Kroll Bond Rating Agency assigned preliminary ratings to four classes of notes issued by VFI ABS 2023-1, LLC (VFI 2023-1), an equipment asset-backed securities transaction. VFI 2023-1 represents the second equipment ABS transaction of Varilease Finance (VFI Corporate Finance), an independent equipment finance company based in Salt Lake City.
Varilease Finance provides funding in two phases: progress funding while equipment is being setup and delivered and then base term leases when the equipment is in place. The company’s originations reached about $244.5 million and $140 million for full year 2022 and the six months ending June 2023, respectively.
Varilease Finance finances a variety of equipment types. The majority of the company’s leases include terminal rental adjustment clauses (TRC) of several types, which typically result in most equipment being retained by the customer at the end of term. The end of lease payments are payment obligations of the lessee, therefore Varilease Finance does not have significant unguaranteed residual risk in its portfolio.
As of the Sept. 10 statistical cut-off date, the pool of equipment contracts backing VFI 2023-1 has an aggregate discounted receivable balance of $153.27 million across 51 receivables that pay monthly. The pool balance is based on the projected cash flows for each contract discounted at each contract’s discount rate. The weighted average discount rate for the statistical pool is 16.37%. The statistical pool has an average lease discounted receivable balance of $3.01 million, with a weighted average number of original scheduled payments of 41.8 months across 51 obligors. As of the initial cut-off date, the pool balance will equal at least $149.54 million and is expected to have characteristics substantially similar to the statistical pool. The total collateral may increase by up to $30.24 million through the addition of equipment contracts during the four-month prefunding period.
VFI 2023-1 will issue four classes of notes. Credit enhancement for the transaction is comprised of overcollateralization, a cash reserve, a capitalized interest account, subordination benefiting senior classes and excess spread. The overcollateralization is subject to a target equal to 5.75% of the current pool balance and a floor equal to 1.25% of the initial pool balance. The reserve account is funded at 1.5% of the initial note balance (1.46% of the pool balance as of the initial cut-off date) and is non-amortizing.
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