DBRS Morningstar Finalizes Provisional Ratings on Lendmark Funding Trust 2020-2

DBRS, Inc. (DBRS Morningstar ) finalized its provisional ratings on the following notes issued by Lendmark Funding Trust 2020-2 (Lendmark 2020-2 or the Issuer):

-- $217,740,000 Class A rated AA (sf)
-- $14,650,000 Class B rated A (sf)
-- $13,030,000 Class C rated BBB (high) (sf)
-- $29,580,000 Class D rated BB (high) (sf)

The ratings are based on a review by DBRS Morningstar of the following analytical considerations:

-- DBRS Morningstar's projected losses include the assessment of the impact of the Coronavirus Disease (COVID-19). While considerable uncertainty remains with respect to the intensity and duration of the shock, the DBRS Morningstar-projected cumulative net loss (CNL) includes an assessment of the expected impact on consumer behavior. The DBRS Morningstar CNL assumption is 10.80%.
-- The transaction assumptions consider DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the coronavirus, available in its commentary “Global Macroeconomic Scenarios: September Update,” published on September 10, 2020. DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020, and they have been regularly updated. The scenarios were last updated on September 10, 2020, and are reflected in DBRS Morningstar’s rating analysis.
-- The assumptions consider the moderate macroeconomic scenario outlined in the commentary, with the moderate scenario serving as the primary anchor for current ratings. The moderate scenario remains predicated on a more rapid return of confidence and a steady recovery heading into 2021.
-- Transaction capital structure and form and sufficiency of available credit enhancement.
-- Credit enhancement in the form of overcollateralization, subordination, amounts held in the reserve fund, and excess spread. Credit enhancement levels are sufficient to support DBRS Morningstar’s stressed projected finance yield, principal payment rate, and charge-off assumptions under various stress scenarios.
-- 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.
-- Lendmark’s capabilities with regard to originations, underwriting and servicing.
-- DBRS Morningstar has performed an operational review of Lendmark and considers the entity to be an acceptable originator and servicer of unsecured personal loans with an acceptable back-up servicer.
-- Lendmark’s senior management team has considerable experience and a successful track record within the consumer loan industry.
-- The credit quality of the collateral and performance of Lendmark’s consumer loan portfolio. DBRS Morningstar has used a hybrid approach in analyzing the Lendmark portfolio that incorporates elements of static pool analysis employed for assets, such as consumer loans, and revolving asset analysis, employed for such assets as credit card master trusts.
-- The weighted-average (WA) remaining term of the initial collateral pool is approximately 45 months.
-- The WA current BEACON of the initial pool is approximately 617.
-- Lendmark’s finance yield has averaged approximately 27.00% since 2017. The WA coupon (WAC) of the pool is 25.94% and the transaction includes a Reinvestment Criteria Event if the WAC is less than 24.50%.
-- The DBRS Morningstar base-case assumption for the finance yield is 24.50%.
-- DBRS Morningstar applied a finance yield haircut of 8.00% for Class A, 6.00% for Class B, 4.67% for Class C, and 2.67% for Class D. While these haircuts are lower than the range described in the DBRS Morningstar “Rating U.S. Credit Card Asset-Backed Securities” methodology, the fixed-rate nature of the underlying loans, lack of interchange fees, and historical yield consistency support these stressed assumptions.
-- Principal payment rates for Lendmark’s portfolio, as estimated by DBRS Morningstar, have generally averaged between 3.0% and 5.0% over the prior several years.
-- The DBRS Morningstar base-case assumption for the principal payment rate is 3.15%.
-- DBRS Morningstar applied a payment rate haircut of 40.00% for Class A, 35.00% for Class B, 31.67% for Class C, and 23.33% for Class D.
-- Charge-off rates on the Lendmark portfolio have generally ranged between 5.00% and 10.00% over the prior several years.
-- The DBRS Morningstar base-case assumption for the charge-off rate is 10.80%.
-- DBRS Morningstar has increased the base-case charge-off assumption rate to 10.80% for the Series 2020-2 transaction, which contrasts with the charge-off rate of 9.80% for the 2019-2 transaction. The increase in the assumption is due to the expected economic impact of the coronavirus pandemic.
-- The legal structure and presence of legal opinions that address the true sale of the assets to the Issuer, the non-consolidation of the special-purpose vehicle with Lendmark, that the trust has a valid first-priority security interest in the assets, and is consistent with the DBRS Morningstar “Legal Criteria for U.S. Structured Finance.”

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 methodology is Rating U.S. Structured Finance Transactions – Appendix I: U.S. Consumer Loan ABS Transactions (November 6, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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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