Fitch Ratings has assigned final ratings and Rating Outlooks to Santander Retail Auto Lease Trust (SRT) 2022-A.
Fitch's base case cumulative net loss (CNL) proxy is derived by considering through-the-cycle 2006-2009 peer recessionary static managed portfolio performance and Santander Consumer's (SC) more recent 2016-2019 vintages, while the 'BBsf' residual value (RV) proxy is derived by using 2008-2009 Chrysler vehicle model and term-level monthly disposition data. Fitch also considered recent Santander Consumer managed portfolio and ABS performance in its analysis. The sensitivity of the ratings to scenarios more severe than currently expected is provided in the Rating Sensitivities section below.
Entity / Debt
Santander Retail Auto Lease Trust 2022-A
VIEW ADDITIONAL RATING DETAILS
KEY RATING DRIVERS
Collateral and Concentration Risks-Stable Pool Composition and Strong Credit Quality: SRT 2022-A has a weighted average (WA) FICO score of 753 and WA seasoning of six months. Vehicle type concentrations are consistent with prior transactions and peer issuers. There continues to be a considerably low exposure to cars and high concentration among the Grand Cherokee and Ram 1500 models. Undiscounted base RV exposure is slightly higher than that of most prior transactions, with RV as a percentage of securitization value (SV) totaling 70.1% of the pool, albeit lower than 72.8% in 2021-C but higher than 69.0% in 2021-B and 68.4% in 2021-A. Vehicles with original term greater than 36 months declined to 35.7% from 37.5% in 2021-C and 44.9% in 2021-B.
Lease-End RV Risk-Stable Concentration: SC's RV performance has been strong in recent years. However, to account for concentration risks and potential future wholesale vehicle market (WVM) volatility, Fitch used the worst 18-month period of historically observed residual disposition losses in deriving its 'BBsf' RV proxy, consistent with prior transactions.
Forward-Looking Approach to Loss Proxy-Stable but Limited Credit and RV Performance: SC's credit and residual losses have demonstrated strong and stable performance in recent years. SC began originating auto leases through Chrysler Capital in 2013. Therefore, empirical data are somewhat limited. Fitch supplemented the SC data with proxy data from previous Chrysler origination platforms to derive a credit loss expectation. RV performance data for Chrysler vehicles were used to derive a residual loss expectation. Additionally, Fitch took potential risks of the economic environment and the state of the auto industry and WVM into consideration, as well as future expectations and their impact on the transaction, in deriving the net loss expectation.
Fitch's initial base case CNL proxy is derived by considering through-the-cycle 2006-2009 recessionary proxy performance and SC's more recent 2016-2019 vintages, while the 'BBsf' RV proxy is derived by using 2008-2009 Chrysler vehicle model and term-level monthly disposition data. Fitch's forward-looking base case credit loss proxy is 1.20% of the SV, and the 'BBsf' RV proxy is 13.00% of returned residual.
Payment Structure-Adequate Credit Enhancement: SRT 2022-A is a sequential-pay structure. Initial hard credit enhancement (CE) is the same for all classes compared to 2021-C and 2021-B, which was the lowest among all prior transactions. However, based on a 1.20% credit loss proxy stressed for each rating category and stressed RV loss expectations ranging from 29.5% to 17.2% for 'AAAsf' to 'BBBsf', available CE is sufficient to support each expected rating.
Operational and Servicing Risks-Adequate Originator, Underwriter and Servicer: Fitch's current Long-Term Issuer Default Rating of Santander Holdings USA, Inc., the parent of SC, is 'BBB+'/Stable. Fitch views SC as an adequate originator, underwriter and servicer, evidenced by the historical performance of its managed portfolio and prior securitizations.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Unanticipated decreases in the value of returned vehicles and/or increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than the base case and would likely result in declines of CE and loss coverage levels available to the notes.
Decreased CE may make certain note ratings susceptible to potential negative rating actions, depending on the extent of the decline in coverage. Hence, Fitch conducts sensitivity analyses by increasing a transaction's initial base case RV and credit loss assumptions and examining the rating implications on all classes of issued notes. The increases to the base case losses are applied such that they represent moderate and severe stresses, respectively, and are intended to provide an indication of the rating sensitivity of notes to unexpected deterioration of a trust's performance.
During the sensitivity analysis, Fitch examines a transaction structure through cash flow modeling to test the ability to cover stressed credit and RV losses. Fitch calculates loss coverage levels for each rating category by first applying credit defaults to the pool and then increasing residual realization haircuts until the first dollar of note principal is lost. As base case credit or RV losses are increased, the modeled loss coverage supported under the CE structure may fall below the target level for each rating category and would therefore be subject to a negative rating action.
The first rating sensitivity scenario is to increase the base case credit loss assumptions by a moderate and a severe stress. Under a moderate stress scenario of 1.5x the base case credit loss, the decrease in targeted loss coverage would likely not result in a downgrade of any class of notes.
This resilience is partially due to the strength of the CE structure, as well as the trade-off that occurs when credit defaults are increased because, at this point, less of the collateral is subject to residual stresses upon lease end. Under the more severe credit loss stress of 2.5x the base case credit loss, changes in target coverage would likely result in a downgrade of less than one rating category for the notes.
Additionally, the ratings are sensitive to fluctuations in RV losses in auto lease ABS transactions. A moderate stress to the RV loss estimate, an increase in the base case to 25%, would likely result in a negative rating action of approximately one to two rating categories for the notes. Under the severe RV loss stress, an increase in the base case to 30%, the notes would likely be subject to a downgrade of up to three rating categories.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Given that the class A notes are rated 'AAAsf', up stresses were not considered for this class. However, if CNL is 20% less than the projected proxy, the expected ratings for all subordinate classes could see a rating upgrade of up to one rating category.
Best/Worst Case Rating Scenario
International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Fitch was provided with Form ABS Due Diligence-15E (Form 15E) as prepared by Deloitte & Touche LLP. The third-party due diligence described in Form 15E focused on a comparison and re-computation of certain characteristics with respect to 150 sample leases. Fitch considered this information in its analysis and it did not have an effect on Fitch's analysis or conclusions.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
The transaction, along with all auto and fleet lease transactions, has an ESG Relevance Score (RS) for Labor Relations and Practices of '3' (low impact on credit), which is higher than the baseline RS of '2' (no impact) for the general North American auto sector. The difference in RS for this ESG factor was driven by the presence of a titling trust structure, which gives rise to superior liens on vehicles from the Pension Benefit Guaranty Corp. (PBGC). In the event of PBGC's bankruptcy, the originator can look to the vehicles and leases to fund its pension obligations. However, after evaluating the current presence of pension plans of the originator, Fitch believes the risk is not material to the trust. The ESG factor is actively mitigated, resulting in no impact on the transaction.
Additionally, the concentration of electric vehicles in the pool (plug-in hybrid electric vehicles; 10.6%) did not have an impact on Fitch's rating analysis or conclusions for this transaction; therefore, it has no impact on Fitch's ESG Relevance Score.
For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Additional information is available on www.fitchratings.com
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.