Moody’s assigns definitive ratings to Dell Equipment Finance Trust 2022-2 notes
New York, July 20, 2022 — Moody’s Investors Service (“Moody’s”) has assigned definitive ratings to the notes issued by Dell Equipment Finance Trust 2022-2 (DEFT 2022-2). This is the second transaction of the year for Dell Financial Services LLC (DFS), a wholly owned subsidiary of Dell Inc. (Baa3, stable). The notes are backed by a pool of small-ticket equipment loans and leases (the contracts) primarily originated by DFS, who is also the servicer and administrator for the transaction.
The complete rating actions are as follows:
Issuer: Dell Equipment Finance Trust 2022-2
Class A-1 Notes, Definitive Rating Assigned P-1 (sf)
Class A-2 Notes, Definitive Rating Assigned Aaa (sf)
Class A-3 Notes, Definitive Rating Assigned Aaa (sf)
Class B Notes, Definitive Rating Assigned Aa1 (sf)
Class C Notes, Definitive Rating Assigned Aa3 (sf)
Class D Notes, Definitive Rating Assigned A3 (sf)
RATINGS RATIONALE
The definitive rating for the Class D notes, A3 (sf), is one notch higher than its provisional rating. The higher rating on the Class D Notes is due to the lower weighted average coupon of the notes relative to the issuer provided expectation at the time of the assignment of the provisional ratings. The decrease resulted in increased excess spread, thus increasing total credit enhancement levels.
The definitive ratings and Moody’s joint loss distribution are based on the credit quality of the securitized underlying equipment contracts pool and its expected performance, the historical performance of DFS’ prior securitizations and its managed portfolio of similar collateral, DFS’ track record, experience and expertise as originator and servicer, the strength of the transaction structure including the sequential pay structure and amount of credit enhancement supporting the notes, and the legal aspects of the transaction.
Moody’s joint loss distribution constructed for the DEFT 2022-2 collateral pool has characteristics of a median expected loss of approximately 0.8% and loss at a Aaa stress of about 14.5%. To derive the joint loss distribution, Moody’s combined two independent loss distributions for the concentrated sub-pool and the granular sub-pool.
Key credit strengths of the transaction include 1) the essential use nature of the underlying equipment, 2) the high credit quality of the obligors, with 87% of the initial pool balance consisting of large or public institutions, both segments that have historically incurred very low losses in DFS’ managed portfolio, and 3) the transaction structure. Credit challenges of the transaction include 1) the high obligor concentration: while the pool consists of 7,283 contracts, the top ten obligors (which are of generally strong credit profile) constitute 26.5% of the pool balance and 2) exposure to residual value risk, with the residual values of the leased equipment representing 4.4% of the pool.
Additionally, in assigning the short-term rating to the Class A-1 notes, Moody’s considered the cash flows that we expect the underlying contracts to generate during the collection periods prior to the Class A-1 notes’ legal final maturity date.
At closing the Class A, Class B, Class C, and Class D notes benefit from 12.00%, 9.50%, 6.75% and 4.75% of hard credit enhancement, respectively. Hard credit enhancement for the notes consists of any available subordination of junior notes, a 1.00% fully funded, non-declining reserve account, and overcollateralization of 3.75% which will build to a target of 5.75% of the outstanding pool balance with a floor of 3.75% of the initial pool balance. The notes will also benefit from excess spread, estimated at around 2.5% assuming the initial yield on the underlying assets and trust expenses and note interest obligations.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was “Equipment Lease and Loan Securitizations Methodology” published in July 2022 and available at alternatively, please see the Rating Methodologies page on for a copy of this methodology.
Factors that would lead to an upgrade or downgrade of the ratings:
Up
Moody’s could upgrade the ratings on the notes if levels of credit protection are greater than necessary to protect investors against current expectations of loss. Moody’s then current expectations of loss may be better than its original expectations because of lower frequency of default by the underlying obligors or slower depreciation in the value of the equipment that secures the obligor’s promise of payment. As the primary drivers of performance, positive changes in the US macro economy and the performance of various sectors where the lessees operate could also affect the ratings.
Down
Moody’s could downgrade the notes if levels of credit protection are insufficient to protect investors against current expectations of portfolio losses. Losses could rise above Moody’s original expectations as a result of a higher number of obligor defaults or deterioration in the value of the equipment that secures the obligor’s promise of payment. Transaction performance also depends greatly on the US macro economy. Other reasons for worse-than-expected performance include poor servicing, error on the part of transaction parties, inadequate transaction governance and fraud. 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 reasons, high delinquencies or payment deferrals or a servicer disruption that impacts obligor’s payments.
REGULATORY DISCLOSURES
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 on /rating-definitions.
Further information on the representations and warranties and enforcement mechanisms available to investors are available on /documents/PBS_1336894.
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 later 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 issuer/deal page for the respective issuer on .
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 .
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 /documents/PBC_1288235.
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 .
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK . Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on .
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Ekrem Cinar
Associate Lead Analyst
Structured Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 100007
USA
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Aron Bergman
VP – Senior Credit Officer
Structured Finance Group
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Moody’s Investors Service, Inc.
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