Fitch Assigns Expected Ratings to flexicommercial ABS Trust 2021-1; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-28 February 2021: Fitch Ratings has assigned expected ratings to flexicommercial ABS Trust 2021-1's pass-through floating-rate notes. The notes are backed by a granular pool of first-ranking Australian secured commercial auto and equipment finance receivables originated by Flexirent Capital Pty Limited and serviced by flexicommercial Pty Ltd (together, flexicommercial); each a wholly owned subsidiary of Humm Group Limited. The notes will be issued by Perpetual Corporate Trust Limited as trustee for flexicommercial ABS Trust 2021-1. flexicommercial ABS Trust 2021-1 ----A ; Long Term Rating; Expected Rating; AAA(EXP)sf; Rating Outlook Stable ----B ; Long Term Rating; Expected Rating; NR(EXP)sf ----C ; Long Term Rating; Expected Rating; NR(EXP)sf ----D ; Long Term Rating; Expected Rating; NR(EXP)sf ----E ; Long Term Rating; Expected Rating; NR(EXP)sf ----F ; Long Term Rating; Expected Rating; NR(EXP)sf ----G ; Long Term Rating; Expected Rating; NR(EXP)sf Transaction Summary The total collateral pool consisted of 5,466 receivables totalling approximately AUD300 million, with an average obligor exposure of AUD59,512 at the cut-off date. All receivables are fixed, amortising principal and interest loans and leases with a weighted-average remaining term of 45 months. The pool's highest concentration by industry, as classified by Fitch, is in transportation and distribution (31.1%) and building and materials (24.9%). The loans are secured by collateral types such as trucks (26.4%), prime movers (16.2%) and construction equipment (14.0%). KEY RATING DRIVERS Pandemic Raises Default Risk: Fitch has made assumptions about the spread of the coronavirus and the economic impact of related containment measures. SME loan portfolios have higher default probabilities than other asset classes, reflecting the volatile economic performance of the underlying businesses. Fitch raised the probability of default by 2.9% at each rating level to reflect the portfolio's vulnerability to elevated defaults due to the pandemic. We consider this stress to encompass sufficient buffer compared with increases in defaults observed in recent gross loss data. We also lowered base-case recovery rates by a factor of 0.86x to account for the potential coronavirus pandemic impact. The 'AAAsf' and 'Bsf' recovery rates are 2.7% and 6.1%, respectively. See the following links for Fitch's pandemic-related credit views and analytical approach: - "Global Economic Outlook - December 2020", published on 7 December 2020, available at www.fitchratings.com/site/re/10145707 - "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update", published on 7 December 2020, available at www.fitchratings.com/site/re/10145938 - "Global SF Rating Assumptions Updated to Reflect Coronavirus Risk", published on 3 April 2020, available at www.fitchratings.com/site/pr/10117224 Granular Portfolio: The securitised portfolio is highly granular; the largest single obligor makes up 0.24% of the portfolio balance and the largest 10 obligors account for 2.2%. The portfolio is also diversified across geography and industry. All loans are amortising and the transaction structure includes a trigger to switch payments back to sequential at 10% of the initial note balance to ensure the portfolio remains granular at the tail end. Structural Risks Addressed: Counterparty risk is mitigated by structural mechanisms that ensure remedial actions take place should the ratings of the liquidity facility provider, swap provider or trust account bank fall below a certain level. The transaction includes an interest-rate swap with a fixed schedule to cover any over- or under-hedging, depending on the level of prepayments and defaults. A derivative reserve also traps excess spread to the extent the transaction is over-hedged, allowing for additional income where swap payments increase in proportion to the portfolio. Adequate Liquidity Protection: The transaction benefits from a liquidity facility sized at 1.5% of the class A to F notes' invested balance with a floor of AUD300,000 to ensure stable cash flow to the A to F notes. The transaction can withstand 87% of the portfolio being granted a payment holiday for six months before needing to draw on principal and the liquidity facility; this is above the 2% of receivables under such arrangements as of January 2021. There were no receivables under payment holidays within the pool at the cut-off date. Low Operational and Servicing Risk: All receivables were originated by flexicommercial, which demonstrated adequate capability as originator and underwriter. The operations of the servicer have not been disrupted by the pandemic, as staff can work remotely and have access to the office. Servicer disruption risk is mitigated by back-up servicing arrangements. The nominated back-up servicer is Perpetual. Fitch undertook an operational and file review and found that the operations of the originator and servicer were comparable with those of other auto and equipment SME lenders. Economic Rebound Supports Outlook: Fitch expects near-term asset performance to deteriorate, but to continue to support the Stable Outlook on the notes. We forecast an unemployment rate of 6.2% for 2021 and GDP growth of 3.8%. The key rating drivers listed in the applicable sector criteria, but not mentioned above, are not material to this rating action. RATING SENSITIVITIES Unanticipated increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than Fitch's base case and are likely to result in a decline in credit enhancement and remaining loss-coverage levels available to the notes. Decreased credit enhancement may make certain note ratings susceptible to potential negative rating action, depending on the extent of the coverage decline. Hence, Fitch conducts sensitivity analysis by stressing a transaction's initial base-case assumptions. This section provides insight into the model-implied sensitivities the transaction faces when assumptions - default rates or recovery rates - are modified, while holding others equal. The modelling process uses the modification of default and loss assumptions to reflect asset performance in up and down environments. The results below should only be considered as one potential outcome, as the transaction is exposed to multiple dynamic risk factors. Factors that could, individually or collectively, lead to positive rating action/upgrade: The rated notes are at 'AAAsf', which is the highest level on Fitch's scale. The ratings cannot be upgraded. Factors that could, individually or collectively, lead to negative rating action/downgrade: A longer pandemic than Fitch expects that leads to deterioration in macroeconomic fundamentals and consumers' financial position in Australia beyond Fitch's baseline scenario. Available credit enhancement cannot compensate for higher credit losses and cash flow stresses, all else being equal. Fitch conducted sensitivity analysis by increasing gross default levels and decreasing recovery rates over the life of the transactions. Upgrade Sensitivity: As the rated notes are at 'AAAsf', upgrade sensitivity scenarios are not relevant. Downgrade Sensitivity: Current Rating: AAAsf Impact on note ratings of increased defaults: Increase in mean rating default rate (RDR) by 25%: AAAsf Increase in mean RDR by 50%: AAAsf Reduce recovery rates by 25%: AAAsf Reduce recovery rates by 50%: AAAsf Impact on note ratings of multiple factors: Increase the mean RDR by 25% and reduce recovery rates by 25%: AAAsf Increase the mean RDR by 50% and reduce recovery rates by 50%: AAsf Coronavirus Downside Scenario Sensitivity: Under Fitch's downside scenario, re-emergence of infections in the major economies prolongs the health crisis and confidence shock, prompts extensions or renewals of lockdown measures and prevents a recovery in financial markets. Fitch tested this scenario by increasing mean RDR by 25% and decreasing the recoveries by 25%. Impact on note ratings of downside scenario: AAAsf Best/Worst Case Rating Scenario International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY Fitch sought to receive a third-party assessment conducted on the asset portfolio information, but none was made available. Fitch reviewed a small targeted sample of the originator's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. Overall, and together with any assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg Contacts: Primary Rating Analyst James Leung, Director +61 2 8256 0322 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst Jimmy Tanzil, Senior Analyst +61 2 8256 0305 Committee Chairperson Natasha Vojvodic, Senior Director +61 2 8256 0350 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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