DBRS Morningstar Finalizes Provisional Ratings on Encina Equipment Finance 2021-1, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of asset-backed notes (the Notes) issued by Encina Equipment Finance 2021-1, LLC:

-- $108,700,000 Class A-1 Notes at AAA (sf)
-- $88,940,000 Class A-2 Notes at AAA (sf)
-- $13,242,000 Class B Notes at AA (sf)
-- $13,812,000 Class C Notes at A (sf)
-- $21,643,000 Class D Notes at BBB (sf)
-- $12,103,000 Class E Notes at BB (sf)

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

(1) In its analytical review, DBRS Morningstar considered the set of macroeconomic scenarios for select economies related to the Coronavirus Disease (COVID-19), available in its commentary "Global Macroeconomic Scenarios: March 2021 Update" published on March 17, 2021. DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020. The scenarios were updated on March 17, 2021 and are reflected in DBRS Morningstar's rating analysis. The assumptions consider the moderate macroeconomic scenario outlined in the commentary (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.

(2) DBRS Morningstar’s respective stressed cumulative net loss (CNL) hurdle rates of 32.94%, 27.99%, 22.74%, 15.87%, and 11.37% in the cash flow scenarios commensurate with the AAA (sf), AA (sf), A (sf), BBB (sf), and BB (sf) ratings did not assign any credit to seasoning of the collateral of approximately 11 months as of the Cut-Off Date. In addition, DBRS Morningstar assigned no credit to any expected build-up in collateral coverage over the life of the transaction.

(3) DBRS Morningstar assessed the stressed CNL hurdle rates at each rating level by blending the stressed net loss assumptions for the concentrated (including 22 obligors) and more granular portions of the collateral pool based on their share of the Aggregate Securitization Value.

(4) The transaction’s capital structure and form and sufficiency of available credit enhancement. The subordination, overcollateralization, cash held in the reserve account, available excess spread, and other structural provisions create credit enhancement levels that are commensurate with the respective ratings for each class of Notes.

(5) The weighted-average (WA) yield for the collateral pool is approximately 8.43%. The securitization value of the collateral pool is determined by discounting all leases and loans at either implied or actual applicable contract rate, thus, creating excess spread that may be available to the Notes.

(6) The transaction does not have a prefunding period.

(7) The transaction is the first 144A term securitization sponsored by Encina Equipment Finance, LLC (Encina EF), which has been operating since 2017. Nevertheless, the company’s senior management team has extensive experience in equipment industry, originating, underwriting, and managing credit to small- and middle-market companies in the United States through multiple market cycles. Funds managed by Oaktree Capital Management hold a minority equity interest in Encina EF and also participate in the investment committee.

(8) Since inception, Encina EF has experienced a limited number of obligor defaults and low and intermittent amount of charge-offs.

(9) 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 Encina EF, that the trustee has a valid first-priority security interest in the assets, and the consistency 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 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.

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

The principal methodologies are Rating U.S. Equipment Lease and Loan Securitizations (July 7, 2020) and Rating CLOs and CDOs of Large Corporate Credit (February 8, 2021), 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 releases: 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 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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