Fitch Ratings has assigned final ratings and Ratings Outlooks to the BMW Vehicle Lease Trust 2021-2 (BMWLT 2021-2) notes.
RATING ACTIONSENTITY/DEBT RATING PRIOR
BMW Vehicle Lease Trust 2021-2
ST F1+sf New Rating F1+(EXP)sf
LT AAAsf New Rating AAA(EXP)sf
LT AAAsf New Rating AAA(EXP)sf
LT AAAsf New Rating AAA(EXP)sf
VIEW ADDITIONAL RATING DETAILS
KEY RATING DRIVERS
Collateral and Concentration Risks - Improving Pool Composition and Strong Credit Quality: The 2021-2 pool is a prime portfolio with a strong weighted average (WA) FICO score of 790, the second highest to date but down slightly from 792 in 2021-1. Light trucks represent 53.9% of the pool, consistent with 2021-1 though higher compared with all other past transactions, which is reflective of shifting consumer preferences and new vehicle models introduced by BMW.
The pool is more diversified by model compared with all prior transactions with the exception of 2021-1, with the single largest and top five model concentration representing 17.2% and 68.9% of securitization value (SV), respectively. The undiscounted base residual value (RV) as a percentage of SV totals 70.2%, consistent with 2021-1 and lower compared with most recent transactions.
Lease-End RV Risk - Stable Concentrations: The 2021-2 residual value (RV) maturity profile is well distributed though slightly more concentrated than in 2021-1, with 56.2% of the base RV of the leases schedule to mature over the most concentrated twelve-month period, compared with 51.5% in 2021-1. However, 2021-2 is more diversified compared with all other prior recent transactions. To account for potential future volatility in the wholesale market, Fitch utilized the historical worst 18 months' residual disposition losses in deriving its 'BBsf' RV proxy.
Forward Looking Approach to Loss Proxy - Improving Credit and RV Performance: BMW FS's credit performance has remained strong and residual loss performance has improved following a period of moderate RV losses during 2016-2019, though below peak loss levels. Fitch's forward-looking base case credit loss proxy is 0.80% of the SV, and the 'BBsf' RV proxy is 12.50%. Additionally, the economic environment and state of the auto industry, including the wholesale market, can have a material impact on ratings. Fitch took these risks into consideration, as well as future expectations and their impact on the transaction, in deriving the net credit and RV loss proxies.
Payment Structure - Adequate CE: Initial hard CE for the 2021-2 class A notes will be 14.40% of the aggregate initial securitization value, consistent with all prior transactions since 2018-1. Initial hard CE is comprised of overcollateralization (14.15%) and non-declining reserve account (0.25%). Initial excess spread is expected to be approximately 5.10%. Loss coverage is adequate to support Fitch's 'AAAsf' stressed assumptions.
Operational and Servicing Risks - Adequate Origination, Underwriting and Servicing: BMW FS demonstrates adequate abilities as originator, underwriter and servicer, as evidenced by historical delinquency, credit loss and RV loss performance of the managed portfolio and 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. Fitch conducts sensitivity analysis 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 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 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, therefore, would 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 severe stress. Under a moderate stress scenario of 1.5x the base case credit loss, it is unlikely that targeted loss coverage would decrease enough to warrant a downgrade in excess of a single rating category to the class A notes. The resiliency is partially due to the strength of the non-declining structure of the CE as well as the tradeoff that occurs when credit defaults are increased. As credit defaults are increased, 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 up to one rating category for the class A notes.
Comparatively, the class ratings are more sensitive to fluctuations in RV losses than credit losses, as is the case for most 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 up to two rating categories for the class A notes. Under the severe RV loss stress (an increase in the base case to 30%), the class A notes could be downgraded by up to four rating categories, falling to non-investment grade.
Fitch also conducted a rating sensitivity to increased residual lag (time to sell vehicles at auction) to examine the impact of an increased lag between lease return and the receipt of residual proceeds. This stress consisted of increasing the residual lag time to four months from two months in the primary stress scenario. In this sensitivity scenario, the notes saw a decrease in loss coverage. However, it is unlikely that loss coverage would decrease enough to warrant a downgrade to the class A notes.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Stable to improved asset performance driven by stable delinquencies and defaults would lead to increasing CE levels and consideration for potential upgrades. Given the class A notes are rated 'AAAsf', up stresses were not considered for these classes.
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 KPMG LLP. The third-party due diligence described in Form 15E focused on a comparison and re-computation of certain characteristics with respect to 100 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'.
The concentration of electric vehicles (3.22% of base residual) in the pool did not have an impact on Fitch's ESG Relevance Score (RS) score.
The transaction, along with all Auto and Fleet Lease transactions, has an ESG RS for Labor Relations & 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 the vehicles from the Pension Benefit Guaranty Corp. In the event of its bankruptcy, the originator can look to the vehicles and leases to fund their pension obligations. Fitch believes this risk mitigated since the pension fund liabilities for BMW Financial Services NA, LLC were not materially underfunded per the prospectus for the transaction.
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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings/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.
Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 29 Jan 2020)
Global Structured Finance Rating Criteria (pub. 24 Mar 2021) (including rating assumption sensitivity)
U.S. Auto Lease ABS Rating Criteria (pub. 12 Apr 2021) (including rating assumption sensitivity)
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
ABS Loss Forecaster Model, v1.1.1 (1)
Auto Lease Cashflow Model, v1.0.1 (1)
Read More On This Topic
BMW Vehicle Lease Trust 2021-2 (US ABS)
BMW Vehicle Lease Trust 2021-2 - Appendix
Dodd-Frank Rating Information Disclosure Form
ABS Due Diligence Form 15E 1
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