DBRS Morningstar Maintains Under Review with Negative Implications Status on ME Funding, LLC, Series 2019-1

DBRS, Inc. (DBRS Morningstar) maintained the Under Review with Negative Implications status on the BBB (high) (sf) and BBB (sf) ratings of the Class A-1 VFN and Class A-2 Notes, respectively, issued by ME Funding, LLC, Series 2019-1.

The maintenance of the Under Review with Negative Implications status is based on the following analytical considerations:

-- Transaction performance for asset-backed securities (ABS) has shown improvement since the onset of the Coronavirus Disease (COVID-19) pandemic in Q2 2020, amid weakening in the underlying credit profile of the manager related to the impact of the pandemic. Systemwide sales, same-clinic sales, and same-clinic service counts have significantly recovered from their bottoms in March 2020 when strict stay-at-home orders were implemented and only essential businesses were allowed to operate. Membership cancellations continue to be successfully contained in large part from relationship management strategies by franchisees to retain current memberships and encourage conversion by trial members to new memberships.

--The deal’s structural features, including the back-up manager mechanism, Massage Envy’s franchise business model, amortization triggers, and the liquidity of the manager, are positive elements supporting the current ratings.

-- A catalyst to the recovery is on the horizon, though more visibility is needed in terms of reaching herd immunity levels within 2021, as the vaccine rollout gains momentum over the next several months. DBRS Morningstar expects this to set the stage for further improvement in ABS transaction performance and the potential for improvement in the underlying credit of the manager of the ABS.

-- The transaction assumptions consider DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the coronavirus pandemic, available in its commentary “Global Macroeconomic Scenarios: January 2021 Update,” published on January 28, 2021. DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020, which have been regularly updated. The scenarios were last updated on January 28, 2021, and are reflected in DBRS Morningstar’s rating analysis.

-- The assumptions consider the moderate and adverse macroeconomic scenario outlined in the commentary, with the moderate scenario serving as the primary anchor for current ratings. The moderate scenario factors in increasing success in containment during the first half of 2021, enabling the continued relaxation of restrictions.

-- Franchisees have hired back approximately 80% of their therapists. Those therapists now represent 90% of the full working-hour capacity. Approximately 98% of locations have reopened for business.

-- Principal and interest debt service coverage ratio (DSCR) and interest-only DSCR remain comfortably above their amortization trigger levels.

PRIOR RATING ACTIONS
DBRS Morningstar placed both classes of securities Under Review with Negative Implications on April 22, 2020. DBRS Morningstar maintained the status of Under Review with Negative Implications on July 28, 2020, and again on November 5, 2020. For more information on the April 22, 2020, rating action, please refer to the press release titled “DBRS Morningstar Takes Rating Action on ME Funding, LLC, Series 2019-1.” For more information on the July 28, 2020, maintenance of status, please refer to the press release titled “DBRS Morningstar Maintains Under Review with Negative Implications Status on ME Funding, LLC, Series 2019-1 Ratings.” For more information on the November 5, 2020, maintenance of status, please refer to the press release titled “DBRS Morningstar Maintains Under Review with Negative Implications Status on ME Funding, LLC, Series 2019-1 Ratings.”

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The press release issued on November 5, 2020, inadvertently mislabeled the methodology used and was amended on March 3, 2021.

Notes:
The principal methodology is U.S. ABS General Ratings Methodology (December 2018), 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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did not 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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