CAN Capital Funding LLC

Transcription

1 Presale: CAN Capital Funding LLC Primary Credit Analysts: John J McCarthy, New York (1) ; j.mccarthy@standardandpoors.com Christina Rossi, New York; christina.rossi@standardandpoors.com U.S. Structured Credit New Issuance: Winston W Chang, Lead Analytical Manager, New York (1) ; winston.chang@standardandpoors.com Analytical Manager: Weili Chen, New York (1) ; weili.chen@standardandpoors.com Legal Contact: Stuart Stahl, New York (212) ; stuart.stahl@standardandpoors.com Table Of Contents $191 million fixed-rate asset-backed notes series Transaction Overview Rationale Transaction Strengths Transaction Weaknesses Mitigating Factors Transaction Structure Company Background And Product Information Originations And Underwriting Collections OCTOBER 1,

2 Table Of Contents (cont.) Servicing Backup Servicing Pool And Structural Characteristics Credit Support Payment Structure And Cash Flow Mechanics Credit Analysis Stressed Portfolios And The Small Business Portfolio Evaluator Surveillance Standard & Poor's 17g-7 Disclosure Report Appendix Related Criteria and Research OCTOBER 1,

3 Presale: CAN Capital Funding LLC $191 million fixed-rate asset-backed notes series This presale report is based on information as of Oct. 1, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Ratings As Of Oct. 1, 2014 Class Preliminary rating (i) Preliminary amount (mil. $) Hard credit enhancement (%) A A (sf) B BBB- (sf) (i) The rating is preliminary and subject to change at any time. Transaction Profile Expected closing date Oct. 15, 2014 Stated maturity date April 15, 2020 Collateral Note payment frequency Underwriter Seller and servicer Indenture trustee Backup servicer A revolving pool of loans and merchant cash advances made to U.S. small businesses to fund their working capital needs. Monthly on the 15th Guggenheim Securities LLC CAN Capital Inc. U.S. Bank N.A. First Associates Loan Servicing LLC Transaction Overview This is the first time that Standard & Poor's Ratings Services has assigned preliminary ratings to a transaction backed by a revolving portfolio of loans and merchant cash advances (MCAs) made to U.S. small businesses to fund their working capital needs. CAN Capital Inc. (CAN Capital)--the originator, seller, and servicer--is a leader in this emerging segment of small business financing, which is characterized by proprietary risk models and rapid decision-making. First Associates Loan Servicing LLC (First Associates) will serve as the backup servicer for the transaction. The company has experience servicing loan and MCA products similar to the ones included in this transaction. CAN Capital Funding LLC will issue the series notes in two classes, class A ($171 million) and class B ($20 million), both of which will have a fixed coupon. The notes will be paid sequentially at the end of a 30-month revolving period, beginning with class A. Credit enhancement built into the transaction includes overcollateralization, subordination, excess spread, a reserve account, and any available funds on deposit in a cash-trapping account. We expect the initial overcollateralization amount to be 4.5% of the closing date asset balance and 0.5% of funded reserves OCTOBER 1,

4 at closing. The class A notes will benefit from 10% of subordination from the class B notes. Total credit enhancement for the class A notes will be 26%, consisting of a minimum level of 11% in excess spread, 0.50% of funded reserves, 4.5% of overcollateralization, and 10% of subordination. Credit enhancement for the class B notes will be 16%, consisting of a minimum level of 11% in excess spread, 0.50% of funded reserves, and 4.5% of overcollateralization. For underwriting and servicing purposes, CAN Capital makes a clear distinction between a default on a loan and the non-performance by a merchant that sold receivables to CAN Capital under an MCA agreement. For an MCA, there is no concept of a default--a failure of a remittance to be received by CAN Capital or an insolvency of a merchant does not trigger any recourse under an MCA, there is no set term or maturity date under an MCA, and CAN Capital is only entitled to a portion of future sales, to the extent there are any future sales. A non-performing MCA is one that goes 32 consecutive days with no remittances to CAN Capital. In this presale report, for the purposes of describing our analytics and our criteria, we use the term "default" globally to describe both loan default and MCA non-performance. Rationale The preliminary ratings assigned to CAN Capital Funding LLC's asset-backed notes series reflect our assessment of: The available credit enhancement in the form of subordination (for the class A notes), overcollateralization, a funded reserve account, and excess spread; The transaction's legal structure, which is intended to be bankruptcy-remote; The credit quality of the initial and future collateral portfolio, which consists of a revolving pool of secured, fixed-rate small business loans and MCAs; The issuer's ability to make timely interest and ultimate principal payments on the notes, The servicing capability of servicer CAN Capital and backup servicer First Associates. Transaction Strengths The transaction's strengths include: It is backed by a small business loan and MCA portfolio that is highly diversified in terms of business sector and location. Loans and MCAs are underwritten using a CAN score, a predictive indicator of loan default (or non-performance in the case of MCAs) that we observed to be more predictive than alternatives such as consumer credit scores. CAN receives loan payments and MCA remittances on a daily basis, and the collateral generally has very short tenors, which help to mitigate the risk exposure to small businesses. Combined, these features have demonstrated CAN Capital to be very responsive to changes to the business risk landscape in the past. CAN Capital is a leader in this fast-growing small business finance segment and has been active in it longer than any of its peers. CAN Capital risk-prices its products such that a business with a higher CAN score ends up paying a higher loan interest rate or selling its future receivables with a higher discount rate. Risk-pricing can be effective in absorbing higher losses in a transaction backed by a revolving collateral pool. OCTOBER 1,

5 Transaction Weaknesses The transaction's weaknesses are: The pool of loans and MCAs revolves, and so its credit quality could deteriorate relative to both the initial pool and CAN's historical performance. The pool could also be affected if CAN Capital were to loosen its underwriting criteria or become exposed to unforeseen risks not previously seen by CAN. MCAs are not loans and have risks that lending instruments don't. For example, a merchant bankruptcy would not entitle the holder of the MCA contract to any recovery on the investment. Since the MCA represents a purchase by CAN of future payment card sales, a merchant closing its business results in no further remittances on the MCA. At the individual asset level, those with slow remittance speed exceeding certain levels are excluded from the asset base. At the portfolio level, certain performance triggers would lead to cash-trapping or rapid amortization if the aggregate excess spread were to drop below pre-set levels. Both features can help to mitigate MCA slow remittance risk. Aside from MCA nonperformance risk, the MCAs do not have fixed payment amounts or maturities, which can subject them to slower than-expected remittance speeds. This would effectively reduce the excess spread available to support the transaction. Through most of its history of origination, CAN Capital's product was offered exclusively provided MCAs. By stressing that history, non-performance risks, in particular those caused by merchant business failures, are sufficiently covered, in our opinion. Servicing MCAs, which entails experience working with credit card processors, is more specialized than servicing a typical small business loan backed transaction. Mitigating Factors The transaction's weaknesses are partially mitigated by: Our collateral pool composition assumptions, which are based on the transaction's portfolio eligibility criteria and concentration limitations, allowed us to construct stressed collateral portfolios to assess higher loan default or MCA non-performance risks. We believe the back-up servicer, First Associates, has the related experience to take over if CAN Capital were to become unable to continue to service the portfolio. Transaction Structure The transaction is intended to be structured as a master trust. CAN Capital will sell the assets to CAN Capital Funding LLC. The issuer is intended to be bankruptcy remote under Standard & Poor's special-purpose entity criteria. The issuer will pledge the assets to an indenture trustee to securitize the series notes. Company Background And Product Information CAN Capital has provided access to more than $4 billion in funding to underserved small and medium-sized businesses since The company has grown quickly. In 2013, its total fundings extended to merchants increased to OCTOBER 1,

6 about $800 million (48%). The company uses a proprietary model to assess the probability of merchant default or non-performance using predictive measures. The model assigns a score between 0 and 100 that is referred to as a CAN score. The CAN score is based on an evaluation of how each merchant is expected to perform based on business, industry, and economic risk factors compared with merchant cohorts represented within CAN Capital's proprietary database. The database includes 16 years of transaction history and performance data and comprises more than $4 billion in more than 130,000 merchant funding transactions. The way the model is set up, a lower CAN score means lower risk. CAN Capital and its subsidiaries source the loans and MCAs through the company's direct marketing channels, renewal contracts, and external partnerships with third parties. All assets CAN Capital sources are either originated directly through its subsidiaries (MCAs and a small percentage of loans) or through an outside relationship with WebBank (most loans). The loans and MCAs represented within the series transaction will fit the description and specifications outlined below: Small business loans: Nearly all of the small business loans that CAN Capital and its subsidiaries source are originated, underwritten, and funded by WebBank, a Utah-chartered industrial bank and FDIC member. The servicing relationship is maintained by a subsidiary of CAN Capital, CAN Capital Asset Servicing Inc. (CCAS). Under the current WebBank agreement, WebBank may offer to sell the loans to CCAS, and CCAS may elect to purchase the loans without obligation. CCAS also has the option to directly originate up to 10% of loans to merchants in certain states. The merchant loans are secured by a pledged interest in the merchant's personal property. MCAs: CAN Capital's subsidiaries provide working capital to merchants through a discounted purchase of a fixed portion of the future merchant payment card sales. The amount of sales receipts remitted to CAN Capital daily is based on the level of daily merchant payment card sales, a fixed percentage of which is remitted to CAN Capital. Therefore, MCAs have no fixed payment amounts or maturity dates. The initial purchase price of an MCA transaction is reflected in the ratio between the specified amount of receivables purchased and the discounted purchase price paid. Prior to entering into an MCA contract, CAN Capital estimates an expected underwritten turn, which is the company's projection of the number of months that it will take for CAN Capital to collect all of the purchased receivables based on expected merchant sales. If merchant sales volumes decline a certain percentage from projected levels (e.g., actual remittances fall to 60% of projected remittances at a specified point in time), the MCA will no longer be in line with the transaction's eligibility criteria. This concept is referred to as an "MPP asset" within the eligibility criteria. The actual period of time over which purchased receivables are collected can be determined only after the entire specified amount is remitted. CAN Capital's MCA contracts require business owners to personally guarantee their businesses' adherence to certain covenants. One such covenant requires exclusive use of a designated payment card processor, which allows CAN Capital to automatically receive the agreed-upon percentage of merchant payment card sales daily. Failure by a merchant to comply with such covenants would constitute a breach of its MCA contract. If there is reasonable evidence of a contract breach, CAN Capital would have recourse to the merchant. However, CAN Capital does not have any recourse against merchants that go out of business prior to remitting the specified amount of receivables OCTOBER 1,

7 purchased by CAN Capital, and unlike loans, MCAs do not include any personal guarantee of payment. Originations And Underwriting Sourcing CAN Capital provides access to loans and MCAs to address the working-capital needs of small businesses. The businesses must be U.S. based and must have been operating with revenue of at least $500,000 for more than one year. In addition, CAN Capital has specialty programs for smaller businesses with lower annual operating revenue or with shorter operating history. The current average funding amount is about $40,000. CAN Capital and its subsidiaries source the loans and MCAs through the company's direct marketing channels, renewal contracts, and external partnerships with third parties. The company's third-party partnerships include 200 active relationships with independent sales organizations (ISOs), which may submit merchant applications to CAN Capital's underwriting operations team for review. The ISOs are not involved in any of the underwriting decisions. CAN Capital or WebBank must pre-approve MCA or loan applications, respectively, submitted through these channels before origination and underwriting review. Underwriting review When deciding whether to source funding for small businesses, CAN Capital, for its own account or as a servicer on behalf of WebBank, considers the following factors, among others: Merchant profile (i.e., business sector and region); Business and personal credit history (i.e., FICO); and Merchant sales data or bank statements. CAN Capital uses each of these factors as inputs into its proprietary scoring model to derive the CAN score used to estimate the probability of non-performance for each merchant. The CAN score is also used to establish funding terms and pricing. All merchant information provided to CAN Capital is verified as part of the underwriting process. Loans Loans to merchants with a CAN score of 25 or lower are generally pre-approved and forwarded to WebBank for underwriting review. The remainder are required to undergo a manual approval process prior to being sent to WebBank. WebBank uses CAN Capital's technology platform and CAN scores as part of its underwriting process. MCAs The relevant CAN Capital subsidiary carries out a similar approval process for MCAs, with all merchants meeting a CAN score threshold of 25 or lower generally receiving automatic pre-approval. The CAN Capital subsidiary also determines a minimum return on investment (ROI) that the MCA contract will be designed to meet. In determining whether the contract can meet this ROI, CAN Capital projects an "estimated turn," which is CAN Capital's projection of the number of months that it will take for CAN Capital to collect all of the purchased receivables based on expected merchant sales. OCTOBER 1,

8 Collections Loans Collections occur each business day, whereby fixed repayment amounts are automatically debited from the merchants' business bank accounts and remitted to CAN Capital, either for its own account or to a WebBank account, as appropriate. This process is handled by a designated ACH operator. MCAs CAN Capital's MCA contracts require all merchants to agree to use designated payment processors. This allows a fixed percentage of daily merchant payment card sales to be remitted automatically to CAN Capital daily as long as the merchants' customers transact using specified payment cards supported by CAN Capital's payment processors. When payment card charges processed by the merchant are reversed (i.e. dilution of payment card purchases), CAN Capital's share of collections would be reversed as well, and netted against the next day's collections. Account monitoring If a contract experiences a temporary break in remittances, the servicing group's asset management department reaches out to the merchant to determine the cause. Many of these instances result from temporary operational issues, and the loans/mcas in question do not end up as part of the nonperforming population. In addition, the servicing group has systems in place to monitor all merchant accounts to determine whether any of them are remitting outside of the expectations that were projected at the time of underwriting. In these cases, the asset management department reaches out to the merchants to investigate the cause. These cases account for a small percentage of the population. (Refer to "Servicing" section for more information on the Asset Monitoring process.) Loss history CAN Capital has demonstrated mid-single-digit loss rates on its loans and MCAs. Approximately 6% of CAN Capital's contracts become nonperforming, which means that they have gone 32 days without collection (either due to a delinquent loan or to no remittances on an MCA contract). These accounts are worked on by the company's collections group, resulting in ultimate collection of about 22% of nonperforming amounts on average, either before or after they are written off. Accounts are written off if they go days without collection. Servicing Receipt of collections on the pooled assets will depend on the ability of the servicer to collect loan payments and MCA remittances. CAN Capital began servicing MCAs in 1998, upon origination of the company's first MCA transaction by one of the company's subsidiaries. Subsequently, CAN Capital began servicing small business loans in CAN Capital has dedicated teams in Kennesaw, Georgia, responsible for servicing, customer service, and asset collections. These teams are primarily responsible for monitoring loan payments and MCA remittances, investigating nonperforming MCA accounts for potential covenant breaches, and handling customer service, collections, and workouts. The servicing team uses its proprietary daily remittance platform to process and monitor collections on the assets. The team seeks to optimize collections through a combination of phone calls, collection letters, OCTOBER 1,

9 notifications, and its network of attorneys if necessary, as per the terms of the loan or MCA agreement. The servicer monitors daily loan payments and MCA remittances and compares the actual performance of the assets to the expected performance profile, projected at the time of underwriting. If an account deviates from expectations, it is assigned to a member of the asset management team to investigate the reason. Accounts are also assigned to a member of the asset management team if there was no loan payment or MCA remittance received for two to seven consecutive business days. For accounts that remain unresolved after two to seven consecutive days, the asset management team will determine whether there is reasonable evidence of an MCA contract breach (in the case of an MCA contract), in which case CAN Capital would have recourse against the merchant. In these instances, the company would make a decision either to have the merchant rectify the breach or to have the collections team enter into a workout agreement. If, on the other hand, it is determined that the delay in remittance was not caused by a contact breach, then CAN Capital would not have any recourse to the merchant and the account would be closed by the collections team. All nonperforming accounts that have gone 32 days or more without collections are handled by the company's collections team. Backup Servicing If CAN Capital were to be removed as servicer of the pooled assets, all servicing responsibilities would be transitioned to First Associates, as the backup servicer for this transaction. First Associates was founded in 1986 and is headquartered in San Diego. The company has experience servicing both the loan and MCA product types in addition to a wider range of asset types. As backup servicer, the company would assume the following daily responsibilities under a successor servicing agreement: Providing information to the designated payment processors and ACH operators that debit the merchant bank accounts to collect on the loan payments and MCA remittances. In the case of the MCAs, this would also include batch-splitting of CAN Capital's share of the merchants' credit card sales. Collecting all amounts owed as a result of defaulted loans or breaches of MCA contracts. Posting daily loan payments and MCA remittances. Adoption and enforcement of the CAN Capital contracts. Warm backup servicing Prior to assuming these daily ongoing responsibilities, First Associates will begin fulfilling its services as a warm backup servicer on the transaction's closing date. These services will include mapping of asset data and carrying out subsequent accuracy and completeness testing, ensuring read-only access to the account to which all merchant payments and remittances are made, monthly reporting to relevant parties, receipt of servicer templates used for loan and MCA administration, and conducting an annual on-site review of the servicer's processes and procedures. Hot backup servicing In addition to First Associates' responsibilities as a warm backup servicer, the company must also be ready to respond to a hot backup servicer trigger event as of any payment date. This type of trigger event will occur if the three-month weighted average spread falls below 15% or in the case of any other such type of trigger event identified in the indenture supplement. Upon notification of a hot backup servicer trigger event by the issuer, First Associates will be OCTOBER 1,

10 required to re-confirm full access to all of the information it had access to as a warm backup servicer. First Associates will also be required to re-test the accuracy and completeness of all asset data boarded on its test servicing platform prior to moving the data to its production servicing platform. Any newly transferred assets will also need to be moved onto the production servicing platform on an ongoing basis. First Associates will also be responsible for nightly data backups as well as monthly reconciliation and certification of settlement statements prior to sending these to the trustee. Pool And Structural Characteristics The revolving asset pool is subject to specified eligibility criteria to limit downside changes in credit quality that could result from changes to the pool's composition. The asset pool is also subject to specified concentration limitations to limit exposure to specific types of geographic, industry, business, or underwriting risks. In addition to these limitations on asset-specific risks within the pool, there are structural features to provide additional payment protections to the noteholders. Eligibility criteria During the 30-month revolving period, beginning with the closing date and ending with the first payment date in 2017, each of the assets transferred by CAN Capital to CAN Capital Funding LLC pursuant to the asset purchase agreement is required to be an eligible asset. The eligible assets must meet the following requirements, among others: Have an original underwritten MCA turn or loan term of less than or equal to 24 months; After giving effect to the acquisition of the asset by the issuer, the weighted average initial pricing ratio of all performing assets is greater than 1.20x; After giving effect to the acquisition of the asset by the issuer, the weighted average CAN score of all performing assets is less than or equal to 15; The funded amount with respect to such asset does not exceed $375,000; After giving effect to the acquisition of the asset by the issuer, the average unamortized funding amount of performing assets is less than or equal to $60,000; and Such asset is not a defaulted asset or MPP asset. Concentration limitations As stated, the asset pool is also subject to specified concentration limitations to maximize diversification within the asset pool while limiting exposure to specific types of geographic, industry, business, or underwriting risks. If any of the assets in the pool were to exceed these limitations, the performing asset balance would be adjusted such that no credit would be given to any asset balances in excess of the concentration limitation. The asset pool is required to meet the following concentration limitations, among others: Merchants located in California can't constitute more than 20% of the pool; those in Texas, Florida, or New York can't account for more than 15%, and the maximum portion from any other state is 10%. Merchants in business less than five years can account for no more than 25% of the pool, and those operating for less than three years can only constitute 10%. OCTOBER 1,

11 Merchants in the food and drug retailers or health care sectors can only make up 35% or 30% of the asset pool, respectively, and no other industry can account for more than 20% Merchants with revenue of less than $300,000 are limited to 10% of the asset pool. Merchants with a CAN score of more than 25 are limited to 3% of the asset pool pool composition as of the statistical cut-off date The identified collateral pool presented to Standard & Poor's for its rating analysis had the characteristics and consisted of the industry, collateral type, and geographic distributions (as of Aug. 31, 2014) shown in table 1. As we see from the collateral pool, the loans in the pool have slightly larger average funded amounts and longer weighted average terms than the funded amounts and estimated turns for MCAs. Table 1 Identified Collateral Pool Loans MCAs Total Number of assets 4,270 2,801 7,071 Aggregate unamortized funded amount ($) 131,963, ,055, ,018, Average unamortized funded amount ($) 30, , , Average funding size ($) 45, , , Weighted average term or estimated underwritten turn (months) Weighted average remaining underwritten term or turn (months) Ratio of weighted average repayment amount or specified amount to funded amount Weighted average CAN score Average years in business Average gross annual sales ($) 1,065, , , Average % gross sales taken Average specified percentage N/A N/A N/A Not applicable. Table 2 Pool Composition (% of pool unamortized funded amount) Loans MCAs Total CAN score <= to to to to or greater New merchant originations Renewal merchant originations Top industry concentrations Food/drug retailers Health care Building and development OCTOBER 1,

12 Table 2 Pool Composition (cont.) Automotive Business and equipment services Top state concentrations California Texas Florida New York Structural payment triggers In addition to the limitations on asset-specific risks within the pool, there are structural features built into the transaction to provide payment protections to the noteholders: Cash-trapping event. At any time prior to a rapid-amortization event, a cash-trapping event will be triggered if the three-month weighted average excess spread were to fall below 13%. In this case, all note proceeds would be diverted to a cash-trapping account and would be released only if the cash-trapping event were to be cured or if a rapid-amortization event were to occur. Rapid-amortization event. Rapid amortization will be initiated by any of the following events: servicer default, bankruptcy of the seller or servicer, event of default with respect to the series notes, or a rapid-amortization trigger event. Such trigger events will include if the three-month weighted average excess spread should fall below 11%, if the aggregate number of merchants in the performing asset pool falls below 500, or if the adjusted performing asset balance falls below the target asset balance. Credit Support Credit enhancement for the series notes will be provided in the form of overcollateralization, subordination, excess spread, a reserve account, and any available funds on deposit in a cash-trapping account. The class A notes will receive 10% of subordination from the class B notes. Excess spread The level of excess spread available will be based on collections received on the performing asset balance, less the sum of fees and required interest payments. Therefore, the amount of excess spread available at any time will be limited by uncollected amounts on non-performing loans and MCAs, or as a result of slower-than-expected actual remittance rates of performing MCAs. Overcollateralization The level of overcollateralization is the amount by which the aggregate unamortized funded amount of pooled assets exceeds the aggregate outstanding principal amount of the series notes. The initial amount of overcollateralization is expected to be 4.5% of the closing date asset balance. Reserve account An initial deposit will be made on the closing date, in an amount equal to 0.50% of the target asset balance as of the closing date. This amount is fixed for the life of the transaction until a rapid amortization event occurs, when it will be OCTOBER 1,

13 released in full. Subordination Subordination for the class A notes will be 10% of the initial pool balance. The class B notes will be subordinated to the class A notes such that no payments of principal of the class B notes will be made until the class A notes have been paid in full, and no payments of interest on the class B notes will be made until all payments of interest due and payable on the class A notes have been made. Payment Structure And Cash Flow Mechanics Interest The series notes will bear interest at the series note rate. Interest accrued but not paid on a payment date will be payable on the subsequent payment date, together with interest on the unpaid amount at the applicable interest rate. Interest on the series notes will accrue on a 30/360 basis. Principal During the amortization period, principal payments will be made on a pro rata basis, based on the adjusted performing asset balance. If any of the assets in the pool were to exceed these limitations, the performing asset balance would be adjusted such that no credit would be given to any asset balances in excess of the concentration limitation. Revolving period The transaction is expected to have a revolving period of 30 months, starting with the closing date and ending on the first payment date in During the revolving period, there is no principal amortization. Instead, extra cash after payment of interest would be used to purchase additional collateral. Each of the assets transferred by the seller to the issuer is required to be an eligible asset, as defined by the eligibility criteria. Amortization Unless a rapid amortization event occurs, the amortization period will begin with the earlier of the first payment date in 2017, the date on which a cash-trapping event is in effect and has continued for six consecutive determination dates, or if a servicer default occurs, only as defined by a leverage ratio of greater than 8-to-1, tangible net worth of less than $50 million, or consolidated liquidity of less than $5 million. Optional redemption The issuer will have the option to prepay the series notes, in whole but not in part, on any payment date during the series amortization period. Priority of payments After the revolving period, principal on the notes will be paid sequentially, beginning with the class A notes, according to the following note payment sequence: Table 3 Payment Priority Priority Payment 1 Indenture trustee fee, subject to a cap of $250,000 OCTOBER 1,

14 Table 3 Payment Priority (cont.) 2 Servicing fee equal to the product of one-twelfth of 3.00% times the series invested percentage of the performing asset balance during the preceding collection period 3 Backup servicing fee, subject to a cap of $250,000 4 Current and any carry-forward interest, first to the class A noteholders and second to the class B noteholders 5 At final maturity, Class A note principal until reduced to zero, and then Class B note principal until reduced to zero 6 During the revolving period, distribute to the principal account an amount equal to the product of the maximum advance rate and any amount required to cause the adjusted performing asset balance to satisfy the target overcollateralization amount for each class 7 During the amortization period, pay principal due, first to the Class A noteholders and second to the Class B noteholders 8 If the amount on deposit in the reserve account is less than the reserve account required balance, the lesser of 1)the product of the amount remaining after paying Items 1-7 and the cash-trapping percentage and 2) the amount required to cause the reserve account to equal the reserve account required balance. If a cash-trapping event is in effect, to the cash-trapping account, the product of the amount remaining after paying Items 1-7 and the cash-trapping percentage 9 Pro rata, pay any fees and expenses not paid in Items 1 or 3 above due to the caps 10 Any remainder to the series settlement account Events of default Upon the occurrence of an event of default, the series notes and, if applicable, other series of notes issued by the issuer may be accelerated. An event of default with respect to the series notes will occur upon any of the following events: A default in the payment of interest on any note of any series, which continues for five business days or more; A default in the payment of principal of any note of any series when due; Failure by the issuer to adhere to the covenants agreed to in the transaction documents, continuing for a period of 30 days or more, or continuing for a period of up to 60 days if such period is deemed reasonably necessary to satisfy the covenants subject to certain conditions; An event that causes the issuer to be treated as a corporation for tax purposes or otherwise to be subject to U.S. federal income tax on a net income tax basis; The SEC or other regulatory body deems that the issuer is an investment company, according to the Investment Company Act of 1940; or Certain bankruptcy or insolvency events occur with respect to the issuer. Credit Analysis This transaction consists of a revolving portfolio of loans and MCAs to U.S. small businesses. We have not seen a securitization including MCAs prior to this transaction. From a credit risk perspective, the collateral is similar to those backing other small business loan-backed securitizations that we rate, as our analysis shows that both collateral types are sensitive to the macroeconomic conditions in which these businesses operate. As such, we believe that the recent re-calibrated U.S. small business loan securitization criteria ("Methodology And Assumptions For U.S. Small Business Loan-Backed Securitizations," March 28, 2014) are applicable to this transaction. At the same time, there are meaningful differences between a typical small business loan pool and the CAN Capital Funding asset pool: (1) The CAN Capital Funding asset pool revolves, whereas a typical small business loan pool is static; and (2) The CAN Capital asset pool can have up to 100% MCA receivables purchases that only entitle the buyer to receive a fixed percentage of a small business' future payment card sale receipts, with no recovery offered OCTOBER 1,

15 to the holder of the MCA contract in the case of a merchant bankruptcy. In addition, MCAs are exposed to small business nonpayment risks--for example, regular business closure can also result in nonpayment for MCAs. For these and other reasons, we have supplemented our small business loan securitization criteria with those of other asset classes. For example, in determining loss levels, we also applied criteria for asset backed securities (ABS) equipment loans and leases, outlined in the "ABS Multiples" branch of the chart below. Before the application of the small business criteria, a key part of which is running the Small Business Portfolio Evaluator as depicted in the other branch of the chart, we did extensive analysis to determine an appropriate method to stress the pool composition. For our analysis, we focused on two stressed pool compositions that we believe are representative of the default/nonperformance risk of a revolving portfolio: 1) concentrated exposure to risky business sectors and 2) deterioration in underwriting not captured in CAN Capital's history. We chose to calibrate the loss levels generated by the small business criteria to be equal to those by applying the ABS equipment loans and leases criteria. The details of the calibration are further outlined in the sections that follow. Either way, our credit analysis enables us to conclude that for the CAN Capital 2014 collateral pool, the loss levels generated under our stress scenarios satisfy criteria applicable to what we consider to be related asset classes. The ABS equipment approach measures losses under the scenario that for an actuarial pool, if CAN Capital's history were to repeat itself, that history would be a reasonable basis for establishing a base case loss scenario to which we would apply rating-specific stress multiples. The small business approach, on the other hand, measures losses that may result from a downward change in credit quality if the revolving pool were to drift to riskier business sectors or if CAN Capital's underwriting were to deteriorate beyond what its historical results have reflected. We then compared the available credit enhancement to each class with their respective loss scenarios. For the class A Notes, we estimate the stress loss level to be 25.33%, supported by the available credit enhancement of 26%. For the class B Notes, we estimate the stress loss level to be 14.97%, supported by the available credit enhancement of 16%. OCTOBER 1,

16 For the purposes of our analysis, we focused on the past 10 years of CAN Capital's transaction history, which we believe to best reflect more recent refinements to the company's risk model and framework. The database used in our analysis contains history on 111,804 loans and MCAs funded between 2004 and The total volume is approximately $3.5 billion. Stressed Portfolios And The Small Business Portfolio Evaluator Base case default analysis The starting point of our analysis is the initial collateral pool: If the CAN Capital portfolio were to remain static, the application of our small business criteria would generate default levels outlined in the following section. As part of our base case default analysis, we first evaluated CAN Capital using the framework provided as part of our small business criteria to assess the company's performance history and underwriting quality. We assigned CAN Capital a performance history score of 3 and an underwriting quality score of 3.4, based on the information provided to OCTOBER 1,

17 us during the analytical process. The performance history score is based on a comparison of CAN Capital and SBA default rates across the same business-industry codes (known as Standard Industrial Classification [SIC] codes). As shown in the plot below, CAN Capital merchants have demonstrated significantly lower default rates than SBA merchants across the same SIC codes. The 45 degree line delineates the performance region: Above it are cases where CAN Capital's SIC code based defaults are higher than the relative performance of the SBA pool, and below, the opposite. Of the 50 top SIC codes in CAN Capital's history, only three have a higher defaults than the relative SBA pool. For this reason, we scored CAN Capital a '3' for table one (the data comprise more than 10 years of history, with defaults of between 50% and 100% of the overall SBA default rate (as per table 1 of the small business criteria), as compared to the relative performance of the SBA pool, and the history includes a moderate economic stress). Chart 2 Table 4 below (which is table 1 in the small business criteria) outlines the Performance History scoring framework: Table 4 Performance History Score (Contributes 80% Of The Overall Score) Greater than 10 years of history Five to 10 years of history Less than five years of history Default rate less than 10% (of overall SBA default rate) OCTOBER 1,

18 Table 4 Performance History Score (Contributes 80% Of The Overall Score) (cont.) 10% less than or equal to default rate less than 25% (of overall SBA default rate) 25% less than or equal to default rate less than 50% (of overall SBA default rate) Default rate greater than or equal to 50% less than 100% (of overall SBA default rate) Default rate greater than or equal to 100% (of overall SBA default rate) SBA--U.S. Small Business Association With regard to the underwriting quality assessment, we scored CAN Capital '4' in each of the five categories except with respect to the category "Infrequent change of the underwriting criteria". This is because CAN Capital has been using its scoring model for more than 10 years; the model removes some amount of discretion typically seen in more manual underwriting. Overall, CAN Capital's score has proven to be highly predictive of the loan default/mca non-performing outcome. Therefore, we scored CAN Capital a '1' in this category. Table 5 (which is table 2 in the small business criteria) outlines the underwriting quality scoring framework: Table 5 Underwriting Quality Score (Contributes 20% Of The Overall Score) Average LTV ratio less than or equal to 80% 1 4 Personal guarantee greater than or equal to 50% 1 4 Average DSCR greater than or equal to 1.25x 1 4 Infrequent change of underwriting criteria (that is, no material change in the last five years) Regular audit of underwriting (that is, does the underwriter consistently apply the guidelines?) Total category score 5-20 LTV--Loan-to-value. DSCR--Debt service coverage ratio. Yes No Our small business criteria framework assigns weightings of 80% and 20%, respectively, to these two scores. This resulted in an overall weighted average score of 3.08, which corresponds to a probability of default (PD) scaling factor of 84.67% (out of a possible 50%-75% scaling factor range for a non-sba loan pool). To give credit to the series loan pool's diversification, we ran the entire portfolio through the Small Business Portfolio Evaluator model. The resulting base case scenario default rates (SDR) applicable at the 'A' and 'BBB-' levels based on this scaling factor are 39.90% and 28.38%, respectively. Stressed case default analysis As discussed, the CAN Capital transaction differs from other small business transactions we rate in a significant way: The transaction has a revolving period given the short tenor of the loans and the MCAs. During this period, collections are used to purchase additional loans and MCAs, subject to the set of eligibility criteria described earlier. The eligibility OCTOBER 1,

19 criteria and other portfolio concentration limitations are set so as to provide CAN Capital with enough flexibility to fund future originations and loan purchases from WebBank. This allows for changes to the portfolio, and as a result, the credit quality of the asset pool could deteriorate. Another risk a revolving portfolio faces is that CAN Capital could loosen its underwriting criteria or introduce risks not captured in its historical default data. Therefore, we think the ABS approach, which is based on multiples of historical losses, is insufficient to address the risks. To supplement this approach, we constructed a number of what we refer to as "stressed portfolios"--those that could result in higher potential losses than would be generated by the initial portfolio as we outlined in the "Base Case Default Analysis" section above. From among these stressed portfolios, we selected two that we believe represent portfolio drift toward worsening credit quality and underwriting drift to unknown risks. Stressed Portfolio 1 Our small business criteria are calibrated by using the U.S. small business default risk of different sectors, as defined by the four-digit SIC code. In constructing Stressed Portfolio 1, we attempted to address a scenario in which the portfolio drifted to business sectors that have higher default risk as determined by our small business securitization criteria while still satisfying eligibility criteria and concentration limitations. The table below shows several possible CAN Capital portfolios, each constructed using sectors with the highest default rates according to our small business criteria; we identified the highest default sectors in CAN Capital's history from the hundreds of SIC codes represented (based on the past 10 years of origination data used for our analysis). Then, we narrowed the selection to the top 100 SIC codes, then 50, and finally the top 10. From the left to the right side of the table, each portfolio becomes more representative of CAN Capital's origination history, and as it does so, the 'A'/'BBB-' SDRs decrease. This illustrates that the SIC codes with the highest default levels make up a very small percentage of loans and MCAs underwritten by CAN Capital. This exercise demonstrated to us the relationship of adverse portfolio selection and the increase in aggregate portfolio default/nonperformance risk. For Stressed Portfolio 1, we decided to base our final analysis on the pool consisting of the 10 SIC codes from CAN Capital's entire history with the highest default rates. The 'A' SDR of 59.30% is approximately 49% higher than that of the CAN Capital's initial portfolio. For the 'BBB-' stress scenario, the SDR is 46.10%, which is 62% higher than that of the initial portfolio. The higher SDRs represent the additional stress we believe is appropriate for a revolving portfolio. Table 6 Description Of The Asset Pool % of the CAN history # of SIC codes Worst from CAN history Worst from CAN history--top 100 SIC codes Worst from CAN history--top 50 SIC codes CAN Top 10 SIC codes CAN portfolio Stressed Portfolio * 237 'A' SDRs (%) 'BBB-' SDRs (%) Scaling factor OCTOBER 1,

20 Table 6 Description Of The Asset Pool (cont.) *The count 377 under represents the actual number of business sectors in the CAN Capital initial portfolio. CAN Capital uses a proprietary industry classification system that blends the SIC codes and its successor the NAICS. We are not able to map its system 100% into the SIC codes. Stressed Portfolio 2 Another risk faced by a revolving portfolio is underwriting drift--the risk that CAN Capital could either loosen its underwriting criteria or introduce unforeseen risks. Our revised small business criteria introduced a framework to deal with similar underwriting risk: the shorter the history, the higher a scaling factor applied to asset default probabilities used in the Small Business Portfolio Evaluator. In this case, rather than using the 84.67% scaling factor we applied to Stressed Portfolio 1, we can use the highest factor under the criteria: 125%. We developed Stressed Portfolio 2 by randomly sampling CAN Capital's history using a Monte Carlo analysis, which considered the extent to which the portfolio characteristics could deteriorate while remaining within the portfolio's eligibility criteria and concentration limitations. The Monte Carlo analysis allowed us to construct 1,000 such portfolios, each with $200 million in total collateral. We then selected the portfolio outcome resulting in the highest default rates and ran this portfolio through our Small Business Portfolio Evaluator. This portfolio allows us to relax the assumption we used in Stressed Portfolio 1, where the SIC codes are restricted to the top 10 with highest historical default rates--an assumption that introduces a high degree of stress, as the selected SIC codes constitute less than 1% of the origination in CAN Capital's history. On the other hand, we coupled this portfolio with the highest asset default scaling factor to account for uncertainty in future underwriting risk inherent in a revolving portfolio. The SDRs for the 'A' and 'BBB-' stress scenarios were 59.91% and 50.04%, respectively (see chart 3). OCTOBER 1,

21 Chart 3 Conversion of SDRs into net losses The CAN Capital collateral also differs from small business loans backing Standard & Poor's rated securitizations in their loss curves due to the very short tenor of the loans and MCAs CAN Capital originates and purchases from WebBank. Chart 4 contrasts the progression of the default curves between the two collateral types. OCTOBER 1,

22 Chart 4 Also depicted in the chart above is the distinction in terms of default rate as calculated by count and defaulted balance. At their terminal point, the cumulative default rate by account is approximately twice the level by balance. This makes sense, as during a typical 12-month term (or MCA estimated turn), some borrowers default right away, and others default toward the end of the term; when the distribution is averaged, the defaulted amount is approximately 50% of the initial amount. Default rates used in our small business portfolio criteria are calculated by borrower count. The ratio of the rate of default by count and that of default by balance varies over time. Under greater economic stress, the ratio tends to be higher, meaning more accounts default early on and thus diminish the difference between the two rates. A time series of the ratio of the two rates is plotted in chart 5. OCTOBER 1,

23 Chart 5 We applied a conversion factor that converts the cumulative gross default levels into net loss levels (see table 7). The average net loss levels for the 'A' and 'BBB-' stress scenarios are 25.33% and 14.97%, respectively. These levels, as we indicated in the beginning of this section, are consistent with those generated by applying appropriate multiples to CAN Capital's historical losses. Table 7 Conversion Of Cumulative Gross Default Level Into Net Loss Level --Portfolio Portfolio Average-- (%) 'A' 'BBB-' 'A' 'BBB-' 'A' 'BBB-' Cumulative gross defaults by count Conversion factor Net loss Stressed MCA excess spread analysis In addition to analyzing expected net losses resulting from nonperforming loans and MCAs, we did a separate analysis to stress-test excess spread levels of performing MCAs. Given that MCAs have no fixed payment amounts or maturity dates, they can perform worse than expected without ever violating the merchant's MCA agreement, which would result in diminished excess spread. Our stress testing considered the extent to which effective spread could diminish if OCTOBER 1,