 14 July 2022; Consumer and Auto ABS Rating Methodology, 3 March 2023), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings is (Scope Cash Flow Structured Finance Expected Loss Model Version 1.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/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, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.

Solicitation, key sources and quality of information
The Rated Entity and/or 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 at closing. The external due diligence assessment/asset audit was considered when preparing the Credit Ratings and it has 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, Senior Director
Person responsible for approval of the Credit Ratings: Antonio Casado, Executive Director
The Credit Ratings were first released by Scope Ratings on 26 September 2019. The Credit Ratings were last updated on 22 June 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.