New York, July 6, 2022 — Moody’s Investors Service (“Moody’s”) has assigned interim ratings to the notes to be issued by Dell Equipment Finance Trust 2022-2 (DEFT 2022-2). This is the second transaction of the year for Dell Financial Services LLC (DFS), a wholly owned subsidiary of Dell Inc. (Baa3, stable). The notes will be backed by a series of low cost equipment loans and leases (contracts) primarily by DFS, which is also the servicer and administrator for the transaction.
The complete grading actions are as follows:
Publisher: Dell Equipment Finance Trust 2022-2
Class A-1 Notes, assigned to (P)P-1 (sf)
Class A-2 Notes, assigned to (P)Aaa (sf)
Class A-3 Notes, assigned to (P)Aaa (sf)
Class B Notes, assigned to (P)Aa1 (sf)
Class C notes, assigned to (P)Aa3 (sf)
Class D Notes, assigned (P)Baa1 (sf)
RATINGS RATIONALE
The interim ratings and Moody’s joint loss distribution are based on the credit quality of the underlying pool of equipment contracts to be securitized and its expected performance, the historical performance of DFS’s previous securitizations and its managed portfolio of similar collateral, DFS’s track record, experience and expertise as originator and servicer, the strength of the transaction structure including the sequential payment structure and the amount of credit enhancement supporting the notes, and the legal aspects of the transaction.
Moody’s joint loss distribution constructed for the DEFT 2022-2 collateral pool features a median expected loss of approximately 0.8% and a loss at Aaa stress of approximately 14.5%. To derive the joint loss distribution, Moody’s combined two independent loss distributions for the concentrated sub-pool and the granular sub-pool.
Key credit strengths of the transaction include 1) substantial use of underlying equipment, 2) high credit quality of the borrower, with 87% of the fund’s initial balance consisting of large or public institutions, both segments that have historically had very low losses in DFS’s managed portfolio and 3) transaction structure. Credit challenges of the transaction include 1) high concentration of obligors: while the pool consists of 7,283 contracts, the top ten obligors (who are generally of strong credit profile) account for 26.5% of the pool balance and 2) exposure to residual value risk, with the residual values of leased equipment they represent 4.4% of the pool.
In addition, in assigning the short-term rating to the Class A-1 notes, Moody’s considered the cash flows that we expect the underlying receivables to generate during the collection period prior to the statutory final maturity date of the Class A-1 notes.
At closing the Class A, Class B, Class C and Class D notes will benefit from 12.00%, 9.50%, 6.75% and 4.75% senior credit enhancements, respectively. The notes’ hard credit increase consists of any available junior bond subordination, a 1.00% fully funded, non-declining reserve and a 3.75% over-collateralization that will increase to a target of 5.75% of the outstanding fund with a floor of 3, 75% of the initial state of the pool. The Notes will also benefit from an excess spread, which is initially estimated to be approximately 2.0% assuming an initial yield on the underlying asset and trust expense and interest liability.
MAIN METHODOLOGY
The basic methodology used in these ratings was the “Equipment Lease and Loan Securitization Methodology” published in August 2021 and available at https://ratings.moodys.com/api/rmc-documents/72151. Alternatively, see the Assessment Methodology page at https://ratings.moodys.com for a copy of this methodology.
Factors that would lead to an increase or decrease in the rating:
Above
Moody’s could upgrade the ratings on the notes if credit protection levels are higher than necessary to protect investors from current loss expectations. Moody’s then-current loss expectations may be better than original expectations due to a lower frequency of default by the underlying obligors or a slower depreciation of the value of the equipment securing the obligor’s promise to pay. As primary drivers of performance, positive changes in the US macro economy and the performance of the various sectors in which tenants operate may also affect the rating.
Down
Moody’s could downgrade if credit protection levels are not sufficient to protect investors from current expected portfolio losses. Losses could increase beyond Moody’s original expectations as a result of more borrower defaults or deterioration in the value of the equipment securing the borrower’s promise to pay. Transaction performance is also highly dependent on the US macro economy. Other reasons for poorer-than-expected performance include poor service, errors by transaction participants, inadequate transaction management, and fraud. In addition, Moody’s could downgrade the Class A-1 short-term rating following a significant slowdown in principal collection that could result from, among other reasons, large payment delays or delays or servicer disruptions affecting the obligor’s payments.
REGULATORY ANNOUNCEMENTS
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the Methodological Assumptions and Assumption Sensitivity sections of the disclosure form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.
Additional information on representations and warranties and enforcement mechanisms available to investors is available at https://ratings.moodys.com/documents/PBS_1335473.
The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or the range of expected collateral losses or cash flows under the rated instruments. As a second step, Moody’s estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss distribution and other structural characteristics, to derive an expected loss for each rated instrument.
Moody’s quantitative analysis involves evaluating scenarios that highlight factors that contribute to rating sensitivity and take into account the likelihood of serious collateral losses or reduced cash flows. Moody’s weights the impact on rated instruments based on its assumptions about the likelihood that events in such scenarios will occur.
For ratings issued for a program, series, category/class of debt or security, this release provides certain regulatory disclosures regarding each rating of subsequently issued bonds or notes of the same series, category/class of debt, security or pursuant to the program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued to a supporter, this announcement provides certain regulatory disclosures regarding the supporter’s credit rating action and in connection with each particular credit rating action for securities whose credit ratings are derived from the supporter’s credit rating. For interim ratings, this release provides certain regulatory disclosures regarding the interim rating assigned, and regarding the definitive rating that may be assigned after the final issuance of the debt, in each case where the transaction structure and terms are not changed prior to the assignment of the final rating in a manner that would affected the rating. For additional information, see the issuer/agreement page for the respective issuer at https://ratings.moodys.com.
For all affected securities or rated entities that receive direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the related regulatory disclosures will be those of the guarantor. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: ancillary services, disclosure to a rated entity, disclosure from a rated entity.
Ratings are disclosed to the rated entity or its designated agents and are issued without modification resulting from such disclosure.
These ratings are requested. Please see Moody’s Policy for the Determination and Assignment of Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
The regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the associated rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risk in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The credit rating on a global scale in this credit rating announcement is issued by one of Moody’s subsidiaries outside the EU and is supported by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Article 4 paragraph 3 Regulation (EC) no. 1060/2009 on credit rating agencies. Additional information on the EU approval status and the Moody’s office that issued the credit rating is available at https://ratings.moodys.com.
The global credit rating in this credit rating announcement is issued by one of Moody’s subsidiaries outside the United Kingdom and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on UK approval status and the Moody’s office that issued the credit rating is available at https://ratings.moodys.com.
Please see https://ratings.moodys.com for all updates on changes to Moody’s lead rating analyst and issuing entity.
Please see the issuer/contract page at https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Ekrem Cinar
Associate Lead Analyst
Structured Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA
JOURNALISTS: 1 212 553 0376
Customer Service: 1 212 553 1653
Aaron Bergman
VP – senior credit officer
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Customer Service: 1 212 553 1653
Issuing office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA
JOURNALISTS: 1 212 553 0376
Customer Service: 1 212 553 1653
