DBRS Morningstar Finalized Provisional Ratings on GMF Canada Leasing Trust's Asset-Backed Notes, Series 2021-1

DBRS Limited (DBRS Morningstar) finalized the following provisional ratings on the Class A-1 Asset-Backed Notes, Series 2021-1 (Class A-1 Notes); Class A-2 Asset-Backed Notes, Series 2021-1 (Class A-2 Notes); Class A-3 Asset-Backed Notes, Series 2021-1 (Class A-3 Notes; together with the Classes A-1 and A-2 Notes, the Class A Notes); Class B Asset-Backed Notes, Series 2021-1 (Class B Notes); and Class C Asset-Backed Notes, Series 2021-1 (Class C Notes; together with the Class A Notes and the Class B Notes, the Offered Notes). The Subordinated Asset-Backed Notes, Series 2021-1 (Subordinated Trust Note; together with the Offered Notes, the 2021-1 Trust Notes) were retained by the Issuer and are not rated. The 2021-1 Trust Notes were issued by GMF Canada Leasing Trust on the Closing Date:

-- Class A-1 Notes at AAA (sf)
-- Class A-2 Notes at AAA (sf)
-- Class A-3 Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (sf)

DBRS Morningstar considered additional analyses and, where appropriate, additional adjustments to expected performance as a result of the global efforts to contain the spread of the Coronavirus Disease (COVID-19). DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020. The scenarios were updated on March 17, 2021, and reflect the updated scenarios in DBRS Morningstar’s rating analysis. For details, see https://www.dbrsmorningstar.com/research/375376. DBRS Morningstar’s analysis considered impacts consistent with the moderate scenario in the referenced commentary.

The 2021-1 Trust Notes will be supported by Senior and Subordinated Borrower Notes (together, the 2021-1 Borrower Notes), which are supported by a first-priority security interest in a portfolio of closed-end lease contracts of new automobiles, light-duty trucks, and utility vehicles (the Designated Pool). The lease contracts were originated through authorized General Motors dealers in Canada.

The collections from the Designated Pool will be used to repay the 2021-1 Borrower Notes, and the proceeds from the 2021-1 Borrower Notes will be used to repay the 2021-1 Trust Notes. No payments of interest or principal will be made on the Subordinated Borrower Note or the Subordinated Trust Note until all principal and interest on the Senior Borrower Note and the Offered Notes has been paid in full. The Subordinated Borrower Note is fully subordinated to the Senior Borrower Note, and the Subordinated Trust Note is fully subordinated to the Offered Notes. Collections from the Designated Pool generally include scheduled monthly and biweekly lease payments (including residual value payments in the case of customer-retained vehicles) as well as proceeds from vehicle sales, either at the end of the lease term or earlier in the case of prepayments and defaults. Proceeds from excess mileage and wear-and-tear charges, if any, also form part of the collections from the Designated Pool.

The Offered Notes will be repaid in sequential order with the Class A-1 Notes repaid first, followed by the repayment of the Class A-2 Notes, Class A-3 Notes, Class B Notes, and finally the Class C Notes. The assigned ratings are based on the full repayment of the Offered Notes by their respective Final Scheduled Payment Dates.

The ratings incorporate the following considerations:

(1) High level of Credit Enhancement (CE)
Initially, hard CE of 19.55%, 15.70%, and 12.15% (as a percentage of Initial Securitization Value (SV)) is available to the Class A Notes, Class B Notes, and Class C Notes, respectively, and consists of a cash reserve of 0.50%, overcollateralization (OC) of 7.00%, and subordination of 12.05%, 8.20%, and 4.65% to the Class A Notes, the Class B Notes, and the Class C Notes, respectively. By using excess monthly collections to repay the outstanding principal of the Offered Notes, the OC amount will build to 8.75% of SV at closing. No cash will be released to the Issuer until the target OC amount is met, which is expected by month five, based on scheduled payments (assuming no losses, delinquencies, or prepayments). In addition,4.74% (annualized) of excess spread, net of the cost of funds of the Offered Notes and monthly servicing fees, is available to offset any collection shortfalls on a monthly basis.

(2) Non-amortizing CE
The requirement to maintain the cash reserve account and OC amounts at their target levels provides a deleveraging structure as principal on the Offered Notes is repaid. Residual values represent the largest risk in closed-end auto lease securitizations, and exposure to such risk is at its highest at the maturities of the lease contracts. Non-amortizing CE ensures that an increasing level of protection is available to offset potential vehicle disposition losses.

(3) Conservative advance rate on residual values
The Base Residual Value of each vehicle in the pool is determined by using the lowest of the contract residual value, Automotive Lease Guide (ALG) value at lease inception, and updated ALG value as of ALG's March/April 2021 edition. The reference to the ALG values in setting the Base Residual Value eliminates the funding of potential embedded losses (negative equity in relation to residual values) on the Closing Date, effectively reducing residual value risk in the Designated Pool. The ALG values at origination and updated ALG values have been provided for each of the vehicles in the Designated Pool. As ALG projects its residual values primarily based on auction proceeds, ALG values represent an independent and conservative estimate of the expected wholesale value of the vehicles in the portfolio at maturity.

(4) Securitization experience and parent strength
GMFC has demonstrated its ability to manage successful private securitization transactions supported by auto leases in Canada. GM and its related entities were downgraded to BBB with a Negative trend by DBRS Morningstar on June 22, 2020. The rating action reflected the headwinds caused by the coronavirus pandemic, resulting in a deterioration in GM's financial risk assessment. DBRS Morningstar noted that GM proactively took several meaningful actions to support its cash position and boost liquidity, including suspending share repurchases and dividend payments, drawing from its available credit facilities, and issuing unsecured notes. Notwithstanding the downgrade, GM Financial’s earnings generation capabilities remain solid and its risk profile continues to be sound, with high levels of prime credit quality loans and leases and conservative underwriting standards. As a subsidiary of GM Financial, GMFC benefits from its parent’s strong financial standing and global presence, allowing it to leverage GM Financial’s experience and expertise to ensure sound and consistent underwriting standards and efficient servicing operations.

(5) Strong obligor profile
The obligors of the underlying lease contracts represent high-credit quality customers, evidenced by the weighted-average credit bureau score of 780. Approximately 65% of the Designated Pool was originated after the outbreak of the pandemic in March 2020. The performance of these contracts is expected to be less affected by the pandemic, as the contracts were likely originated to customers who were less affected. However, as the pace of recovery from the pandemic remains uncertain, DBRS Morningstar applied additional conservatism in its stress testing when setting its base-case cumulative net loss for the Designated Pool. The strong credit profile is also supported by low credit losses, consistently low delinquency levels of GMFC's owned and managed portfolio, and 12 months of seasoning. In addition, contract term pool mix results in lower expected losses as 24- and 36-month terms (52.1% of the pool) typically have lower credit losses than 48- and 60-month contracts.

The DBRS Morningstar cash flow analysis includes a conservative base-case cumulative net loss estimate. Available CE is able to withstand the stresses at levels commensurate with the assigned ratings.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Auto Retail Loan and Lease Securitizations (October 26, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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