Kroll Bond Rating Agency assigned preliminary ratings to four classes of notes issued by CP EF Asset Securitization II, LLC, Series 2023-1 (CPEF 2023-1), an equipment ABS transaction from Channel Partners Capital.
CPEF 2023-1 represents Channel Partners Capital’s fifth ABS transaction and its second ABS transaction secured by equipment loans and leases. Three of Channel’s prior ABS transactions are secured by small business loans and business cash advances. The company, which was founded in 2009, focused on providing point-of-sale working capital finance to small businesses during the first 10 years of its history, resulting in it working with and developing relationships with equipment finance partners.
Beginning in 2020, Channel launched its own equipment finance offering. Originations are sourced through its network of equipment finance company partners, which refer business to Channel for both working capital finance as well as for equipment finance. Channel generally funds originations that its partners are unable to finance, and its current portfolio consists mostly of the following: 1) originations in excess of risk-based portfolio concentration limits for a partner (for example obligor or industry limits), 2) originations that don’t fit a partner’s credit strategy and 3) originations from brokers. As of October, the company has funded more than $500 million in equipment contracts. While Channel began originating equipment finance contracts in 2020, the partners on this product are largely the same as Channel’s partners for small business working capital loans. Including both equipment contracts and small business working capital, Channel has financed over $2.2 billion to more than 25,000 businesses since its founding.
The discounted pool balance for the ABS transaction represents the discounted value of the projected cash flows of the contracts included in the collateral pool using a discount rate based on the interest rate on the notes plus fees and other amounts. As of Aug. 31, based on a discount rate of 9.5%, the discounted pool balance is $172.86 million (statistical pool). The discounted pool balance as of the initial cut-off date will total at least $178.30 million and is expected to have characteristics substantially similar to the statistical pool. The transaction also features a prefunding account of approximately $34.86 million that may be used to purchase additional contract value of approximately $40 million during the three month period following the closing date.
CPEF 2023-1 will issue four classes of notes. Credit enhancements include excess spread, a reserve account, overcollateralization and subordination for senior classes. The overcollateralization is subject to a target equal to 13% of the current pool balance and a floor equal to 0.5% of the initial pool balance. The reserve account is funded at 1% of the initial pool balance and is non-declining.
