DBRS Morningstar Finalizes Provisional Ratings of AA (sf), A (sf), BBB (high) (sf), and BBB (sf) on Fairstone Financial Issuance Trust I, Series 2020-1

DBRS Limited (DBRS Morningstar) finalized its provisional ratings on the following Series 2020-1 Notes (the Notes) issued by Fairstone Financial Issuance Trust I (the Trust):

-- AA (sf) on the Series 2020-1 Class A Notes
-- A (sf) on the Series 2020-1 Class B Notes
-- BBB (high) (sf) on the Series 2020-1 Class C Notes
-- BBB (sf) on the Series 2020-1 Class D Notes

The Revolving Period Termination Date is October 20, 2023, and the Final Maturity Date is October 20, 2039.

On September 10, 2020, the DBRS Morningstar Sovereigns group published its updated outlook on the impact of the Coronavirus Disease (COVID-19) on key economic indicators for the 2020–22 time frame, which was updated from the initial outlook that DBRS Morningstar published on April 16, 2020, and subsequently updated on June 1, 2020, and July 22, 2020. For details, see https://www.dbrsmorningstar.com/research/366542. For the ratings assigned, DBRS Morningstar’s analysis considered adjustments to base-case assumptions as a result of the global efforts to contain the spread of the coronavirus. In connection with DBRS Morningstar’s Sovereigns group's moderate economic scenario, DBRS Morningstar applied adjustments that lead to an increase in the base-case cumulative net loss (CNL). The increase in unemployment is expected to lead to increases in delinquencies and losses as obligors’ ability to repay is reduced.

DBRS Morningstar considered the following factors in its analysis:

(1) The high levels of credit enhancement (CE) provided by subordination (27.5%, 16.0%, and 6.0% of the Initial Pool Balance for AA (sf)-, A (sf)-, and BBB (high) (sf)-rated notes, respectively), overcollateralization (OC) of 9.0% of the Initial Pool Balance, cash reserve of 1.0% of the Initial Pool Balance, and estimated excess spread of 26% at closing are commensurate with the ratings assigned.

(2) At the end of the revolving period, the sequential-pay structure and nonamortizing OC and cash reserve increase enhancement and provide a deleveraging structure as principal is repaid during the amortization period.

(3) The portfolio of receivables is well diversified by province, product type (unsecured homeowner, unsecured nonhomeowner, and secured loans), and obligor risk rank (Excellent, Good, and Average) and new loans added to the pool are subject to eligibility criteria and concentration limits.

(4) The considerable experience of the Seller and Servicer, Fairstone Financial Inc. (Fairstone), with respect to originating, underwriting, and servicing in the consumer loan industry.

DBRS Morningstar derived its base-case CNL through an analysis of the historical performance of Fairstone’s owned and managed portfolio in conjunction with the composition of the securitized pool and securitized pool eligibility criteria and concentration conditions. After determining the base-case CNL, DBRS Morningstar runs a variety of stress tests using its proprietary cash flow engine, which incorporates the CE available and structural features, considering any fees and expenses paid ahead of interest and principal in the waterfall and the ability to defer principal and interest payments to the Class B Notes, Class C Notes, and Class D Notes until the Class A Notes have been fully repaid. DBRS Morningstar’s stress testing indicates that the Trust’s ability to repay interest and principal of the Notes is consistent with their respective ratings.

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 Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Structured Finance Transactions (April 15, 2020), 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

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 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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