DBRS Morningstar Finalizes Provisional Rating on LFS 2023A, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional rating on the following class of notes (the Notes) issued by LFS 2023A, LLC (the Issuer):

-- $130,000,000 Fixed Rate Asset Backed Notes, Class A at A (sf)

RATING RATIONALE/DESCRIPTION
-- Overcollateralization, subordination, a fully funded reserve account, and a capitalized interest account provide credit enhancement levels that are commensurate with the rating on the Notes. Credit enhancement levels are sufficient to support DBRS Morningstar-projected expected cash flows based on historical cash multiples, estimated losses from the underlying insurance carriers, and collections timing 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 rating addresses the ultimate payment of interest and the ultimate payment of principal by the Legal Final Payment Date.

-- DBRS Morningstar applies stresses to the expected case cash multiples to reflect the variability of cash collections. The stresses are determined based on the originator’s historical variability in collections, which is measured by the coefficient of variation, and translated into haircuts to be applied to the expected case via a lognormal distribution.

-- Assessment of payment sources. In order to assess insurance carrier risk, DBRS Morningstar used its proprietary model, the DBRS CLO Asset Model, to estimate losses at different statistical confidence intervals that correspond to a given rating level. The loss levels generated by the DBRS CLO Asset Model are applied to reduce the transaction cash flow as a stress.

-- The full-turbo feature included in the transaction provides further protection for the Notes.

-- The underwriting and origination capabilities of the Originators.

-- The ability of US Claims Capital, LLC, as Servicer, to make and monitor collections on the collateral pool and other required activities, with an acceptable backup servicer.

-- The credit quality of the collateral.

-- The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: April 2023 Update,” published on April 28, 2023. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse coronavirus pandemic scenarios, which were first published in April 2020.

-- While the coronavirus pandemic has had an adverse effect on the U.S. borrower in general, the performance of the underlying receivables in the transaction is expected to remain resilient because litigation funding receivables and loan receivables are underwritten based on the strength of the case to reach a successful resolution rather than the plaintiff's ability to repay.

-- Advances are most often repaid by insurance companies, many of which carry strong ratings. While there is exposure to the insurance industry, DBRS Morningstar does not expect the insurance carrier's ability to pay in the short- to medium-term to be adversely impacted by the economic stress.

-- 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 US Claims Holdings, LLC, and that the trust has a valid first-priority security interest in the assets and are consistent with DBRS Morningstar’s “Legal Criteria for U.S. Structured Finance.”

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology applicable to the rating is Rating U.S. Structured Finance Transactions – Appendix XI: U.S. Consumer Litigation Finance (February 6, 2023; https://www.dbrsmorningstar.com/research/409449/rating-us-structured-finance-transactions).

Other methodologies referenced in this transaction are listed at the end of this press release.

The rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS, Inc.
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New York, NY 10005 USA
Tel. +1 212 806-3277

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

Operational Risk Assessment for U.S. ABS Servicers (April 5, 2023)
https://www.dbrsmorningstar.com/research/412303/operational-risk-assessment-for-us-abs-servicers

Operational Risk Assessment for U.S. ABS Originators (April 5, 2023)
https://www.dbrsmorningstar.com/research/412302/operational-risk-assessment-for-us-abs-originators

Legal Criteria for U.S. Structured Finance (December 7, 2022) https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.