NextGear Floorplan Master Owner Trust (Series )

Transcription

1 Presale: NextGear Floorplan Master Owner Trust (Series ) This presale report is based on information as of April 20, 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 Class Preliminary rating(i) Interest rate Preliminary amount (mil. $) Credit support (% of collateral amount) A-1/A-2 AAA (sf)/aaa (sf) Floating/fixed(ii) (iii) B-1/B-2 A (sf)/a (sf) Floating/fixed(ii) 37.35(iii) (i)the rating is preliminary and subject to change at any time. (ii)the class A-1 and B-1 notes are floating rate. The class A-2 and B-2 notes are fixed rate. (iii)the allocation of the principal amount between the class A-1 and A-2 notes and the class B-1 and B-2 notes will be determined on the day of pricing. The sum of the class A-1 and A-2 note balances will equal $400 million. The sum of the class B-1 and B-2 notes will equal $37.35 million. Primary Credit Analyst: Joanne K Desimone, San Francisco (1) ; joanne.desimone@spglobal.com Secondary Contact: Robert Jorgensen, New York (212) ; Robert.Jorgensen@spglobal.com See complete contact list on last page(s) APRIL 20,

2 Profile Expected closing date May 3, Expected principal payment date April 15, Final maturity date April 18, Interest payment date The 15th of each month beginning May 15, Collateral Servicer, sponsor, seller, custodian, and administrator Transferor Indenture trustee and paying agent Owner trustee Servicing guarantor Back-up servicer Underwriters Two revolving pools of receivables and related assets (Asset Groups 1 and 2). Asset Group 1 consists of dealer floorplan receivables to primarily independent auto dealers and, to a lesser extent, franchised auto dealers secured by the dealers' inventory of new and used automobiles and light-duty trucks and related assets. Asset Group 2 consists primarily of receivables secured by the dealers' inventory of recreational vehicles, heavy-duty trucks, rental and salvage vehicles, motorcycles, boats, all-terrain vehicles, and other vehicles and related assets; and an interest in a syndicated loan to a dealer (DriveTime Automotive Group Inc.). NextGear Capital Inc. (not rated). NextGear Funding LLC. U.S. Bank N.A. (AA-/Stable/A-1+). Wilmington Trust Co. DE (A/Negative/A-1). Cox Enterprises Inc. (BBB/Negative/A-2). Portfolio Financial Servicing Co. (not rated). Citigroup Global Markets Inc. Rationale The preliminary ratings assigned to NextGear Floorplan Master Owner Trust's $ million asset-backed notes series reflect: Our view that the 18.00% hard credit support (expressed as a percentage of the collateral amount) for the class A-1 and A-2 notes (collectively, the class A notes) is sufficient to withstand our stress scenario commensurate with the assigned preliminary 'AAA (sf)' ratings. Our view that the 10.25% hard credit support (expressed as a percentage of the collateral amount) for the class B-1 and B-2 notes (collectively, the class B notes) is sufficient to withstand our stress scenario commensurate with the assigned preliminary 'A (sf)' ratings. The 30.0% three-month average payment rate trigger, which, when breached, causes a credit enhancement increase period whereby the transaction's required subordinated amount is required to increase to 11.75% from 9.25% of the collateral amount. Alternatively, the depositors may raise the required reserve account amount to 3.50% from 1.00% of the collateral amount in lieu of increasing the required subordinated amount. If the required credit enhancement is not provided, an early amortization event will occur. The 25.0% three-month average payment rate trigger, which, when breached, causes an early amortization event to occur. Our view of the collateral portfolio's credit quality. NextGear Capital Inc.'s (NextGear's) servicing experience and our opinion of the quality and consistency of its account underwriting and collateral monitoring practices. The performance guaranty provided by Cox Enterprises Inc. (Cox; BBB/Negative/A-2) of NextGear's obligations as servicer under the transaction documents. Our expectation that under a moderate ('BBB') stress scenario, all else being equal, our 'AAA (sf)' ratings on the class APRIL 20,

3 A notes and our 'A (sf)' rating on the class B notes will remain within one rating category and two rating categories, respectively, of the assigned ratings in the next 12 months based on our credit stability criteria (see "Methodology: Credit Stability Criteria," published May 3, 2010). Our expectation of the timely payments of periodic interest and principal by the final maturity date according to the transaction documents based on stressed cash flow modeling scenarios, using assumptions commensurate with the assigned preliminary ratings. The transaction's underlying payment structure, legal structure, and cash flow mechanics. Transaction Overview NextGear Capital Inc. is a leading national provider of floorplan financing to independent auto dealers and, to a lesser extent, franchised auto and other vehicle or asset type dealers. The collateral consists of receivables from two revolving pools of receivables and related assets: Asset Groups 1 and 2. Asset Group 1 consists of dealer floorplan receivables from independent auto dealers and, to a lesser extent, franchised auto dealers secured by the dealers' inventory of new and used automobiles and light-duty trucks and related assets. Asset Group 2 consists primarily of receivables secured by the dealers' inventory of recreational vehicles, heavy-duty trucks, rental and salvage vehicles, motorcycles, boats, all-terrain vehicles, and other vehicles and related assets; and an interest in a syndicated loan to a dealer (DriveTime Automotive Group Inc.). The outstanding principal balance of the series notes, the invested amount, and the required subordinated amount will be allocated to both asset groups based on the relative outstanding principal amount of eligible receivables in each asset group. The transaction is structured so that the total required subordinated amount is available as credit enhancement for both asset groups. Each receivable is an obligation in which the related dealer agrees to repay the loan amount that it incurred when purchasing a vehicle for its inventory; the related vehicle secures the receivable. The dealer generally repays the related receivables within 48 hours of the dealer's receipt of proceeds of the sale of the underlying vehicle or at the end of the term finance period for the applicable vehicle, whichever is earlier. The trust is a master owner trust that issues notes through discrete series. The series class A-1 and B-1 notes will have a floating interest rate based on one-month LIBOR with a margin that will be determined on the pricing date. The class A-2 and B-2 notes will have a fixed rate that will be determined on the pricing date. The transaction is scheduled to pay principal to the class A and B noteholders on the expected final payment date. S&P Global Ratings' credit ratings, however, addresses ultimate principal paid by the final maturity date. Changes From The Transaction There are no material changes to structure, credit enhancement, or concentration limits from the series transaction. Similar to the transaction, the pool includes receivables related to franchise dealers that were added back into the trust. These receivables were removed from the trust on Jan. 29, 2016, but were subsequently added back before the transaction occurred. As of Feb. 28, 2017, receivables related to new auto collateral represented approximately 5% of the total trust receivables. It's important, in our opinion, to note that, despite the franchise dealer account deletions and additions that have APRIL 20,

4 occurred, our expected loss analysis has always included consideration of the performance of franchise dealer receivables because, even after removal, these receivables could be added back in the future, consistent with the transaction documents. We have not adjusted our expected loss, expressed as a 2.55% loss to liquidation. This is because there are no changes to concentration limits or trigger events. Furthermore, we have received updated performance data that, in our view, does not warrant any changes to our expected loss. Collateral performance has remained steady since series (the first series to be rated by S&P Global Ratings) was issued in July Transaction Strengths The transaction's strengths, in our opinion, include the following: The performance guaranty provided by Cox Enterprises Inc. of NextGear's obligations as servicer under the transaction documents and the commitment from Cox to NextGear as a part of the Cox Automotive segment (Cox Automotive); The strength of NextGear's servicing experience and stand-alone financial condition; NextGear's significant operation time as a floorplan finance company (10-plus years); and NextGear's experienced management team with substantial expertise in diversified floorplan lending through multiple economic cycles. Transaction Weaknesses And Mitigating Factors We believe the transaction's weaknesses and their mitigants include the following: The diversified floorplan segment requires intensive and specialized servicing compared with a typical non-diversified auto dealer floorplan (i.e., franchised dealers) transaction. Also, the portfolio has grown significantly since 2013, which further increases the burden of the intensive servicing and dealer monitoring. We believe these weaknesses are mitigated by NextGear's servicing experience and the financial strength of the servicing guarantor, Cox. The pool of floorplan loans revolve, and so their credit quality could deteriorate relative to the historical performance. The pool could also be affected if NextGear were to relax its underwriting and dealer monitoring criteria for existing or newly originated accounts. We view this weakness as being mitigated by performance-based triggers incorporated in the transaction structure, such as a payment rate trigger or credit support deficiency amortization events. Additional mitigating factors include the transaction's asset eligibility and concentration limits that restrict the portion of the trust receivables secured by, in our view, higher risk and discretionary assets, such as recreational vehicles, boats, and power sports. NextGear Capital Inc. NextGear was created through the merger of Manheim Automotive Financial Services Inc. and Dealer Services Corp. on Feb. 1, NextGear is headquartered in Carmel, Ind. Its management team is among the most experienced in the diversified auto dealer floorplan industry. NextGear will service the receivables according to their customary APRIL 20,

5 policies and procedures. Originations NextGear's underwriting and loan approval department is located centrally at the company's headquarters to attain consistency, accuracy, and efficiency. The underwriting process begins with a write-up from the field sales force, which outlines the dealer's business model and financing needs. This information is brought into the centralized credit and underwriting team, which conducts the review. The review includes: A full Westlaw Uniform Commercial Code search; An external Experian credit review of the dealer owners/guarantors; and Photos of the dealer's facility. Loan documentation includes: A completed and signed line-of-credit application; A copy of the dealer's dealer license and a copy of the driver's license of each individual guarantor, if any; A copy of a canceled check from the dealer (information regarding bank accounts); A list of auction and business references for the dealer; and Additional information, if requested by NextGear's credit committee, which, depending on the amount of credit desired, may include copies of the dealer's business and personal financial statements, tax returns, and copies of the dealer's organizational documents. In addition, dealers typically provide personal guarantees on their floorplan loans. NextGear generally finances an individual advance for each vehicle purchased at an auction in an amount equal to the purchase price plus transaction and transportation fees. For a vehicle that is not acquired at an auction or an approved source, the amount of such an advance is the lesser of the wholesale book value for the vehicle or the purchase price paid by the dealer. The payment terms that NextGear offers dealers generally include a requirement to make curtailment payments, which are designed to maintain a sufficient collateral position for the receivables. Servicing systems NextGear's management team leveraged their experience in floorplan lending in the development of its proprietary DISCOVER operating platform. The operating system allows for flexibility in payment terms at the loan level by each vehicle floorplan. In addition, the system provides access to the dealer's financial or operation position. For example, NextGear's credit team has timely access to the Knock Out Book (KO Book), which is maintained by the Auction Insurance Agency (AIA). The AIA provides check and title insurance to auto auctions across the country. It insures the auctions against damages arising from transactions in which a buyer either remits funds via a check that is subsequently returned because of insufficient funds or engages in other activities resulting in financial loss to the auction. If a dealer has engaged in any of those activities, then it is included in the KO Book. NextGear can then immediately cut a dealer's access to inventory funding. Dealer monitoring As part of NextGear's dealer monitoring practices, it reviews the dealer's payment history and the financial condition of APRIL 20,

6 the dealership and dealer guarantors. It also audits its inventory and sales records regularly to evaluate the dealer's financial position and to verify that it possesses the financed vehicles and promptly pays each receivable following the vehicle's sale. NextGear engages DataScan, a third-party vendor, to perform on-site inventory audits. On-site audits of its active dealers are performed every days on average. The company maintains a complete history of all audits, and through statistical analysis, utilizes this and other performance information to determine an account's risk management activities. In addition to a typical servicing and collection function, inventory monitoring is important for floorplan transactions because of the numerous parties involved, the receivables' high turnover rate, and the high value of the collateral securing the receivables. After the dealership audit, NextGear uploads the information to the DISCOVER system, and NextGear's collateral reconciliation team then reconciles any unverified vehicles with the dealer. If a vehicle cannot be located, the dealer's account may be locked or other enforcement actions may be taken, and further investigation is conducted until the situation is resolved to NextGear's satisfaction. Back-up servicing arrangement PFSC is the back-up servicer and, pursuant to the back-up servicing agreement, is required to confirm certain data in the monthly investor report and to become the successor servicer if, for any reason, NextGear is terminated as the servicer. Founded in 1992, PFSC performs primary, back-up, and successor servicing for a variety of banks, captive finance, and specialty finance companies across the U.S. Cox Enterprises Inc. Cox, a Delaware corporation, will guaranty the NextGear obligations as servicer under the transaction documents. Through its subsidiaries, Cox is a communications, media, and automotive services company. NextGear is a wholly owned indirect subsidiary of Cox. We believe that the performance guaranty provided by Cox, along with NextGear's experience, are sufficient, without the benefit of a back-up servicer, to achieve a 'AAA (sf)' rating. Headquartered in Atlanta, Cox's revenues in 2016 were approximately $20.1 billion, and the company has more than 60,000 employees. It has three main operation segments: communications (cable TV and broadband communications), media, and automotive. The Cox Automotive group segment includes more than 20 wholesale and retail automotive brands, including: Manheim; AutoTrader; Kelley Blue Book; vauto; Dealertrack; and NextGear. APRIL 20,

7 Legal Structure NextGear, the originator, will sell and transfer its right, title, and interest in and to all of the receivables related to the designated accounts to the transferor, NextGear Funding LLC. The transferor, which is structured to be a bankruptcy-remote special-purpose entity, will grant a perfected security interest in the receivables to the trust, which will then grant a security interest to the indenture trustee on the noteholders' behalf. NextGear has a first-priority perfected security interest in the vehicles it finances. This security interest in the vehicles is transferred by NextGear to the transferor, and by the transferor to the trust, and by the trust to the indenture trustee for the noteholders' benefit. In rating this transaction, we will review the relevant legal matters outlined in its criteria. An indeterminate portion of the vehicles securing the floorplan loans sold to the trust may also secure other agreements between the dealers and NextGear. NextGear has agreed, pursuant to the receivables purchase agreement, to subordinate any claims that it may have in its security interest in any vehicle securing a receivable sold to the trust until the trust has been paid in full. Furthermore, NextGear has agreed that it will not sell or assign any of the other agreements unless the purchaser similarly agrees to subordinate any claim it has in the vehicle securing a receivable sold to the trust. APRIL 20,

8 Credit Support According to the transaction documents, the credit support for the class A-1 and A-2 notes (class A notes) will total 18.00% of the collateral amount and is structured as follows: The subordination that the class B notes provide will equal 7.75% of the collateral amount. The required subordinated amount will equal 9.25% of the collateral amount. The required reserve account will equal 1.00% of the collateral amount. The credit support for the class B-1 and B-2 notes (class B notes) will total 10.25% of the collateral amount and is structured as follows: The required subordinated amount will equal 9.25% of the collateral amount. The required reserve account will equal 1.00% of the collateral amount. APRIL 20,

9 Available subordinated amount and the credit enhancement increase period The series required subordinated amount is the sum of the required subordinated amount for Asset Groups 1 and 2. Similarly, the series available subordinated amount is the sum of the available subordinated amount for Asset Groups 1 and 2. The transaction's required subordinated amount is required to increase to 11.75% from 9.25% of the collateral amount if the three-month average principal payment rate is less than 30.0%. Alternatively, the depositors may raise the required reserve account amount to 3.50% from 1.00% of the collateral amount in lieu of increasing the required subordinated amount. During an early amortization period, the required subordinated amount will be based on the invested amount allocated to Asset Groups 1 and 2 as of the revolving period's last day. An early amortization event will occur if the available subordinated amount is less than the required subordinated amount. The series transaction structure also incorporates an incremental subordination feature. If the dealer, asset type, and other collateral characteristics exceed the concentration limits established in the transaction documents or the receivables become ineligible, the required subordinated amount level will increase by an amount equal to the excess concentration amounts or ineligible receivables. Reserve account overview The amounts held in the reserve account will be available to cover any shortfalls in senior fees and the class A and B notes' monthly interest. If a reserve account shortfall occurs, available non-principal collections will be deposited in the reserve account to the required amount. If, on any payment date, the amount of funds remaining in the reserve account exceeds the outstanding principal balance of the class A and B notes after the application of funds on such payment date or the series adjusted invested amount is zero, then the remaining funds in the reserve account will be made available on such payment date to pay principal of the class A and B notes' outstanding principal amount. In addition, on the stated maturity date, the funds in the reserve account will be available to pay the class A and B notes' outstanding principal amount. Structural Overview And Payment Priority Allocations overview Collections on the receivables in each of the asset groups are required to be allocated to the series notes for each weekly allocation period based on the portion of the series invested amount and the series available subordinated amount allocated to that asset group. The series transaction has three distinct allocation periods: revolving, accumulation, and early amortization. The revolving period will be in effect from the closing date until the earlier of the accumulation period start date or the business day immediately preceding an early amortization event. For all three periods, non-principal collections (interest, fees, investment earnings, and recoveries) will be allocated to the series notes based on the floating allocation percentage (the series notes' proportional share of the trust's receivables). APRIL 20,

10 During the revolving period, principal collections are required to be allocated to the series notes based on the floating investor percentage for each asset group. During the controlled accumulation and early amortization periods, the series notes' allocation of the trust's principal collections will be based on the fixed investor percentage for each asset group, which is equal to the respective asset group's share of the asset group receivables at the end of the revolving period. The fixed investor percentage may cause the series notes to amortize more quickly than if the collections were distributed strictly based on the series' proportional share of the trust's receivables. Asset test The transaction structure requires the depositors to hold 100% of the principal receivables relative to the collateral amount for each asset group. Non-principal collections--weekly allocations and distributions Regarding each asset group, on each weekly allocation date, the servicer will instruct the indenture trustee to apply: Series noteholder non-principal collections (i.e., finance charges and fees); Reallocated principal collections (to cover any shortfall in the first and second priorities below that are not covered by funds from the series reserve account); Investment proceeds, if any; and Excess non-principal collections from other series to make the deposits and distributions in table 1. Table 1 Non-Principal Collection Waterfall Priority AG1 AG2 Section/note 1 AG1 weekly indenture trustee amount and the AG1 weekly owner trustee amount 2 AG1 weekly series interest set aside amount 3 (A) AG1 weekly noteholders' servicing fee; and (B) AG1 weekly back-up servicer amount 4 AG1 noteholder defaulted amount 5 (A) AG1 noteholder charge-offs; (B) AG1 required subordinated amount replenishment 6 Complete distribution of priorities one through five of AG2 non-principal collections waterfall 7 Reserve account deposit amount AG2 weekly indenture trustee amount and the AG2 weekly owner trustee amount AG2 weekly series interest set aside amount (A) AG2 weekly noteholders' servicing fee; and (B) AG2 weekly back-up servicer amount AG2 noteholder defaulted amount (A) AG2 noteholder charge-offs; (B) AG2 required subordinated amount replenishment Complete distribution of priorities one through five of AG1 non-principal collections waterfall Reserve account deposit amount Payable up to the applicable series annual cap amounts(i) Allocated for entire amount (classes A and B) and then distributed sequentially for monthly distribution to class A notes, pro rata, and then the class B notes, pro rata 2.0% annual rate and the back-up servicing fee up to the applicable series annual cap amounts(i) To be treated as a portion of available principal collections Available funds can be used to cover shortfalls in other asset group Amounts from both asset groups are accumulated together in the series reserve account. The required reserve account amount is 1.0% of the initial collateral amount or 3.5% if the transferor elects to increase in lieu of the available subordinated amount if the three-month average payment rate trigger is below 30.0%. APRIL 20,

11 Table 1 Non-Principal Collection Waterfall (cont.) Priority AG1 AG2 Section/note 8 Unpaid AG1 weekly indenture trustee amount; AG1 weekly owner trustee amount; and AG1 weekly back-up servicer amount 9 The remainder is treated as AG1 excess non-principal collections Unpaid AG2 weekly indenture trustee amount; AG2 weekly owner trustee amount; and AG2 weekly back-up servicer amount (uncapped and to the extent not necessary for non-principal shortfalls) Remainder treated as AG2 excess non-principal collections These amounts are uncapped and to the extent not necessary for non-principal shortfalls (i)the series annual cap amounts are $100,000 before an event of default (EOD) and $300,000 after an EOD for indenture trustee fees; $75,000 (excluding a one-time transition fee of $100,000) for the back-up servicing fee; and $6,000 for the owner trustee fees. AG1--Asset Group 1. AG2--Asset Group 2. Coverage of shortfalls--the reserve account and available subordinated amounts For the reserve fund, if there are insufficient funds to cover Items 1 and 2 above (senior fees and class A and B interest) for an asset group, then the servicer will instruct the indenture trustee to withdraw funds from the series reserve account and apply the withdrawn funds to complete the distributions. For reallocated principal, if, on any weekly allocation date after the amounts from the reserve fund are applied, the distributions described in items 1, 2, and 5(A) above (senior fees, class A and B interest, and noteholder charge-offs) for an asset group have not been made in full, the servicer will instruct the indenture trustee to apply additional noteholder collections for that asset group up to the required subordinated draw amount for that asset group to complete those distributions. Principal collections weekly allocations and distributions During the revolving period, the indenture trustee will pay the transferor the principal collections allocated to the series notes in exchange for the new receivables that are sold to the trust. If the pool balance is less than the required amount, the indenture trustee will then deposit the principal collections that it would otherwise allocate to the transferor into the excess funding account to the extent necessary to cure the shortfall in the required pool balance. The controlled accumulation period can range from one to six months, depending on the trust's principal payment rate and the payment maturities of any other series issued from the trust. In each month during the controlled accumulation period, the indenture trustee will deposit the principal collections into the principal funding account up to the controlled deposit amount for each asset group. The indenture trustee will distribute the amounts held in the principal funding account during the accumulation period to the noteholders in a payment on the expected final payment date. Regarding each asset group, on each weekly allocation date, the servicer will instruct the indenture trustee to apply available noteholder principal collections in the priority below. APRIL 20,

12 Table 2 Principal Collection Waterfall Priority AG1 principal collections AG2 principal collections Note 1 Complete distribution of Items 1 and 2 of the AG1 non-principal collections waterfall 2 Complete distribution of Items 1 and 2 of the AG2 non-principal collections waterfall 3 If during the accumulation period, the AG1 controlled deposit amount or if during the early amortization period, the AG1 invested amount to be deposited to the principal funding account 4 If during an early amortization period, the AG2 invested amount to be deposited to the principal funding account 5 Remainder treated as AG1 excess principal collections Complete distribution of Items 1 and 2 of the AG2 non-principal collections waterfall Complete distribution of Items 1 and 2 of the AG1 non-principal collections waterfall If during the accumulation period, the AG2 controlled deposit amount or, if during the early amortization period, the AG2 invested amount to be deposited to the principal funding account If during an early amortization period, the AG1 invested amount to be deposited to the principal funding account Remainder treated as AG2 excess principal collections 6 AG1 excess funding account AG2 excess funding account 7 Residual interestholder Residual interestholder AG1--Asset Group 1. AG2--Asset Group 2. Early amortization events To apply principal collections, to the extent the reserve account funds are insufficient, to cover senior fees and interest on the class A and B notes Shortfalls in the other groups' senior fee and interest on the class A and B notes to be covered In an early amortization, pay the class A notes, pro rata, and then the class B notes, pro rata. In an early amortization, the available subordinated amount can be shared among both asset groups and applied to pay down the class A notes, pro rata, and then the class B notes, pro rata. If the pool balance is less than the required amount, an amount to be deposited into the excess funding account to cure the shortfall The transaction structure incorporates early amortization events that, if triggered, would initiate the early amortization period and end the revolving or controlled accumulation period. During the early amortization period, the indenture trustee is required to use the available investor principal collections to make principal distributions on each payment date, first to the class A notes until paid in full, second to the class B notes, and third any remainder to the depositor interestholders. Also, available non-principal collections will be available to make interest distributions to the class A notes and then to the class B notes (see table 1). An amortization event would occur if any of the following events occurs: The average monthly payment rate for the three preceding collection periods is less than 25.0% on any determination date. On any weekly allocation date, Asset Group 1 or 2's available subordinated amounts for the next succeeding distribution date is less than the required subordinated amount for each asset group, and such shortfall continues for five business days (30 days if such shortfall is the result of an increase in the subordination percentage). The amount deposited into the excess funding account exceeds 30% of the sum of the adjusted invested amounts of all outstanding series the trust issued for six consecutive collection periods. The series note principal balance is not paid in full on the expected principal payment date. On any determination date, the three-month average excess spread percentage is less than 0.00%. On any determination date, the amount on deposit in the series reserve account is less than the reserve account required amount for such date. The transferor fails to make the required distributions or deposits, violates other covenants and agreements, or APRIL 20,

13 makes materially incorrect representations and any of these breaches is not cured within a specified period. Any servicing default occurs, and NextGear is removed as the servicer. The series notes are accelerated following an event of default under the indenture. An early amortization event occurs with respect to the series , , or notes as a result of the three-month average payment rate being less than 30.00%. Additional early amortization events include the transferor failing to transfer the receivables from the additional accounts as the transaction documents require; an uncured breach of a representation or warranty by NextGear, the transferor, the servicer, or the issuer; an insolvency of NextGear, the transferor, the servicer, the servicing guarantor, or the issuer; the trust or the transferor being subjected to regulation as an investment company under the Investment Company Act of 1940; or the transferor or the issuer being a "commodity pool" under the Commodity Futures Trading Act. Collateral Overview And Master Trust Statistics The collateral comprises receivables generated under lines of credit that NextGear extends to dealers throughout the U.S. Dealers finance their vehicle inventory pending the inventory's sale to the retail buyer. The vehicles that have been financed by the securitized floorplan loans are primarily used autos from various manufacturers. As of Feb. 28, 2017, the dealer accounts of the combined pool had the following characteristics: There were 17,484 dealer accounts in the combined pool, and the aggregate principal balance of the combined pool receivables was $3,969,369,759. The average credit line per dealer account in the combined pool was $367,841, and the average principal balance of combined pool receivables per dealer account was $226,250. The aggregate principal balance of the combined pool receivables as a percentage of the aggregate total credit lines of dealer accounts in the combined pool was approximately 61.50%. The weighted average interest rate charged to dealer accounts in the combined pool based on the average daily aggregate principal balance was approximately 7.07%. The trust's portfolio exhibits a much higher number of obligors with a lower average balance per account compared with non-diversified auto dealer floorplan loans. Non-diversified dealer floorplans typically have fewer dealers with higher obligor concentrations and a much higher average loan balance per account. Trust asset types The first three rows of table 3 represent Asset Group 1 collateral types, while the remaining rows represent Asset Group 2. The new auto category (4.89%) includes the accounts and related receivables that were removed from the trust on Jan. 29, 2016, and then added back on Sept. 19, While the mix of the master trust has shifted slightly toward more new collateral as Nextgear's portfolio has grown, the vast majority of the collateral continues to be used autos (retail or wholesale). Table 5 below shows trust concentration limits for Asset Groups 1 and 2 and for individual collateral types. APRIL 20,

14 Table 3 NextGear Asset Types Financed As of Feb. 28, 2017 Collateral Receivable balance (mil. $) % of combined receivable balance Description Used auto (retail) 3, Dealers selling used autos directly to consumers and includes cars, SUV, and light-duty trucks New auto Dealers selling new autos directly to consumers Used auto (wholesale) Dealers selling used autos to other dealers Recreational vehicle--new Recreational vehicle--used Dealers selling new recreational vehicles directly to consumers that are backed by manufacturer buyback agreements Dealers selling used recreational vehicles directly to consumers Marine---new Dealers selling new boats directly to consumers that are backed by manufacturer buyback agreements Marine--used Dealers selling used boats directly to consumers Rental Financing provided to small rental car companies to support fleet purchases Salvage Dealers selling vehicles with a salvage title to other dealers or consumers Heavy trucks Dealers selling heavy trucks (i.e., tractor/semis/big-rigs) to other dealers or consumers Powersports --used and new Manufacturer concentrations Dealers selling directly to consumers the following vehicle types: (non-boat) marine, golf carts, scooters, motorcycles, etc. The portfolio is well-diversified by brand and manufacturer, which, in our view, substantially reduces the event risk of a single manufacturer bankruptcy on the portfolio's credit risk (see table 4). Table 4 Brand Distribution As of Feb. 28, 2017 Brand (related manufacturer) Flooring count Percentage of total flooring count (%) Receivables outstanding ($) Percentage of total receivables outstanding (%) Ford (Ford Motor Co.) 47, ,270, Chevrolet (General Motors Co.) Toyota (Toyota Motor Corp.) Nissan (Nissan Motor Co. Ltd.) Mercedes-Benz (Daimler AG) 46, ,348, , ,223, , ,892, , ,274, BMW (BMW AG) 15, ,211, Dodge (FCA US LLC) 20, ,249, Other 166, ,916,219, Total 364, ,955,749, Concentration limits This is a revolving structure with eligibility parameters that specify the maximum permitted loan concentrations by obligor, loan type, and other parameters. We assume that the pool composition would migrate toward an adverse pool APRIL 20,

15 composition given the eligibility and concentration limits. The trust incorporates the following concentration limits, which are each shown as a percentage of the pool balance: Dealer concentration limits: 3% for the largest dealer (other than DriveTime Automotive Group Inc.), 2% for each of the second- through 11th-largest dealers (including DriveTime Automotive Group Inc.), and 1% for all other dealers. Extended receivables: 10.0%. Asset Group 2 limits. Table 5 Asset Group Two Limits Asset type Concentration limit (% of combined pool balance) Heavy duty trucks 2 New recreational vehicle Used recreational vehicle Used power sports New power sports Used marine New marine Rental 3 Salvage 3 Total 12 (i)the combined concentration limit for new and used recreational vehicles is 5.00%. (ii)the combined concentration limit for new and used power sports vehicles is 2.00% in total. (iii)the combined concentration limit for new and used marine vehicles is 2.00%. Geographic distribution Table 6 shows the geographic distribution of the vehicle inventories for the receivables in the trust portfolio, which has remained relatively consistent with portfolio growth and represents, in our view, a high degree of geographic diversification. Table 6 Geographic Distribution Of Trust Receivables As of Feb. 28, 2017 State Receivables balance outstanding (%) California Texas Florida 9.46 Georgia 5.57 Tennessee 3.88 Other U.S. states Age distribution The aging characteristics differ significantly between asset groups. Asset Group 1 primarily comprises used autos and reflects that segment's higher payment rates, as independent dealers typically purchase and quickly sell used vehicles that are currently in demand in the market (see table 7). The somewhat longer aging for group 1 receivables (i.e., higher percentage of 120-plus days on floorplan) that began at 5(i) 5(i) 2(ii) 2(ii) 2(iii) 2(iii) APRIL 20,

16 year-end 2016 and has continued into month-end February 2017 reflects a slowdown in payment rates, and inventory turn for independent dealers as used care supply has increased towards the end of Table 7 Asset Group One Aging Distribution Feb Dec No. of days on floorplan (% of month end principal balance) plus Total Asset Group 2 has a variety of different floorplan assets with different and longer payment terms, such as rental floorplan loans. Accordingly, the aged inventory in the 120-plus bucket is considerably higher for Asset Group 2 (see table 8). The overall agings for Asset Group 2 have lengthened, beginning at year-end 2016 and continuing into month-end February 2017, reflecting a movement in the mix of customers toward more new product (rather than used) dealers; and, as mentioned, new inventory tends to turn relatively more slowly than used. Table 8 Asset Group Two Aging Distribution Feb Dec No. of days on floorplan (% of month end principal balance) plus Total Payment rates The trust's payment rates for Asset Group 1 are generally higher compared to Asset Group 2 (see tables 9 and 10). The payment rates for Asset Group 2 reflect longer payment terms, which can vary by product type and also reflect the seasonal nature of some of the discretionary products. Asset Group 2 is limited to 12% of the total trust receivables. Payment rates for both asset groups have declined somewhat beginning at year end This is driven by increased supply and therefore slower movement of used car inventory for Asset Group 1. For Asset Group 2, the higher concentration in dealers of new inventory dealers as opposed to used contributes to the slowdown. Despite the declines in the most recent periods, the total combined payment rate for the trust remains well above the 30% payment rate trigger level. APRIL 20,

17 Table 9 Monthly Payment Rates--Asset Group 1 Two months ended Feb. 28/29 (%) --Year ended Dec. 31 (%) Highest month Lowest month Average Table 10 Monthly Payment Rates--Asset Group 2 Two months ended Feb. 28/29 (%) --Year ended Dec. 31 (%) Highest month Lowest month Average Loss rates Tables 11 and 12 show the loss experience for Asset Groups 1 and 2, respectively. Losses typically occur on the receivables when a dealer has been terminated due to selling one or more vehicles and having failed to remit the related proceeds of such sale to NextGear (sale out of trust). Losses may also occur when vehicles repossessed by NextGear from a terminated dealer are sold for less than the balance due on the related receivables. NextGear generally recognizes losses on the receivables at the time it deems such receivables to be uncollectible, which is generally when it has exhausted all non-legal remedies, such as collecting on the vehicles securing the floorplan loans. Losses for both groups generally declined as a percentage of average assets from 2012 through 2015; however, this is primarily reflective of a relatively stable dollar amount of losses declining as a percentage of an increasing asset balance as Nextgear's portfolio has increased in size. Beginning in 2016, the portfolio growth has levelled off. In addition, in the second half of 2016, both asset groups experienced some larger dealers that struggled and, consistent with their credit policies, Nextgear began to move accounts into "non-originating" status. Chargeoffs are eligible to occur five months following this status change, so this resulted in a cluster of chargeoffs occurring at year-end 2016 and the beginning of The 2017 percentage also appears higher as it is an annualized figure rather than a full 12-month result. Nextgear has taken proactive steps to influence healthy dealer behavior in light of these recent dealer experiences. Table 11 Loss Experience For Asset Group 1 Receivables Two months ended Feb 28/29 --Year ended Dec Average Asset Group 1 receivables (000s $) 3,577,510 3,463,793 3,467,788 2,967,654 2,151,643 1,176, ,772 Asset Group 1 losses (000s $) 23,292 11,092 85,909 47,047 31,602 21,806 18,497 APRIL 20,

18 Table 11 Loss Experience For Asset Group 1 Receivables (cont.) Two months ended Feb 28/29 --Year ended Dec Asset Group 1 losses as a % of average Asset Group 1 receivables (i) 1.92 (i) (i)annualized. Table 12 Loss Experience For Asset Group 2 Receivables Two months ended Feb 28/29 --Year ended Dec Average Asset Group 2 receivables (000s $) 367, , , , ,710 56,189 28,056 Asset Group 2 losses (000s $) 1, ,201 2,297 1, Asset Group 2 losses as a % of average Asset Group 2 receivables (i)annualized. 2.19(i) 0.78(i) Credit Analysis Key macroeconomic factors and sector outlook Most of the receivables of the trust's portfolio are used autos. Key drivers of cyclicality for the auto sector include economic growth, employment growth, household formation, interest rates, availability of credit, overall consumer demand, and consumer confidence. Cars represent big-ticket items for most households, and, therefore, consumer confidence is key when considering a purchase. In our view, the primary credit risks associated with this transaction are: An abrupt and sharp drop in used vehicle sales and prices; and A decrease in credit availability for consumers. Our current baseline economic outlook calls for a flattening out in new auto sales over the course of 2017 and It also anticipates a slight uptick in auto-finance rates could slow auto sales growth later into 2017 (see "U.S. Auto Sales Will Likely Reach 17.5 Million Again In 2017 As Demand Begins To Level Off," published Jan. 9, 2017). Used auto unit sales, which represent the majority of the Nextgear Master Trust collateral, are expected to remain stable through 2017 as well. According to the Manheim Used Vehicle Value Index, used vehicle prices have remained elevated and in a narrow range over the past several years (see chart 2 below). The end of 2008 and beginning of 2009 showed a sharp drop in the index. This period also exhibited increased losses by NextGear dealers. Higher used car prices have continued through August 2016, when compared to the same period the prior year. APRIL 20,

19 Chart 2 Diversified Floorplan Overview In our view, diversified auto dealer floorplan loans secured by primarily used vehicles have the following strengths compared with non-diversified auto dealer floorplan (ADFP) loans: There is little reliance on manufacturer support and on warranty; therefore, the historical performance may provide a basis for our expected loss and stress assumptions. Prices that may not be affected as severely by a bankruptcy of the related manufacturer. Auction prices reflect market prices of used vehicles more closely than new cars. There is a diversified manufacturer and dealer base. In our view, diversified auto dealer floorplans have the following weaknesses compared with non-diversified ADFP: Independent dealers are generally financially weaker than large, franchised dealer groups. There is a higher servicing intensity, with a larger number of dealers and smaller loan balances. The NextGear dealer floorplan loans are similar to some equipment asset-backed securities (ABS) transactions in that the underlying obligors are diversified small businesses domiciled in the U.S. and the portfolio experiences a flow of APRIL 20,

20 losses that generally increases or decreases with the health of the overall economy and/or the underlying obligors' related industry (i.e., the auto industry for NextGear's dealers). NextGear's historical portfolio performance can be analyzed to arrive at a reasonable proxy for future performance and an expected level of losses in a stressed amortization scenario. Unlike non-diversified ADFP loans, NextGear's diversified floorplan portfolio has a low level of manufacturer support that would otherwise mask the underlying obligors' credit deterioration. Our non-diversified ADFP criteria do not address an expected case loss. Instead, we start with 'AAA' default to liquidation (DTL), loss given default (LGD), and loss-to-liquidation (LTL) assumptions and scale down our stresses for 'AA' and lower rating categories. To apply appropriate multiples to our expected loss assumption, we adapted our equipment lease ABS criteria (see Equipment Leasing Criteria: Credit Risks Evaluated In Lease-Backed Securitizations, Sept. 1, 2004). We derived an expected net loss (or LTL) and applied an appropriate multiple from our equipment lease criteria. This stressed LTL is the month-one assumption in our stressed modeling scenarios and will increase by 100% over six months, as is consistent with our non-diversified ADFP criteria. Our expected loss was derived by: Historical data for Asset Groups 1 and 2. In particular, our analysis focused on the level of volatility experienced in the downturn for both asset groups. Our expected loss reflects the different credit characteristics of both asset groups and assumes a pool mix of 88% for Asset Group 1 and 12% for Asset Group 2 (based on the transaction's concentration limits). The historical performance provided a basis for our expected loss and stress assumptions. We express our expected loss as LTL. We view LTLs as a more descriptive way of expressing losses for dealer floorplan loans compared with annualized net losses. This is because the floorplan loans' weighted average life are months in duration, and they are typically not exposed to a full year of losses in our stressed amortization scenarios. Our LTL assumptions are further supported by DTL (gross loss) and LGD (loss severity) assumptions to make appropriate comparisons to other asset classes, such as small business and non-diversified ADFP. We derived our LGD assumption based on the collections and recovery data that NextGear has experienced for defaulting dealers. Our LGD assumptions are based on the historical data for the combined portfolio, which we believe reflects the improved loan-to-value position that used vehicles have relative to new vehicles; the lower event risk associated with a manufacturer bankruptcy; the higher incidence of sold-out-of-trust vehicles; and the inclusion of discretionary and less-liquid assets, such as RVs, marine, and power sports, compared with autos. Cash Flow Modeling Assumptions Loss assumptions Our expected losses are supported by assumptions that reflect the different credit characteristics of each asset group. Overall, we believe Asset Group 2 has higher credit risk pool than Group 1. Accordingly, we assumed that Asset Group 2 reflected 12.0% of the combined portfolio when deriving our expected and stressed loss assumptions. Our combined expected LTL assumption is 2.55%. The month one LTL in our 'AAA' stress scenario is approximately 12.1% (approximately 4.75x our expected case) and approximately 7.0% (2.75x our expected case) in our 'A' stress scenario. We have not changed our combined expected LTL assumption of 2.55% from the prior Nextgear Floorplan Master APRIL 20,

21 Owner Trust transactions we have rated. This is based on immaterial changes to the pool characteristics that would impact our expected loss, because we base our expected loss on a worse-case pool assumption using the concentration limits for the revolving pool. In addition, recent loss and delinquency data is well below the stress period that our LTL assumption is primarily based upon, evidencing conservatism in our assumption. Consistent with our non-diversified ADFP criteria, the month one LTLs will increase by 100% over a six-month period and then remain at that level for the remainder of the amortization scenario. Our expected and stressed LTLs reflect: The loss performance during the downturn, which exhibited sharp declines in vehicle prices, lower sales due to economic stress, reduced credit availability, and higher losses for NextGear's portfolio. The substantial growth the portfolio has exhibited in the past two years. Some asset types included in Asset Group 2 lacked performance data from the downturn period, such as recreational vehicles and others. The discretionary nature of the Asset Group 2 product types, such as marine, recreational vehicles, and power sports. Somewhat offsetting the risk of these assets is that they are capped individually, and the aggregate composition is limited to 12% of the pool. The 30% payment rate trigger credit enhancement increase that can take 30 days to cure. For this transaction, our stressed DTL and LGD assumptions for 'AAA' rated securities are shown in columns A and B of table 13. Column G shows the resulting loss-to-liquidation (LTL) rate based on the modeled DTL and LGD assumptions from columns C and D (LTL is the product of DTL and LGD). Based on the modeled DTL, LGD, and LTL assumptions and assuming a 30% payment rate trigger, the resulting cumulative gross defaults are approximately 36.5% for a 'AAA' stress scenario. The weighted average LGD is approximately 46.4%. Therefore, the overall 'AAA' stressed cumulative net loss is approximately 16.9% (36.5% x 46.4%). Our 'A' net loss assumption is approximately 60% of this 'AAA' result. Table 13 DTL, LGD, And LTL Cash Flow Modeling Assumptions For 'AAA' And 'A' Stress Scenarios Month (A)DTL (%) (B)LGD (%) (C)LTL (%) 'AAA' assumptions One Six 'A' assumptions One Six DTL--Default to liquidation rate. LGD--Loss given default. LTL--Loss-to-liquidation rate. Liquidation rate assumption We consider the payment rate an important performance variable in dealer floorplan transactions. All else being equal, an increase in the payment rate will decrease the amount of receivables that are exposed to losses in any given month. The series transaction incorporates a 30.0% three-month average payment rate trigger, which, if triggered, APRIL 20,

22 causes the required subordinated amount to increase. If the increased required amount is not available, then an amortization event will occur. In our view, the dealers' ability to sell their inventory of vehicles may be severely hampered in a stressed economic environment causing reduced demand for vehicles from consumers and lower credit availability. In our 'AAA' and 'A' stressed cash flows, we run stressed cash flow scenarios for both payment rate trigger scenarios. We assume that the pool's liquidation rate starts at 100% of the 30% or 25% payment rate trigger, as applicable, in the first month of the early amortization period, and then declines straight to 70% of the payment rate trigger by month sixpursuant to our non-diversified ADFP criteria. The collateral is assumed to fully liquidate by Month 12. The monthly liquidation rate is equal to the monthly decline in the pool balance (i.e., the sum of the monthly principal collections from performing dealers, recoveries, and net losses, divided by the pool balance as of the beginning of the month). Yield and coupon stresses The class A-1 and B-1 notes' interest rates will be floating based on one-month LIBOR, with a margin that will be determined on the pricing date. The class A-2 and B-2 notes' interest rate will be fixed at a rate determined on the pricing date. The receivables sold to the trust generally pay interest at a variable rate based on a base rate that NextGear establishes that applies to all dealers plus or minus a dealer-specific spread agreed to by NextGear and each dealer. The base rate is currently set at 6.25%. NextGear may amend the base rate up or down by not more than 0.50% in any 30-day period by adjusting the published base rate on its Web site. To stress the interest rate and basis risk present in this portfolio, we applied stressed yield and coupon assumptions derived from our one-month LIBOR and prime rate interest rate vectors (see "U.S. Interest Rate Assumptions Revised For May 2012 And Thereafter," April 30, 2012) in our 'AAA' and 'A' rating scenarios to stress this transaction's inherent basis risk. As of Feb. 28, 2017, the weighted average interest rate in the combined pool was approximately 7.07%, which is equivalent to approximately prime plus 3.07%. We assume the pricing on NextGear's portfolio shifts lower due to competitive forces to an equivalent rate of prime plus 2.0%. More specifically, we looked at the degree to which the projected monthly prime rate exceeded the monthly one-month LIBOR rate while the transaction is outstanding. We applied the lowest monthly excess of the prime rate over one-month LIBOR when determining appropriate stresses to our yield and coupon assumptions for our 'AAA' and 'A' rating scenarios. We did not give credit to fee income in our stress scenarios. Credit enhancement floors and comparisons To achieve ratings comparability, we look to see that the transaction's credit enhancement levels and our loss assumptions are at least equal to an amount calculated using the following approaches: Applying our equipment ABS criteria by establishing an actuarial expected loss (i.e., LTL) and applying appropriate stresses for each rating scenario. (See table 13 for our stressed cash flow modeling assumptions.) Applying our non-diversified ADFP criteria and assuming a low manufacturer event risk (i.e., a 'AAA' manufacturer's base levels). For example, the base cumulative net loss assumptions from our non-diversified ADFP criteria are approximately 16.75% for 'AAA' rated manufacturer with a 30.0% payment rate trigger. Applying our small-business loan criteria by running the Small Business Portfolio Evaluator for used car dealers. We applied a conversion factor of 42.5% to: (1) convert the cumulative gross default levels by count that are generated by the Small Business Portfolio Evaluator into loss levels by dollar amount; and (2) to account for the short-term APRIL 20,

23 tenor of the NextGear floorplan loans, which are typically under six months. Applying (from our collateralized debt obligation criteria) our supplemental alternative largest industry default test for the 'AAA' scenario and our largest obligor default test for the 'A' scenario, which are the applicable tests prescribed for those rating categories in that criteria with a modification to the LGD (or recovery rates) as described below. We applied loss severities that are higher than the average LGD used in our stressed 'AAA' and 'A' cash flow scenarios. Although we assumed a slightly higher loss severity when applying the supplemental alternative largest industry default test and largest obligor test (47% for 'AAA' and 42% for 'A') versus what we used in our cash flows (46% for 'AAA' and 41% for 'A'), these loss severities are actually much lower than those used in the collateralized debt obligation criteria. The use of a lower severity assumption for this asset class is supported by the strength of the legal rights that the issuer holds over the specific assets (vehicles) securing the floorplan loans and their value in a liquid, secondary market for vehicles in the U.S. APRIL 20,