Rating Action: Moody's assigns provisional ratings to flexicommercial's first commercial auto and equipment ABS transaction for 2021Global Credit Research - 01 Mar 2021flexicommercial ABS Trust 2021-1 -- AUD280.5 million of debt securities ratedSydney, March 01, 2021 -- Moody's Investors Service has assigned provisional ratings to notes to be issued by Perpetual Corporate Trust Limited, as trustee of flexicommercial ABS Trust 2021-1."IMPORTANT NOTICE: MOODY'S RATINGS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS. SUCH USE WOULD BE RECKLESS AND INAPPROPRIATE. SEE FULL DISCLAIMERS BELOW."Issuer: flexicommercial ABS Trust 2021-1....AUD201.00 million Class A Notes, Assigned (P)Aaa (sf)....AUD29.10 million Class B Notes, Assigned (P)Aa2 (sf)....AUD16.80 million Class C Notes, Assigned (P)A2 (sf)....AUD10.50 million Class D Notes, Assigned (P)Baa2 (sf)....AUD16.50 million Class E Notes, Assigned (P)Ba2 (sf)....AUD6.60 million Class F Notes, Assigned (P)B2 (sf)The AUD19.50million of Class G Notes are not rated by Moody's.The transaction is a securitisation of a portfolio of commercial auto and equipment loans and leases originated by Flexirent Capital Pty Limited and serviced by flexicommercial Pty Ltd (together, flexicommercial), each a wholly owned subsidiary of Humm Group Limited (Humm Group). This is flexicommercial's first auto and equipment asset backed securities transaction for 2021.Flexicommercial has been providing commercial asset finance to Australian businesses for over 20 years. Historically, flexicommercial primarily funded smaller ticket "tertiary assets" such as scanner, copiers, printers and telephone systems under a point-of-sale origination model. However, since early 2018, flexicommercial has shifted its strategic focus towards commercial lending via broker distribution funding larger ticket "primary" assets such as trucks, trailers and construction equipment, which form the majority of the portfolio.RATINGS RATIONALEThe provisional ratings take into account, among other factors:- There is a limited performance history for flexicommercial's broker originated "primary" asset receivables that constitute most of this portfolio. Although flexicommercial have been originating commercial equipment loans and leases for over 20 years they shifted focus from point-of-sale originated "tertiary" assets to broker originated larger ticket "primary" assets in early 2018;- The evaluation of the underlying receivables and their expected performance;- The fact that approximately 70% of the receivables were extended to the obligors on a no-income verification basis, referred to as "Matrix". The Matrix product allows obligors who meet certain stringent requirements to access the loan without providing financial statements;- The evaluation of the capital structure;- The availability of excess spread over the life of the transaction;- The liquidity facility in the amount of 1.50% of the rated note balance subject to a floor of AUD300,000;- The interest rate swap provided by Westpac Banking Corporation (Aa3/P-1/Aa2(cr)/P-1(cr)).Initially, the Class A, Class B, Class C, Class D, Class E and Class F Notes benefit from 33.00%, 23.30%, 17.70%, 14.20%, 8.67% and 6.50% of note subordination, respectively.The notes will initially be repaid on a sequential basis until the credit enhancement of the Class A Notes is at least 45%. Should the Class A Notes credit enhancement exceeds 45% the Class A to Class F Notes will be paid pro-rata and senior to the Class G Notes until such point that the Class G Notes subordination equals or exceeds 13%. At that point Class A to Class G Notes will be paid pro-rata. The notes will however be paid on a sequential basis should there be any unreimbursed charge-offs or the payment date is on or after the call option date. The call option date is the earlier of the date the aggregate invested amounts of the notes is equal to or less than 10% of the initial invested amount of the notes or the payment date in March 2025.MAIN MODEL ASSUMPTIONSMoody's base case assumptions are a portfolio loss rate of 8.00%, and a portfolio credit enhancement of 38.00%.To address the limited historical loss data on flexicommercial's portfolio, we have benchmarked the performance to data from comparable Australian commercial auto and equipment ABS originators. We have also overlaid additional stresses into our default and PCE assumptions.The Matrix (no-income-verification) product offering has been originated for almost twelve years in the Australian auto and equipment loan space. However, through-the-cycle historical data on the performance of this product is limited. To address this risk and the fact that the portfolio has a very high proportion of Matrix (approximately 70.0%), we have applied further qualitative stresses in our analysis.Risks arising from the lack of income verification for these borrowers are partly mitigated by the stringent requirements to access this product. The key requirements, among others, relate to the length of time the business has been active (generally, a minimum of two years), limitations with respect to the maximum exposure (AUD 250,000 for primary assets and AUD 150,000 for non-primary assets) and the nature of the assets (used assets acceptable for primary assets only), and requirements relation to satisfactory credit reports on all applicants and guarantors.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of small businesses from the current weak Australian economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high.We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.Methodology Underlying the Rating ActionThe principal methodology used in these ratings was "Moody's Approach to Rating ABS Backed by Equipment Leases and Loans" published in December 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1253993. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Factors That Would Lead to an Upgrade or Downgrade of the RatingsFactors that could lead to an upgrade of the notes include a rapid build-up of credit enhancement, due to sequential amortization or better-than-expected collateral performance. The Australian job market is a primary driver of performance.A factor that could lead to a downgrade of the notes is worse-than-expected collateral performance. Other reasons that could lead to a downgrade include poor servicing, error on the part of transaction parties, a deterioration in the credit quality of transaction counterparties, or lack of transactional governance and fraud.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK 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 the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. John Paul Truijens Vice President - Senior Analyst Structured Finance Group Moody's Investors Service Pty. Ltd. 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