DBRS Morningstar Assigns New Ratings to ME Funding, LLC, Series 2019-1Other
DBRS, Inc. (DBRS Morningstar) assigned new ratings to the following notes issued by ME Funding, LLC, Series 2019-1:
-- Up to $50,000,000 Series 2019-1, Class A-1 VFN (Class A-1) at BBB (high) (sf)
-- $334,162,500 Series 2019-1, Class A-2 Notes (Class A-2) at BBB (sf)
These notes are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these notes Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on January 9, 2020. In accordance with MCR’s engagement letter covering these notes, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.
As stated in its December 3, 2019, press release, “DBRS and Morningstar Credit Ratings Confirm U.S. ABS Whole Business Asset Class Coverage,” DBRS Morningstar applied MCR’s “U.S. ABS General Ratings Methodology” to assign the above-listed new ratings.
DBRS Morningstar ratings are based on the following analytical considerations:
(1) DBRS Morningstar reviewed the rating analysis performed by MCR on the transaction on or prior to the closing date.
(a) The analysis considered the legal structure of the transaction, the credit quality of ME Funding, LLC (Massage Envy); its business position in the industry; potential industry prospects; and the operation of the sponsor.
(b) The rating analysis also included an evaluation of the transaction cash flow using an analytical tool. MCR based its assumptions on the historical performance of the assets and built stress scenarios to simulate adverse business conditions and, in some cases, find the break-even business-reduction rates. The tool altered the cash flow payments according to the various covenant triggers to enforce the proper payment priority. The projected results of the Class A-1 and Class A-2 notes demonstrated that the issuer will be able to timely pay interest and ultimate principal by the legal final maturity under stressful scenarios at the assigned rating level.
(2) DBRS Morningstar notes that a legal analysis, including but not limited to legal opinions and various transaction documents, was performed by MCR, which engaged external counsel as part of its process of assigning new ratings to the transaction on or prior to the closing date. For the purpose of assigning new ratings to the transaction, DBRS Morningstar did not perform additional legal analysis unless otherwise indicated in this press release.
(3) DBRS Morningstar did not perform additional operational risk assessments; its analysis relied on MCR’s operational risk assessments performed when assigning ratings to this transaction on or prior to the closing date.
(4) DBRS Morningstar reviewed key transaction performance indicators reported in periodic remittance reports since the transaction’s closing date.
This transaction is secured by substantially all of Massage Envy’s revenue-generating assets, including existing and future franchise agreements, product referral fees, net franchise fees, intellectual property (including information technology), existing and future training fees, certain transaction accounts, and the pledge of the equity interests in the issuer and its subsidiaries. The cash flow for the securitization comes primarily from the royalties and other franchise-related fees generated by each clinic.
CASH FLOW ANALYSIS
The key assumptions in the cash flow analysis include growth rate of the clinics, average unit volume (AUV) growth, royalty rates, franchise renewals and terminations, and potential revenue reduction from certain factors (e.g., closure of clinics run by top franchisees). Some of the variable assumptions such as management fees and the related aggregate amount cap are as outlined in the offering memorandum’s priority of payments.
DBRS Morningstar considered eight stress scenarios derived for the initial ratings that tested the Class A-1 and Class A-2 notes and examined sensitivities to the stress scenarios. The Class A-1 notes have an anticipated repayment date in July 2023 and offer one one-year extension option subject to certain conditions being met. The Class A-2 notes have an anticipated repayment date in July 2024. Each of the scenarios used the assumption that the notes would not be refinanced and that the transaction would continue after the anticipated repayment date. Each scenario with the annual AUV-reduction rates assumed the decline would continue after the anticipated repayment date. The various scenarios stressed either annual AUV decline or initial revenue decline and results were compared across different scenarios.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is MCR’s U.S. ABS General Ratings Methodology, which can be found on dbrs.com under Methodologies & Criteria.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.
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