DBRS Morningstar Takes Rating Actions on Two Series Issued by OnDeck Asset Securitization Trust II

DBRS, Inc. (DBRS Morningstar) confirmed the following ratings of OnDeck Asset Securitization Trust II LLC (the Issuer):

-- Series 2018-1 Asset Backed Notes, Class A at AA (sf)
-- Series 2018-1 Asset Backed Notes, Class B at A (sf)
-- Series 2019-1 Fixed Rate Asset Backed Notes, Class A at AAA (sf)
-- Series 2019-1 Fixed Rate Asset Backed Notes, Class B at AA (sf)
-- Series 2019-1 Fixed Rate Asset Backed Notes, Class C at A (sf)

DBRS Morningstar also placed the following ratings of the Issuer Under Review with Negative Implications:

-- Series 2018-1 Asset Backed Notes, Class C
-- Series 2018-1 Asset Backed Notes, Class D
-- Series 2019-1 Fixed Rate Asset Backed Notes, Class D
-- Series 2019-1 Fixed Rate Asset Backed Notes, Class E

Due to the widespread shutdown of economic activity throughout the U.S. due to the Coronavirus Disease (COVID-19) pandemic, significant stress on the small business sector is expected to continue throughout the upcoming months. Consequently, DBRS Morningstar expects the performance of non-Small Business Administration (non-SBA) securitization transactions sponsored by small business lenders to be negatively affected.

DBRS Morningstar’s review of the most recently reported collateral performance (as at the April 14, 2020, remittance report) for the transactions listed above resulted in compliance with transaction performance triggers, though it also showed a material increase in missed payment factors pointing at the impact of the coronavirus.

The rating actions are based on the following analytical considerations:

(1) Small businesses are especially vulnerable to the impact from the coronavirus outbreak in several different respects, including sharply lower or non-existent consumer foot traffic, supply chain disruptions, and the possibility of employee absences. Stay-at-home measures and closures of non-essential businesses enacted by government authorities throughout the U.S. have either shut down or drastically curtailed the operations of small businesses, adversely affecting their financial condition and ability to make timely payments on borrowings, including those originated by On Deck Capital, Inc. (On Deck).

(2) The information about the extent of the impact of the coronavirus on originations, underwriting, operations, and portfolio performance to date, which was shared with DBRS Morningstar by On Deck.

(3) DBRS Morningstar’s assessment as to how collateral performance could deteriorate due to macroeconomic stresses brought about by the coronavirus pandemic.

(a) In conjunction with DBRS Morningstar’s commentary “<a href="https://www.dbrsmorningstar.com/research/359679/" target="_blank">Global Macroeconomic Scenarios: Implications for Credit Ratings</a>.” published on April 16, 2020, the agency has updated its baseline stresses for the non-SBA asset class that corresponds to the moderate macroeconomic scenario outlined in the commentary. The baseline coronavirus stresses include that an increase in small business defaults would be of a similar magnitude to that observed during the 2008–09 financial crisis. Such an increase would result in losses in excess of the original stressed default expectations for the affected classes of notes.

(b) In the moderate scenario, DBRS Morningstar currently expects that the coronavirus will begin to be contained during Q2 2020, resulting in a gradual relaxation of stay-at-home measures and non-essential business closures, allowing a gradual economic recovery to begin starting in 3Q 2020. Additional information regarding DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the COVID-19 pandemic can be found in DBRS Morningstar’s “<a href="https://www.dbrsmorningstar.com/research/359679/" target="_blank">Global Macroeconomic Scenarios: Implications for Credit Ratings</a>.” commentary.

(4) A potentially material impact of U.S. government intervention on the ability of many small businesses to survive through the shutdown in the short term until the economy starts to re-open. Signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act included a $349 billion appropriation for a significant expansion of guaranteed lending under Section 7(a) of the Small Business Act through a new Paycheck Protection Program (PPP). Eligible businesses began applying on April 3, 2020, and the entire amount has already been allocated by the lenders. While exact impact of these efforts by the Government remains uncertain, they are expected to benefit small businesses and soften the impact of the coronavirus by allowing companies to keep employees to be able to restart operations faster and more seamlessly and to use other available liquidity to support non-payroll business needs.

(5) The relative benefit from geographical and industry diversification of the collateral pool.

When a rating is placed Under Review with Negative Implications, DBRS Morningstar seeks to complete its assessment and remove the rating from this status as soon as appropriate. Upon the resolution of the Under Review status, DBRS Morningstar may confirm or downgrade the ratings on the affected classes.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
The principal methodology is the DBRS Master U.S. ABS Surveillance Methodology, which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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