Rating Action: Moody’s assigns provisional ratings to Tesla Auto Lease Trust 2020-A notes
New York, July 27, 2020 — Moody’s Investors Service, (“Moody’s”) has assigned provisional ratings to the notes to be issued by Tesla Auto Lease Trust 2020-A (TALT 2020-A). This is the first auto lease transaction in 2020 for Tesla Finance LLC (TFL; not rated). The notes will be backed by a pool of closed-end retail automobile leases originated by TFL, who is also the servicer and administrator for this transaction.
The ratings are based on the quality of the underlying collateral and its expected performance, the strength of the capital structure, and the experience and expertise of TFL as the servicer and administrator.
Moody’s expected median cumulative net credit loss expectation for TALT 2020-A is 0.50% and the total loss at a Aaa stress on the collateral is 34.50% (including 4.50% credit loss and 30.00% residual value loss at a Aaa stress). The residual value loss at a Aaa stress of 30.00% is higher than the 28.00% assigned to the prior 2019-A transaction mainly due to higher RV setting as percentage of MSRP. In general, the relatively high residual value loss at a Aaa stress for TALT transactions are the result of (1) the sponsor’s very limited securitization history and short operating history; (2) thin RV performance data, especially for Model 3, which is included in ABS transactions for the second time; (3) a lack of model diversification; (4) high RV maturity and geographic concentration: (5) unique or significantly greater RV risk for BEVs, especially for Tesla vehicles, which have significant technology risks including those that relate to self-driving and battery technology; (6) the impact of a potential manufacturer bankruptcy on RV, especially in the context of Tesla’s vertically integrated production model; and (7) the current expectations for the macroeconomic environment during the life of the transaction. Moody’s based its cumulative net credit loss expectation and loss at a Aaa stress of the collateral on an analysis of the quality of the underlying collateral; the historical credit loss and residual value performance of similar collateral, including securitization performance and managed portfolio performance; the ability of TFL and its sub-servicer LeaseDimensions to perform the servicing functions; and current expectations for the macroeconomic environment during the life of the transaction.
At closing, the Class A notes, Class B notes, Class C notes, Class D notes, and Class E notes are expected to benefit from 30.75%, 23.75%, 18.25%, 14.50%, and 10.50% of hard credit enhancement, respectively. Hard credit enhancement for the notes consists of a combination of overcollateralization, non-declining reserve account and subordination, except for the Class E notes, which do not benefit from subordination. The notes may also benefit from excess spread.
The rapid spread of the COVID-19 outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the performance of auto leases from the collapse in US economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections. Specifically, for US auto lease deals, the softening of the used car market will impact residual value performance on leases. In addition, performance will weaken due to the unprecedented spike in the unemployment rate, which may limit lessees’ income and their ability to make lease payments, also a credit negative. Furthermore, lessee assistance programs such as lease deferrals and extensions may adversely impact scheduled cash flows to bondholders. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the COVID-19 outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
The principal methodology used in these ratings was “Moody’s Global Approach to Rating Auto Loan- and Lease-Backed ABS” published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1236186. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Please note that a Request for Comment was published in which Moody’s requested market feedback on potential revisions to one or more of the methodologies used in determining these Credit Ratings. If the revised methodologies are implemented as proposed, it is not currently expected that the Credit Ratings referenced in this press release will be affected. Request for Comments can be found on the rating methodologies page on www.moodys.com.
Factors that would lead to an upgrade or downgrade of the ratings:
Moody’s could upgrade the subordinated notes if, given current expectations of portfolio losses, levels of credit enhancement are consistent with higher ratings. In sequential pay structures, such as the one in this transaction, credit enhancement grows as a percentage of the collateral balance as collections pay down senior notes. Prepayments and interest collections directed toward note principal payments will accelerate this build of enhancement. Moody’s expectation of pool losses could decline as a result of a lower number of obligor defaults or appreciation in the value of the vehicles securing an obligor’s promise of payment. Portfolio losses also depend greatly on the US job market, the market for used vehicles, and changes in servicing practices.
Moody’s could downgrade the notes if, given current expectations of portfolio losses, levels of credit enhancement are consistent with lower ratings. Credit enhancement could decline if excess spread is not sufficient to cover losses in a given month. Moody’s expectation of pool losses could rise as a result of a higher number of obligor defaults or deterioration in the value of the vehicles securing an obligor’s promise of payment. Portfolio losses also depend greatly on the US job market, the market for used vehicles, and poor servicing. Other reasons for worse-than-expected performance include error on the part of transaction parties, inadequate transaction governance, and fraud. In our analysis of the Class A-1 money market tranche, we applied incremental stresses to our typical cash flow assumptions in consideration of a likely slowdown in borrower payments brought on by the economic impact of the COVID-19 pandemic. Additionally, Moody’s could downgrade the Class A-1 short-term rating following a significant slowdown in principal collections that could result from, among other things, high delinquencies or a servicer disruption that impacts obligor’s payments.
For 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.
Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1234151.
The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to 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 allocation and other structural features, to derive the expected loss for each 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. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving 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 associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. 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_1133569.
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.
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.
Yan Yan Vice President - Senior Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Daniela Jayesuria VP - Senior Credit Officer Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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