Enterprise Fleet Financing LLC (Series )

Transcription

1 Presale: Enterprise Fleet Financing LLC (Series ) This presale report is based on information as of Jan. 19, 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) Type Interest rate Preliminary amount (mil. $) Legal final maturity date A-1 A-1+ (sf) Senior Fixed Feb. 20, 2018 A-2 AAA (sf) Senior Fixed July 20, 2022 A-3 AAA (sf) Senior Fixed July 20, 2022 (i)the ratings on the notes are preliminary and subject to change at any time. Profile Expected closing date Jan. 31, Collateral Titling trust Grantor and UTI beneficiary Issuer Servicer and administrator Qualified intermediary Collateral agent and indenture trustee Delaware trustee Underwriters A special unit of beneficial interest in lease contracts and underlying vehicles. Enterprise FM Trust. Enterprise Vehicle Management II LLC. Enterprise Fleet Financing LLC. Enterprise Fleet Management Inc. Enterprise Fleet Management Exchange Inc. U.S. Bank N.A. BNY Mellon Trust of Delaware. Bank of America Merrill Lynch. UTI--Undivided trust interest. Primary Credit Analyst: Joanne K Desimone, New York (1) ; joanne.desimone@spglobal.com Secondary Contact: Peter W Chang, CFA, New York (1) ; peter.chang@spglobal.com See complete contact list on last page(s) JANUARY 19,

2 Credit Enhancement Summary (%)(i)(ii) Enterprise Fleet Financing LLC Series Series Initial Target(iii) Floor(iii) Initial Target(iii) Floor(iii) Overcollateralization(iv) Cash reserve / /1.50 Total (i)excludes the excess spread credit enhancement estimated (on average on an expected, unstressed basis, including management fees) at 3.14% for series (ii)percentage of the initial pool balance. (iii)cash reserve grows to a target level. If the cumulative charged-off lease ratio is less than 3.00% on the July 2017 payment date for series and on the January 2017 payment date for series , cash reserve releases to a floor level of 1.00% of the initial pool; otherwise, the floor remains at 1.65% for series or 1.50% for series (iv)represents the weighted average enhancement, considering the 17.50% overcollateralization on the closed-end lease discounted residual values (1.27% and 1.77% of the initial aggregate securitization value, respectively, for series and ) portion of the pool and the 7.50% overcollateralization on the remainder of the collateral pool. Rationale The preliminary ratings assigned to Enterprise Fleet Financing LLC's (the issuer) asset-backed notes series reflect: The availability of 8.63% initial hard credit support for the notes, which consists of overcollateralization of 7.63% of the initial pool balance and a cash reserve account of 1.00% of the initial pool balance. The overcollateralization is subject to a floor level of 2.54% of the initial pool balance. The cash reserve increases through trapping of excess spread to a target level equal to 1.65% of the initial pool balance and, if the cumulative charged-off lease ratio is less than 3.00% on the July 2017 payment date, releases to a floor level of 1.00% of the initial pool. The availability of approximately 3.14% annual excess spread, on average, estimated on an expected, unstressed basis, including management fees. The transaction's ability to withstand more than 5x our expected loss of 1.55%-1.75% under stressed cash flow modeling scenarios (including stresses on both excess spread and management fees). The expectation that, under a moderate stress scenario of 2.0x our expected net loss level, the ratings on the class A notes will not decline by more than one rating category during the first year, all else being equal. The characteristics of the amortizing pool being securitized, especially the high proportion (97.35%) of open-end lease contracts. Enterprise Fleet Management Inc.'s ('BBB-/Positive') servicing experience, as well as its financial strength. The transaction's legal structure. Transaction Overview This will be Enterprise Fleet Management Inc.'s (EFM's) 13th S&P Global Ratings-rated term securitization. As in EFM's previous securitizations, the series notes are backed by a diversified pool of vehicle fleet leases to small businesses. The series note issuance will total $ million (as of the cut-off date). The transaction will allocate collections pro rata between the class A notes (92.37%) and the seller's interest (as represented by the 7.63% overcollateralization), until the overcollateralization floor of 2.54% of the initial pool balance is reached. Afterward, JANUARY 19,

3 collections will not be used to reduce overcollateralization until the class A notes are fully repaid. Each month from closing through the July 2017 payment date, excess spread and management fees that are not used to cover losses will be deposited in the cash reserve until it reaches its target level of 1.65% of the initial pool balance. If the cumulative charged-off lease ratio is less than 3.00% as of the July 2017 payment date, then the reserve account releases to a floor level of 1.00% of the initial pool; otherwise, the floor remains at 1.65% of the initial pool balance. If a delinquency trigger is breached, then amounts attributable to lease payment amortization (not including excess spread and management fees) will be maintained in the transaction structure until the class A notes are fully repaid. The first payment date is Feb. 21, Legal structure The vehicles in the series pool will be titled in the name of, and therefore owned by, the titling trust, Enterprise FM Trust (FM Trust). (See chart 1 for the transaction structure.) Enterprise Vehicle Management II LLC (EVM), FM Trust's beneficiary, holds the undivided trust interest in all of FM Trust's assets. We have analyzed both FM Trust and EVM for consistency with our special-purpose entity criteria. JANUARY 19,

4 The series special unit of beneficial interest (SUBI) represents the economic interest in the transaction's vehicles and lease receivables. EVM, as FM Trust's beneficiary, holds the series SUBI. The issuer will make a loan to EVM, secured by the series SUBI and related assets. Enterprise Fleet Financing LLC will issue the series notes to investors for cash and grant a security interest in the loan to the indenture trustee for the noteholders' benefit. EFM will perform all servicing for the series transaction. The issuer will use the cash flows it receives from its interest in the series SUBI to pay principal on the notes. In rating this transaction, we will review the legal matters we believe are relevant to our analysis, as outlined in our criteria. Pension Benefit Guaranty Corp. Risk The leases and leased vehicles are subject to risk relating to Pension Benefit Guaranty Corp.'s (PBGC's) liens. PBGC could file a lien against the assets of any member of EFM's controlled group, including FM Trust, if the minimum contribution payments to any of EFM's defined benefit pension plans are not paid as required by law, or if an underfunded defined benefit pension plan is terminated. Certain EFM affiliates were previously obligated to contribute to certain multiemployer plans operated by various trustees around the U.S. The affiliates have withdrawn from all such plans, and have no unpaid liabilities associated with these withdrawals. The transaction documents describe actions to be taken that would result in the collateral agent, U.S. Bank N.A., having a first-priority perfected security interest in the vehicles (the vehicle lien condition). It is at EFM's sole discretion to satisfy the vehicle lien condition, but the issuer covenants that it will not incur any obligations to contribute to any additional pension plans, as a result of an Employee Retirement Income Security Act affiliate establishing a plan, unless the vehicle lien condition is satisfied. If the collateral agent satisfies this vehicle lien condition by having a first-priority perfected security interest in the vehicles, we can rely upon this condition to address the risk of PBGC's liens on the vehicles. Until the vehicle lien condition occurs, however, our comfort regarding the PBGC lien risk will depend upon our analysis of EFM's potential pension liabilities in relation to its assets. As of the date of this report, the vehicle lien condition had not been satisfied. Changes From The Series Transaction The one structural and credit enhancement change from series is the increase of the initial target level for the cash reserve to 1.65% from 1.50%, as a percentage of the initial pool balance. There are some nonmaterial collateral characteristic changes from series ; however none of these changes resulted in an adjustment to our expected or stressed loss because they are, in our view, relatively minor. The collateral composition changes from the series pool are listed below: Obligor concentrations are slightly higher; the top five obligors comprise 2.68% of the pool balance compared with 2.19% for series In both pools, all individual obligor concentrations are well below (at less than half for both series and ) the 1.50% threshold level that we generally use to begin incorporating event risk (obligor bankruptcy) of top obligors as an additive risk into our stressed loss scenarios. JANUARY 19,

5 Open-end leases slightly increased (97.4% compared with 96.4% for series ). The annual percentage rate (APR) slightly decreased (4.75% compared with 4.87% for series ). The concentration of current-model-year vehicles increased while the concentration of older-model-year vehicles declined. Transaction Structure The series transaction incorporates the following key structural features: The overcollateralization at closing will equal 7.63% of the initial pool balance and amortize to a floor equal to 2.54% of the initial pool balance. The liquid credit enhancement in the form of a cash reserve account initially funded 1.00% of the initial pool balance. The reserve account increases to a target equal to 1.65% of the initial pool balance and then releases to a floor of 1.00% of the initial pool balance, but only if the cumulative charged-off lease ratio is less than 3.00% as of the July 2017 payment date. A delinquency trigger will lock out the seller from receiving future amounts related to lease payment amortization if breached and uncured. The floor on the overcollateralization and the cash reserve provide protection against losses amid high obligor concentrations toward the end of the pool's amortization when the pool balance is small in relation to an individual obligor's lease balances. Payment Structure Under the proposed payment structure, the lease payments, vehicle sale proceeds, any management/other fees, and related available funds will be used to make payments in a specified priority (see table 1). In addition, the funds in the reserve account will be available to cover interest and principal shortfalls. Interest payments are made on each monthly distribution date, and principal is passed through monthly as received. Table 1 Payment Waterfall Priority Payment 1 To the servicer for any liability insurance charges (borrowers who elect to pay the lessor for liability coverage). 2 To the servicer for any physical damage waiver (borrowers who elect to pay the lessor for physical damage waiver). 3 Pro rata, to the indenture trustee up to a capped amount ($400,000 per year) and to the trustee of Enterprise FM Trust up to a capped amount ($100,000 per year). 4 Administrator ($18,000 per year) and servicer (0.65% per year) fees. 5 Interest payment amounts (the class A-1, A-2, and A-3 interest paid pari passu). 6 Priority principal payment amount (excess, if any, of the note balance over the securitization value)(i). 7 To the reserve account up to the required amount. 8 Additional payment amount (excess if any of principal payment amount over priority principal payment amount). 9 Fees and expenses over the limit in item Remaining amounts at the discretion of the issuer. (i)only requires a payment to the extent that the total note balance exceeds the aggregate securitization value, which would likely only occur if losses for a particular month exceeded the total available hard credit support. JANUARY 19,

6 The monthly distributable amount due under item 8 above is an amount needed to reduce the note balance to the borrowing base, which is the aggregate securitization value minus the required overcollateralization amount. Managed Portfolio Gross loss defined The gross loss rates reported in table 2 also account for the proceeds received from the sale of leased vehicles. S&P Global Ratings, however, begins its credit analysis with losses before any recoveries (including proceeds from vehicle sales) and then applies a stressed recovery rate. Our approach addresses the masking of default frequency that could result from analyzing solely net loss performance and allows for stresses to recovery rates below historical levels to reflect servicer stress in our highest rating category (see the Expected Loss section for more information). Table 2 Enterprise Fleet Management Inc. Managed Portfolio % of lease-related billing delinquency Three months ended Oct. 31 Fiscal year ended July days days days plus days Total delinquencies Ending leases (mil. $) N.A. N.A. 4,848 4,489 4,048 3,426 2,827 2,186 Gross losses as a % of ending aggregate lease balance(i)(ii) Net losses as a % of ending dollar amount of ending aggregate lease balance(ii) N.A. N.A N.A. N.A (i)gross losses are reported after the sale of any repossessed vehicles. (ii)percentages annualized for April 30. N.A.--Not available. Low gross and net losses Similar to other fleet lessors, EFM's lease portfolio has maintained very low losses, even during the recession (see table 2). Unlike other fleet lessors, however, EFM's customer base is not concentrated among investment-grade companies that would be expected to exhibit low loss rates. Therefore, the strong performance of EFM's pools is driven by other factors such as conservative underwriting and depreciation policies on vehicles. EFM's depreciation rates have remained conservative, meaning they are higher than depreciation rates generally applied to the same vehicles financed by captive auto manufacturer leasing companies, and consistent over time across different vehicle types resulting in the equity in the vehicles that EFM has as a lender becoming substantial in a relatively short period of time. The strong equity position contributes to low loss levels. The declining gross loss trend that began in fiscal year (FY) 2009 continued through FY 2016, with the gross losses down to 0.05% of the ending aggregate lease balance. JANUARY 19,

7 Reporting change in FY 2012 Some of the improvement in the gross loss rate was due to a reporting change starting in FY While the gross loss rates before FY 2012 include all lease settlements that resulted in a balance due at the time of settlement (even if the balance was paid on time or before being written off), the gross loss rates for FY 2012 and later include only those lease settlements that resulted in an outstanding balance under a lease not being paid. Delinquency Delinquencies are reported on a different basis than losses; they are reported as a percentage of monthly billings, a common metric for the fleet leasing industry. The declines in the pool's total delinquencies that began in FY 2011 stabilized in FY Considering that data are provided annually, portfolio growth likely accounted for some of the reduced delinquency rates from FY as the portfolio dollar amount almost doubled during that period. The earliest-stage delinquency bucket decreased by 0.07% at fiscal year-end (FYE) 2016 compared to one year earlier. We observed at FYE 2015 an increase in the earliest-stage delinquency bucket compared with FYE As of FYE 2016, the increase is seen flowing through the later-stage aging buckets, but the earliest-stage bucket has stabilized, indicating no continued increases with new delinquencies. Surveillance We maintain current ratings on seven Enterprise Fleet Financing LLC transactions issued between 2013 and The cumulative net loss and unaffirmed leases, which together represent the total charge-offs for each transaction, have been low and stable for all transactions (see table 3). All transactions are currently projecting loss levels that are better than or in line with our initial loss expectations. The cumulative unaffirmed leases are not reduced for recovery proceeds so that they are more similar to a gross loss measure, while cumulative net losses take recovery proceeds into account. We have included calculations in table 3, assuming a stressed 50% recovery rate, to convert the cumulative net losses to an estimated cumulative gross loss so that they are on a more comparable basis to the cumulative unaffirmed leases (i.e. an estimated gross basis). We have also shown a projection, using the pool factor, of the sum of the estimated cumulative gross losses plus the unaffirmed leases. While the data shown in table 3 represents cumulative or static pool data for each securitization, we note that the nature of Enterprise's customer base and its buying patterns differ from that of consumer pools. Enterprise finances vehicles for its fleet customers progressively over time as the customer replaces vehicles in its fleet. This results in single obligors being included in multiple vintages depending on when the financing occurs. Because vintages may include the same obligors, in contrast to consumer pools where each vintage generally represents a distinct set of obligors, it is more difficult to identify and isolate vintage-specific patterns. S&P Global Ratings affirmed its ratings on various Enterprise Fleet Financing transactions on Aug. 23, 2016 (see "Thirteen Ratings Affirmed On Seven Enterprise Fleet Financing LLC Transactions"). The affirmations reflect our view that the available total credit enhancement relative to remaining expected losses was consistent with the 'AAA (sf)' and 'A-1+ (sf)' ratings on the notes. JANUARY 19,

8 We will continue to monitor the transactions' performance to determine if the assigned ratings are sufficient, and we will take any rating actions we deem appropriate. Table 3 Enterprise Fleet Financing Securitization Performance (As Of October 2016) Series (A) Pool factor (%) (B) Cumulative net loss (%)(i) (C) Cumulative unaffirmed leases (%)(i) (D) Estimated cumulative gross loss (excluding unaffirmed leases) assuming 50% stressed recovery rate (B/50%) (E) Sum of cumulative unaffirmed leases and estimated cumulative gross loss (C+D) (F) Projected using pool factor (E/(1-A) % % % % % % % Pool Analysis Discounting methodology As of the cut-off date, the collateral pool consisted of approximately $812.7 million of vehicle leases and residuals on EFM-originated leases (see table 4). Under the transaction documents, the collateral value is determined by discounting each lease receivable and closed-end lease residual at the greater of a pool discount rate (equal to debt cost plus the servicing fee) and its respective finance charge rate, resulting in a collateral balance equal to the contracts' (and residuals') outstanding net book values. Table 4 Enterprise Fleet Financing LLC Collateral Characteristics Series (i) Aggregate lease securitization value (mil. $) ,083.6 No. of vehicles/units 31,101 41,711 Avg. securitization value ($) 26,114 25,979 Weighted avg. lease rate (yield including management fees) (%) Weighted avg. lease rate (base finance charge) (%) Weighted avg. original term (mos.) Weighted avg. remaining (mos.) Seasoning (mos.) 4 4 Top five industries (%) Construction Oil and gas services Manufacturer Electrical contractor HVAC contractor Series (ii) JANUARY 19,

9 Table 4 Enterprise Fleet Financing LLC Collateral Characteristics (cont.) Series (i) Total top five industries Vehicle type (%) Cars Light-duty trucks and vans Medium-duty trucks Equipment and other Top five obligors (%) One Two 0.66 (primary industry: automobile dealer) 0.59(primary industry: electrical contractor) Series (ii) 0.66 (primary industry: automobile dealer) 0.42 (primary industry: equipment rental) Three 0.56 (primary industry: truck parts) 0.40 (primary industry: repair facility) Four 0.48 (primary industry: medical supplies) 0.38 (primary industry: steel fabricator) Five 0.39 (primary industry: building contractor) Total top five (primary industry: manufacturer) Top five state concentrations (%) CA:12.72 CA:12.56 TX:11.59 TX:10.90 FL:7.65 FL:7.56 NY:4.26 IL:4.86 IL: 4.14 NY: 3.87 (i)data as of Nov. 30, 2016, for series (ii)data as of May 31, 2016, for series All percentages are of the leases' aggregate securitization value. Diversified pool characteristics The series pool has a high level of diversification by obligor, industry, and geographic concentration. There are 5,919 obligors in the series pool, and each individual obligor concentration is 0.70% or less, which is well below the 1.50% threshold that we generally use to start incorporating event risk (obligor bankruptcy) of top obligor concentrations as an additive component into our stressed loss. Obligor profile Although each EFM small- to medium-sized fleet obligor is not as strong financially as an investment-grade obligor common in large-fleet lease asset-backed securities (ABS) transactions, the series pool's significantly higher diversification generally offsets the difference in aggregate obligor credit profiles. In addition, EFM targets more seasoned and generally stronger credit quality small-business customers, which contributes to stronger loss performance. Given the small-business profile of EFM's customer base, the series pool has a 4.75% (or 6.20% including management fees) weighted average annual percentage rate, which is higher than the typical yields in the fleet lease market's large corporate client segment; however, this rate is much lower than yields typical for small businesses in small-ticket leasing, which reflects, in our view, the credit quality of EFM's obligor base. JANUARY 19,

10 High concentration of open-end leases Almost all (about 97.35%) of the contracts in the series pool are open-end leases. This lease structure effectively converts residual risk into credit risk for the open-end portion. Unlike fleet lessors that serve the large corporate client market (fleets of more than 300 vehicles), EFM, which serves the small- to medium-sized fleet market ( vehicles), uses residuals on most of its portfolio. A significant portion of the series pool contains residuals that exceeded 20% of the capitalized cost at inception. Open-end lease maturities are also distributed relatively evenly in the pool. Vehicle types and manufacturers Similar to collateral supporting other fleet lease ABS transactions, EFM finances mainly light-duty trucks and vans. About 81% of the series pool is light-duty trucks, which include different variations of pick-up trucks and cargo vans. These light-duty trucks are multipurpose and are widely used in various industries such as plumbing, heating, air conditioning, concrete block, hotel and motel shuttle vehicles, and oil and gas services. The vehicles in the series pool represent all major auto and light-truck manufacturers, although the majority are produced by Ford Motor Co. and General Motors Co. A large portion of the trucks in the pool receive some sort of up-fitting, including add-ons such as roof racks. Comparison to the series pool The series pool is generally similar to the series pool. Some slight differences include: The series pool has slightly higher obligor concentrations; the top five obligors comprise 2.68% of the pool balance compared with 2.19% for series However, all obligors individually remain below 1% of the pool, and we have not adjusted our stressed loss to include an additive component for top obligor concentrations. Rather, our stressed loss calculation is based on actuarial, or flow loss, data. The concentration of current-model-year vehicles has increased in the series pool. We have observed this trend steadily occurring for each transaction while the concentration of older-model-year vehicles has declined. The differences are relatively minor, in our view, and did not result in any change to our expected loss based on pool characteristics. Expected Loss: 1.55%-1.75% And Stressed Net Loss: 8.25% Our expected loss proxy for the series pool accounts for a weighted average of different proxies associated with two different risk buckets: open-end leases and closed-end leases. Our expected and net losses remain unchanged from those for the series pool. Managed portfolio loss analysis To derive the expected losses for each of the risk buckets, we evaluated annual managed portfolio net loss data (for ), fiscal loss data showing the book value of leases at the time of default (for ), historical delinquency data, and gain or loss disposition data by vehicle category (for 2004 October 2016). We used the fiscal data to determine a base-case loss default frequency and a base-case recovery rate. Although the period comprises only a few years, we consider that period relevant because it captured a moderately stressful macroeconomic environment. JANUARY 19,

11 Securitization performance analysis We also considered the net charge-offs, unaffirmed leases (which are also charged off), and bankruptcies in previous securitizations. Although the net charge-offs in previous transactions were very low, we believe that this is because of strong underwriting, the absence of a stressful economic period, and high recovery rates that EFM has been able to achieve (in some cases approaching 100% when security deposits are included). In table 3 above, we calculated estimated gross losses assuming a stressed 50% recovery rate. Our expected loss analysis also considers estimated gross losses because we take into account potentially higher net losses if recovery rates are lower than historical rates in a stress scenario. Recovery rate analysis As part of our recovery-rate analysis, we examined both managed pool recovery rates and disposition data. We received recovery rates on EFM's managed pool dating back to In addition, we received data on historical deviations around average vehicle disposition rates that included thousands of vehicle sales, dating back to 2004, and were broken out by vehicle type. Disposition rates represent vehicle sales proceeds as a function of the depreciated book value of those vehicles. Unlike with other fleet lease ABS transactions, we did not receive gain or loss data by months in service for vehicle dispositions. When we are provided with data broken out by months in service, we can observe the point at which the lender's equity position rises to a level where disposition proceeds will cover more than the exposure amount on the financed vehicle. If we can observe this timing, we can, generally, assume higher stressed recovery rates based on the mix of vehicles in the pool and their seasoning. Our stressed recovery rate considers this factor. We derived a base-case recovery rate using both the managed pool and disposition data and then applied reductions, consistent with the preliminary 'AAA (sf)' ratings, to calculate a stressed recovery rate. To derive our expected loss proxy for the open- and closed-end lease scheduled payments, we adjusted the expected net loss proxy upward, using a stressed recovery rate, to determine an expected loss rate that accounts for a potential deterioration in the pool's recovery performance if EFM is no longer the servicer or if other factors affect the recovery rates. We do not ascribe 100% credit to the company's historical recovery rate, but apply stresses consistent with our equipment leasing criteria. Obligor and industry diversification Unlike many other fleet lease ABS transactions that we rate, the series pool does not contain any large obligor concentrations (we generally consider obligor concentrations exceeding 1.50% as large). The largest obligor represents 0.66% of the initial pool, and the sum of the top five obligors represents 2.68% of the initial pool. We generally use the 1.5% threshold as the point at which we would begin adjusting our credit analysis by simulating top obligor defaults in addition to considering actuarial loss levels of a diversified pool. Given the high level of diversification of the pool, our analysis used an actuarial approach focusing on pool-wide loss rates, similar to our approach for other equipment ABS issuers with pools that are highly granular on an obligor basis. We also reviewed the industry mix of the obligors for any additional concentration risk. The largest concentration is the construction sector, which accounts for approximately 7.40% of the pool. There are no significant industry concentrations in the remaining pool, which, in our opinion, results in low industry concentration risk. JANUARY 19,

12 Open-end lease analysis While a significant portion of the series pool contains leases with final payments exceeding 20% of the capitalized cost, which could result, under a 'AAA' stress scenario, in some incremental default risk associated with high final payments, we consider this risk minimal, given the total credit enhancement available. Closed-end lease analysis To derive our expected loss proxy for residual values associated with closed-end leases (about 1.45% of the pool), we applied a stressed residual realization rate and a timing discount consistent with the preliminary 'AAA (sf)' ratings. Our stressed residual realization rate considered the pool's heavy concentration of trucks (approximately 86%) and models from GM and Ford. Heavy concentration results in any changes in truck prices or events surrounding a specific manufacturer having a greater impact on the pool's residual values. We also consider that the concentrations in any single manufacturer for EFM's pool are generally much lower than in pools of captive auto manufacturers, which we view as a credit strength. We have observed that EFM generally sets booked residual values conservatively, meaning that sales proceeds from vehicle dispositions upon lease expiration are well above booked residual values. We believe this is partially because EFM is a non-captive finance company. Captive finance companies face the pressure of maintaining "affordability" of monthly lease payments to support new vehicle sales. Absent this pressure, EFM's depreciation rates are higher and booked residual values lower than those of captive finance companies for the same vehicle, in most cases. Our stressed realization rate also considered the impact of the higher overall level of residuals (as compared to scheduled payments) and the shorter terms on closed-end leases as compared to open-end leases. In addition to a stressed realization rate, our loss proxy accounts for the expected timing of residual payments during the transaction's life. A stress is applied to address the timing mismatch of losses occurring during periods when lower residual amounts are realized. The expected loss for closed-end leases is included in our expected loss estimate. Expected loss and stressed net loss Considering all of these factors and weighting our loss assumptions for the percentage of open-end and closed-end leases in the pool, our expected net loss range for the series pool is 1.55%-1.75%. This range is well above the historical net loss performance of EFM's managed pool for two primary reasons: the stress we apply to EFM's high recovery rates, and our expected loss level that considers industry concentration, especially in the volatile oil and gas industry. Given this expected net loss range, our stressed loss level for the series pool is 8.25% for the preliminary 'AAA (sf)' rated notes. This stressed 'AAA' loss level is the same as that for the series pool, reflecting our view that the pool characteristics are similar to the previous issuance and additional data we received have not changed our view of the expected loss level. Cash Flow Modeling Assumptions And Results We modeled the series transaction to simulate a 'AAA' rating stress scenario (see table 5). We used both significantly front-loaded and back-loaded loss curves in the break-even analysis. We assume a 1.6 absolute prepayment speed, which represents a significant stress to what we view as expected prepayments. We expect prepayment rates to occur in a curved pattern ramping up over time throughout the transaction's life. Therefore, JANUARY 19,

13 applying even a 1.0 absolute prepayment speed straight line assumption represents a stress to expected prepayments. We further stress the expected prepayments to a 1.6 absolute prepayment speed assumption in line with a 'AAA' stress. Table 5 Enterprise Fleet Financing LLC Series Cash Flow Analysis Summary Preliminary rating AAA (sf) Recovery rate (%) 50 Charge-off and recovery lag (mos.) 7 Stressed prepayment rate (ABS) 1.6 Loss curve 1 % of loss per year(i) 50/40/10 Break-even loss rate (%) Loss curve 2 % of loss per year(i) 40/40/20 Break-even loss rate (%) Loss curve 3 % of loss per year(i) 20/40/40 Break-even loss rate (%) (i)net losses as a percent of the initial pool balance. ABS--Absolute prepayment speed. Increased emphasis on back-end loss timing patterns Although we considered a variety of stress scenarios, we placed more emphasis on a back-end loss pattern (see loss curve 3 above). Back-end loss scenarios generally place more stress on transactions that permit credit enhancement amortization, especially in transactions like the series where significant excess spread and management fees flow through it. Servicing fee rate EFM and its predecessor corporations have been servicing its fleet lease portfolio since 1993 through its branch office network. The proposed servicing fee in the series transaction is 0.65% of the aggregate securitization value per year. We ran our break-even cash flow and sensitivity models using a 1.00% per year servicing fee, which we believe is reflective of a market rate for servicing by a third-party replacement servicer. Management fees as a source of credit enhancement Management fees are common in the fleet lease industry and represent contractual payments in constant to dollar amounts that EFM levies monthly on any cars under lease. As a customer's lease balance amortizes over time, the constant dollar management fee (if not diminished due to full or partial voluntary prepayments) increases as a percentage of the remaining lease balance of each contract. On a percentage yield basis, unlike traditional excess spread, this provides additional loss protection later in the transaction's life. While we considered various loss curves in our analysis, the loss timing had little effect on the break-even levels (see table 5). Class A-1 notes' assumptions In evaluating the class A-1 notes' size, we reviewed cash flows that considered only principal payments during the first 12 months of the transaction, assuming zero losses and a zero prepayment rate. The class A-1 notes have a final JANUARY 19,

14 maturity date of Feb. 20, Based on our cash flow analysis, we expect the series class A notes to pay timely interest and ultimate principal and withstand a net loss level that is consistent with our assigned preliminary ratings. Sensitivity Analysis In addition to analyzing break-even cash flows, we conducted a sensitivity analysis that included running a moderate stress scenario to determine the level of loss coverage and potential rating migration that could occur for the class A notes (see "Methodology: Credit Stability Criteria," published May 3, 2010). The results are summarized in chart 2 below. Chart % (2.0x) cumulative net loss results Assuming cumulative net losses of 3.30% (approximately 2.0x the midpoint of our expected loss range), the credit enhancement for the preliminary 'AAA (sf)' rated classes begins at 4.20x and declines to a low of 3.43x by month six. This decline in coverage levels is mainly due to seller releases of excess spread and management fees early in the transaction before charge-offs are realized. JANUARY 19,

15 After month six, the multiple increases throughout the series transaction's life. This is primarily because the transaction contains significant excess spread and management fees, both of which serve to mitigate loss in this scenario. The multiple builds sharply following month 26 as the overcollateralization reaches its floor. In this moderate stress scenario, the class A notes exhibit consistency with our credit stability criteria because the multiples do not decline to levels that would generally lead to a downgrade of greater than one category. EFM EFM ('BBB-/Positive') is one of the leading fleet lessors in the U.S. In the small- to medium-sized fleet market, the company generally competes with local car and truck dealers. The company's branches are often co-located with its parent company's rental car locations. EFM also offers fleet services, but it earns a significant portion of its income through a financing spread on its leases. EFM was incorporated as a separate entity in 1993, and the predecessor company had been involved in the fleet leasing business since EFM historically has served the small- to medium-sized fleet market. The company is a wholly owned subsidiary of The Crawford Group, which also owns Enterprise Holdings Inc. (EHI), the nation's largest rental car company. EFM uses EHI for shared services, including vehicle remarketing, treasury, and corporate tax. The company's outstanding lease portfolio has grown significantly, more than doubling from $2.2 billion at FYE 2011 to $4.8 billion at FYE As evidenced by continued strong performance in both losses and recoveries, growth has been achieved while maintaining conservative underwriting standards and depreciation rates. In our view, this evidences EFM's unique competitive position as it benefits from co-location with its parent company's existing rental car branch network as well as other synergies. Originations, Underwriting, And Servicing Decentralized branch office network Because of its small-business focus, EFM is organized on a decentralized basis with originations, credit, and collections handled at the local level in its nationwide branch office network. The company is active in regional and national trade organizations that represent contractors in a variety of industries. Our comfort with the decentralized nature of the branch office network is also based on EFM's investment-grade rating. In addition, EFM has achieved a high degree of repeat customer business. While the credit underwriting is managed autonomously in each geographical market, there are also checks and balances at the corporate level and systemic checks and balances within EFM's credit checking process known as Enterprise Drive for Growth and Excellence (EDGE). EDGE is a computer system that was developed within EHI to manage EFM, and plays a key role within the credit and collections departments. Underwriting EFM's credit adjudication process involves a manual credit review of each lessee's business at lease inception, annually. Because fleet lease customers typically replace a portion of their fleet annually, EFM has regular customer contact and opportunities to assess any changes to the customers' financial strength and underlying business. JANUARY 19,

16 However, EFM does not perform a full credit re-underwriting for every customer with a new vehicle request, which is customary in the fleet leasing industry. Key factors EFM reviews in its underwriting process include: Type and intended use of fleet vehicles; Bank and credit references; Payment history; Time in business; Tangible net worth (relative to fleet lease exposure); Ownership structure; Lease term; Residual size; and Minimum depreciation rates. When determining any residuals for closed-end leases, EFM often uses Blackbook values (a reference guide used to estimate a vehicle's wholesale value). EFM often sets the residual values for the closed-end leases more conservatively than Blackbook-estimated vehicles values. Although underwriting is handled for most fleet sizes at the branch level, EFM uses a credit review staff at its St. Louis headquarters to monitor the quality and consistency of these decisions. Down payments Further strengthening the contracts' credit quality, approximately 35% of the leases have either a down payment or a gain from the vehicle sale on a previous open-end lease that the lessee chooses to roll into the new lease. During the past two years, the down payments or sale gains have averaged approximately $5,400 per lease, which is approximately 21% of the average securitization value of the vehicles in the series pool. In our opinion, this equity position in the lease's vehicle helps encourage stronger lessee payment behavior, but must be discounted when considering loss given default (in our recovery rate analysis). Services offered together with lease Like other fleet lessors, EFM also offers ancillary services to its customers, such as maintenance management, fuel cards, and insurance. Part of the company's value proposition to its customers is that it offers one-stop shopping for leasing and related services with consolidated billing. In our opinion, EFM's service offering is more extensive than that of other fleet lessors that compete in the large corporate customer market within the Fortune 500 customer base. This is partly because of the small average fleet size ( units) and EFM's typical customer business size. For this segment of the market where companies generally do not have fleet managers, EFM aims to operate as the customer's fleet manager and capture additional value beyond just vehicle financing. To that end, EFM provides some services that are unique in the fleet leasing industry. These include the option for the lessee to pay EFM a fee in exchange for a physical damage waiver, insurance liability coverage, and maintenance management. These services are available individually or combined. To that end, EFM provides some services that are unique in the fleet leasing industry. These include the option for the lessee to pay EFM a fee in exchange for a physical damage waiver, insurance liability coverage, and maintenance management. These services are available individually or combined. JANUARY 19,

17 One concern that can arise under such combined billing arrangements and lease/service offerings is the potential for offset risk, where lessees may be more willing to withhold amounts due under their leases if their services are disrupted (due to the lessor's nonperformance). We believe this risk is consistent with the preliminary ratings on the series notes because: The services and lease payment obligations are not bundled under the same contract. Provisions in the open-end lease contracts state that the lessee's obligations to make payments under the leases are absolute and unconditional without set-off. The lessor may cancel these services with 10 days' notice. For maintenance services, the invoice states that the consolidated billing arrangement is purely for convenience (lease and maintenance obligations are separate), and this maintenance arrangement may be cancelled by the lessor with 60 days' notice. Collections are received into a centralized account in the titling trust's name. Once lease payment and service amounts are identified, they are allocated across separate SUBIs. The servicer then pays the service amounts to the third parties from the related transaction account, as needed. Related Criteria And Research Related Criteria Ratings Above The Sovereign--Structured Finance: Methodology And Assumptions, Aug. 8, 2016 Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD, March 2, 2015 Global Framework For Cash Flow Analysis Of Structured Finance Securities, Oct. 9, 2014 Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012 Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 Revised General Methodology And Assumptions For Rating U.S. ABS Auto Lease Securitizations, Nov. 29, 2011 General Methodology And Assumptions For Rating U.S. Auto Loan Securitizations, Jan. 11, 2011 Standard & Poor's Revises Criteria Methodology For Servicer Risk Assessment, May 28, 2009 Legal Criteria For U.S. Structured Finance Transactions: Criteria Related To Asset-Backed Securities, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Securitizations by Code Transferors, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Appendix III: Revised UCC Article 9 Criteria, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Select Issues Criteria, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Special-Purpose Entities, Oct. 1, 2006 Equipment Leasing Criteria: Credit Risks Evaluated In Lease-Backed Securitizations, Sept Equipment Leasing Criteria: Structural Considerations In Rating Lease-Backed Transactions, Sept. 1, 2004 Assessing The Risk Of Pension Plan Terminations On U.S. Auto Lease Securitizations, Aug. 17, 2004 Related Research Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016 Enterprise Fleet Management Inc. Outlook Revised To Positive On Expectations Of Low Leverage; 'BBB-' Rating Affirmed, Nov. 7, 2016 Thirteen Ratings Affirmed On Seven Enterprise Fleet Financing LLC Transactions, Aug. 23, 2016 In addition to the criteria specific to this type of security (listed above), the following criteria articles, which are JANUARY 19,

18 generally applicable to all ratings, may have affected this rating action: "Post-Default Ratings Methodology: When Does Standard & Poor's Raise A Rating From 'D' Or 'SD'?," March 23, 2015; "Global Framework For Assessing Operational Risk In Structured Finance Transactions," Oct. 9, 2014; "Methodology: Timeliness of Payments: Grace Periods, Guarantees, And Use of 'D' And 'SD' Ratings," Oct. 24, 2013; "Counterparty Risk Framework Methodology And Assumptions," June 25, 2013; "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," Oct. 1, 2012; "Methodology: Credit Stability Criteria," May 3, 2010; and "Use of CreditWatch And Outlooks," Sept. 14, The analysts would like to thank Rahel Avigdor, Linda Yeh, and Jie Liang for their contributions to this presale report. Analytical Team Primary Credit Analyst: Joanne K Desimone, New York (1) ; joanne.desimone@spglobal.com Secondary Contact: Peter W Chang, CFA, New York (1) ; peter.chang@spglobal.com JANUARY 19,

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