DBRS Morningstar Finalizes Provisional Ratings on OneMain Financial Issuance Trust 2020-1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes (collectively, the Notes) issued by OneMain Financial Issuance Trust 2020-1 (OMFIT 2020-1 or the Issuer):

-- $660,440,000 Series 2020-1, Class A rated AAA (sf)
-- $89,560,000 Series 2020-1, Class B rated AA (sf)
-- $70,880,000 Series 2020-1, Class C rated A (sf)

The impact of the Coronavirus Disease (COVID-19) has considerably dislocated the world economy and drastically altered the course of most industries and companies through, among other things, forced shutdown of operations, sharp declines in demand for products and services, altered consumer behavior, and supply chain and labor supply shocks. While considerable uncertainty remains with respect to the intensity and duration of the shock, DBRS Morningstar has revised the base case for this transaction in light of the expected impact on consumer behavior.

In conjunction with its commentary, “Global Macroeconomic Scenarios: Implications for Credit Ratings,” published on April 16, 2020, DBRS Morningstar considers the adverse impact that the coronavirus may have on the transaction and increased the base-case charge-off assumptions for the pool.

DBRS Morningstar estimated the base-case charge-off for the pool with reference to the moderate macroeconomic scenario outlined in the commentary, which serves as the primary anchor for current ratings. In the moderate scenario, DBRS Morningstar currently expects that containment of the coronavirus will begin during Q2 2020, resulting in a gradual relaxation of stay-at-home measures and nonessential business closures and allowing a gradual economic recovery to begin starting in Q3 2020. GDP and unemployment expectations in the moderate scenario are generally in line with those during the 2008–09 financial crisis and the expected base-case charge-off assumption contemplates the level of deterioration in consumer loan defaults during this period.

The ratings are based on DBRS Morningstar’s review of the following analytical considerations:

-- Transaction capital structure, proposed ratings, and form and sufficiency of available credit enhancement.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested. For this transaction, the ratings address the timely payment of interest on a monthly basis and principal by the legal final maturity date.
-- OneMain Financial, Inc.’s (OneMain) capabilities with regard to originations, underwriting, and servicing.
-- The credit quality of the collateral and performance of OneMain’s consumer loan portfolio. DBRS Morningstar used a hybrid approach in analyzing the OneMain portfolio that incorporates elements of static pool analysis, employed for such assets as consumer loans, and revolving asset analysis, employed for such assets as credit card master trusts.
-- The legal structure and presence of legal opinions that address the true sale of the assets to the Issuer, the nonconsolidation of the special-purpose vehicle with OneMain, that the trust has a valid first-priority security interest in the assets, and the consistency with DBRS Morningstar’s “Legal Criteria for U.S. Structured Finance.”

The OMFIT 2020-1 transaction represents the 15th securitization of a portfolio of nonprime and subprime personal loans originated through OneMain’s branch network.

Credit enhancement in the transaction consists of overcollateralization (OC), subordination, excess spread, and a reserve account. The initial amount of OC is 14.30% of the aggregate loan principal balance. The subordination in the transaction refers to the Class B and Class C Notes, which are subordinated to the Class A Notes. The reserve account is 1.00% of the initial note balance. The reserve account will be an amount equal to the greater of 1.00% of the aggregate initial note balance and an amount equal to the aggregate amount of all deposits made to the reserve account. Initial Class A credit enhancement of 32.05% includes a 1.00% reserve account, OC of 14.30%, and 16.75% subordination. Initial Class B credit enhancement of 22.70% includes a 1.00% reserve account, OC of 14.30%, and 7.40% subordination. Initial Class C credit enhancement of 15.30% includes a 1.00% reserve account and OC of 14.30%. Interest on the Notes is payable monthly at a fixed rate.

The DBRS Morningstar expected charge-off rate based on the worst-case pool concentrations is 11.50%. Three factors led to the final rate: (1) a gradual increase in charge-offs in OneMain’s portfolio; (2) a positive shift in the reinvestment criteria, increasing the better-performing secured concentration to 37.5%; and (3) an overall increase in the expected charge-off rate assumption because of the expected impact of the coronavirus. Because of the higher base-case charge-off rate, DBRS Morningstar adjusted the loss multiples for this transaction as a result of the ultimate magnitude in increase to the base-case charge-off rate assumption. DBRS Morningstar used loss multiples from the “Rating U.S. Structured Finance Transactions – Appendix I: U.S. Consumer Loan ABS Transactions” methodology in this transaction.

ESG CONSIDERATIONS
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:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are Rating U.S. Structured Finance Transactions (November 6, 2019) and Rating U.S. Credit Card Asset-Backed Securities (August 6, 2019), 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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