Rating Affirmed In U.K. ABS Leasing Transaction Temese Funding 2#s Class A Notes Following Restructure

Stocks and Financial Services Press Releases Friday May 19, 2017 18:03
LONDON--19 May--S&P Global Ratings

LONDON (S&P Global Ratings) May 19, 2017--S&P Global Ratings has affirmed its 'AAA (sf)' credit rating on Temese Funding 2 PLC's class A asset-backed fixed-rate notes following the transaction's May 18, 2017 restructure. As part of the restructuring, the note issuance amounts of the class A notes and unrated class B and C notes were increased (see list below).

Temese Funding 2 is an existing U.K. equipment lease transaction, with underlying lease receivables originated by Investec Asset Finance PLC (see "NewIssue: Temese Funding 2 PLC," published on Nov. 14, 2014). This is the second transaction by Investec Asset Finance.

On the restructuring date, the increased note volumes were issued. The notes have the same terms and conditions as the original notes. As part of the restructuring, the interest rate on the class A and B notes was reduced to 1.2% from 2.0% and to 1.7% from 2.5%, respectively. The notes' maturity date was extended beyond the original date due to the extension of the revolving period.

Temese Funding 2 originally securitized a revolving portfolio of U.K. receivables from equipment leasing and hire purchase contracts that Investec Asset Finance either originated or acquired through its broker network. Following the restructure, the revolving portfolio also includes commercial loans and materials handling lease contracts originated or acquired by Investec Asset Finance as well as equipment leases originated or acquired by CF Corporate Finance Ltd. The receivables are located in England, Wales, and Scotland. The portfolio is relatively geographically diversified across the U.K. The issuer can purchase further eligible receivables during the extended four year revolving period, as long as no interim amortization events occur.

Investec Asset Finance acts as originator, seller, and servicer. It provides asset and loan finance to U.K. businesses, including small and midsize enterprises (SMEs), corporates, and professional practices. It originates British pound sterling-denominated receivables in the U.K. Its business is entirely introduced through a network of over 200 pre-approved brokers.

CF Corporate Finance acts as originator and seller. It provides finance leases to U.K. based manufacturers, distributors, and suppliers of technology based equipment. CF Corporate Finance, similar to Investec Asset Finance, does not transact business directly with end users. It operates entirely through a network of over 400 approved introducers.

We consider that the most relevant risk for the transaction is its exposure to the credit risk of the underlying lessees. In our analysis, we also took into account liquidity, commingling, operational, legal, and counterparty risks. We have also analyzed the market value decline risk of some of the leased objects, as residual values are included in the transaction.

Our analysis indicates that the cash flow characteristics and the available credit enhancement for the rated notes is sufficient to withstand the credit and cash flow stresses we apply at the assigned rating level for the class A notes.

RATING RATIONALE
Our ratings reflect our assessment of the factors below.
Economic Outlook

Our macroeconomic outlook for the U.K. remains relatively stable. We forecast that the U.K.'s real GDP will grow by 1.7% in 2017, 1.2% in 2018, and 1.4% in both 2019 and 2020. We expect the unemployment rate to increase to 5.1% in 2017, 5.4% in 2018, and 5.6% in 2019 and 2020, from 4.9% in 2016 (see "Europe's Recovery Is On Track, But Not Without Risks Of Derailment Or Disruption," published on March 31, 2017). We have taken our macroeconomic outlook into consideration when sizing our base-case assumptions.

Operational Risk

We consider Investec Asset Finance's origination policies and its ability to fulfill its role as servicer under the transaction documents to be satisfactory for the purpose of this transaction. We have also considered the fact that it has substantially improved its origination and underwriting standards since 2009. The issuer appointed Virtual Lease Services Ltd. as back-up servicer at closing, which further mitigates the risk of servicer discontinuity. Our structured finance operational risk criteria do not impose any cap on the maximum achievable rating in this transaction due to operational risks (see "Global Framework For Assessing Operational Risk In Structured Finance Transaction," published on Oct. 9, 2014).

Credit Risk
We have analyzed credit risk under our European consumer finance criteria, using historical loss data from the originator's loan book (see "European Consumer Finance Criteria," published on March 10, 2000).

Based on the asset-specific gross default rates and the worst-case portfolio composition during the revolving period, the weighted-average gross default base case is 4.68%, down from 5.37% at closing in 2014. This accounts for the updated historical information of the originator's portfolio and the transaction's good performance to date. The stressed default rate in the 'AAA' scenario is now due to the largest industry concentration of 25% allowed during the revolving period. This differs from the stresses at closing when the actuarial approach (base case multiplied by the rating multiple) determined the stressed default rate in a 'AAA' scenario.

Furthermore, we have considered market value decline risk, as some of the leases that form part of the securitized pool contain residual values, for which we have applied an additional loss assumption of 36%. Of the portfolio, 20% (under the replenishment criteria) could comprise lease agreements with residual values. However, this risk is limited to £20.0 million under the eligibility criteria.

Payment Structure

Our rating on the class A notes reflects our assessment of the transaction's payment structure under the transaction documents. The issuer will purchase additional assets during the revolving period, unless an early amortization event occurs. Several of the early amortization events are curable, following which the transaction will resume revolving. The notes pay down sequentially and there are reserve and liquidity reserve funds, which provide credit support to the transaction. The liquidity reserve was not fully funded at closing, but it will build up from principal receipts. Furthermore, there is a considerable amount of excess spread in the transaction. Our analysis indicates that the available credit enhancement for the class A notes is sufficient to withstand the credit and cash flow stresses that we apply at a 'AAA' rating level.

Counterparty Risk
We consider that the replacement mechanisms implemented in the transaction documents adequately mitigate the counterparty risks that the transaction is

exposed to. The transaction is exposed to HSBC Bank PLC as bank account provider. We have analyzed the counterparty risks by applying our current counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013).

Legal Risk
In our opinion, the transaction is not exposed to deposit or employee setoff risks. We have also analyzed potential setoff risk in contracts with insurance

components and maintenance fees, and have found the risk to be minimal. The commingling risk in the transaction is modelled as a liquidity risk as there is a seller declaration of trust over the collection accounts. We consider the issuer to be a bankruptcy remote entity, in line with our legal criteria (see "Structured Finance: Asset Isolation And Special-Purpose Entity Methodology," published on March 29, 2017).

Rating Stability

In line with our approach to scenario analysis, we have run two scenarios to test the stability of the assigned rating. The results show that under moderate stress conditions (scenario 1), the ratings on the notes would not suffer more than the maximum projected deterioration that we would associate with each rating level in the one-year horizon, as contemplated in our credit stability criteria (see "Methodology: Credit Stability Criteria," published on May 3, 2010).

Sovereign Risk
The application of our criteria for structured finance ratings above the sovereign does not cap the rating in this transaction (see "Ratings Above The
Sovereign - Structured Finance: Methodology And Assumptions," published on Aug. 8, 2016).

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