Fitch Rates AMAG Leasing AG Conditional Pass-Through Auto Covered Bond ‘AAA(EXP)’

Fitch Ratings has assigned AMAG Leasing AG's (ALAG) first auto covered bonds an expected rating of 'AAA(EXP)' with a Stable Outlook. The programme is the first covered bond backed by auto lease receivables rated by Fitch, and is based on similar issuance templates as other Swiss covered bonds. The bonds will be backed by a cover pool of Swiss auto lease receivables (including residual value (RV)) and will have a conditional pass-through feature, with a maturity extension of seven years, longer than the maximum tenor of five years for the eligible assets. Fitch has assumed for its analysis that the first issue is denominated in Swiss francs at fixed rates with a 3.25-year maturity. The covered bonds will be issued under a contractual framework under Swiss law. They will constitute senior unsecured obligations of ALAG, guaranteed by AMAG Leasing Auto Covered Bond AG, a special purpose entity that will be granted security of the cover assets. The assignment of the final rating is contingent upon receipt of final documents and legal opinions conforming to the information already received. Key rating drivers The 'AAA(EXP)' conditional pass-through auto covered bonds rating is notched up from ALAG's private Long-Term Issuer Default Rating (IDR), as the auto covered bonds benefit from liquidity protection in the form of a seven-year conditional pass-through maturity extension and a dedicated liquidity reserve that covers three months of senior costs and interest payments, and high recoveries given default. The expected rating is based on the asset percentage (AP) of 79.0% that will be applied in the contractual asset coverage test (ACT) at inception. This is lower than Fitch's 'AAA'(EXP) break-even AP of 80.5% which is predominantly driven by the credit quality of the cover pool, notably the RV risk. The buffer against a downgrade of ALAG's IDR supports a Stable Outlook on the covered bond rating. ALAG has originated several ABS transactions backed by assets similar to those in the cover pool, all of them rated by Fitch. Uplifts ALAG's auto covered bond programme is set up on a contractual basis, and its covered bonds are issued under the SPE guarantor template. Contractual provisions present in the programme include mandatory over-collateralisation (OC), rules in place to disregard delinquent leases in the ACT, as well as the existence and role of an independent asset monitor. Fitch therefore believes the risk of under-collateralisation is low. However, as ALAG is not directly subject to prudential regulation by FINMA, and covered bonds issued under the programme would not be subject to any bank resolution regime/ bail-in tool. As such, we do not expect resolution to be applied in case of a default of ALAG. The PCU reflects the strength of the liquidity protection under the conditional pass-through liability profile with a seven-year principal maturity extension that goes beyond the maximum tenor of the cover assets (five years). The programme also includes interest-protection provisions, a liquidity reserve fund held at the SPE's account bank, that covers the higher of (i) three months' interest payments on the outstanding covered bonds and senior expenses and (ii) accrued interest and senior expenses. None of the other factors influencing payment continuity analysed by Fitch represents a high risk, which in our view would otherwise be reflected in a PCU reduction. Fitch has assigned a recovery uplift to the covered bonds. This reflects our view that, in the event of a covered bonds default, the cover pool, which comprises standard Swiss auto lease receivables, should allow for outstanding recoveries on the covered bond. The recovery uplift takes into account that no material downside risk to recovery expectation have been identified by Fitch. The covered bond issue will be in Swiss francs, the same currency as the assets. 'AAA(EXP)' Break-even AP The 'AAA(EXP)' break-even AP of 80.5%, corresponding to a minimum OC of 24.2%, supports timely payments on the bonds in a stress scenario and recoveries given default to support a 'AAA'(EXP) rating under Fitch's criteria. The credit loss component of 26.9% is the main driver of the 'AAA' break-even OC. The credit loss component represents the RV loss, the credit loss and upfront losses. The ALM loss, which in this programme reduces the break-even OC, reflects the excess spread from the comparatively higher interest earned on the assets than that of the liabilities. OC Protection In its analysis, Fitch gives credit to the AP used in the ACT, to be disclosed in the investor report, which is 79.0% at inception. This provides protection greater than Fitch's 'AAA' break-even AP of 80.5%. Cover Pool Credit Quality The provisional portfolio consists of auto lease receivables originated in Switzerland by ALAG and granted to private and commercial customers. The lease contracts do not include any other product or services such as insurance or maintenance. All leases include an RV component. The provisional cover pool is randomly selected based on eligible, non-encumbered auto-lease receivables originated by ALAG. Given the nature of the assets, Fitch analysed the portfolio using the framework applicable in its "Consumer ABS Rating Criteria" and "Consumer ABS Rating Criteria - Residual Value Addendum". The auto lease receivables in the pool include RV at contract maturity. As no covenant will be set, the RV portion can increase substantially, due to the effect of portfolio seasoning and the characteristics of new assets being added to the cover pool, which will be driven by any changes to ALAG's RV-setting policy. We assume an increase of the RV up to 72% (from 61% in the preliminary portfolio). Car dealers are bound to pay the contractual RV to ALAG, but a dealer default or customer prepayments could expose ALAG to the risk of RV losses if used-vehicle prices decline. Fitch assumes market value losses from RV and prepayments of 22.2% when calculating the 'AAA(EXP)' break-even AP. In its analysis, Fitch used the multi-asset cash flow model (MACFM), which constitutes a variation to the covered bonds rating criteria, to model the RV risk (see Criteria Variation below). No rating impact is linked to this variation. Credit losses on originator's book have been limited, and have not been affected by the coronavirus pandemic. Macro-economic conditions in Switzerland remain strong, and its 2.5% GDP contraction in 2020 was much less pronounced than in other European countries. Fitch has assigned a weighted average (WA) default base case of 1.2% to the stressed cover pool, after taking into account a potential migration to more stressful characteristics given the absence of covenants. Fitch accounted for a possible increase in defaults in a stressed environment by assigning a higher-than-range WA multiple of 7.1x at 'AAA'. Overall losses from the instalment portion of the pool are 4.9% at 'AAA'. Rating sensitivities Factors that could, individually or collectively, lead to positive rating action/upgrade: The covered bonds' rating is 'AAA(EXP)' is the highest level on Fitch's scale and therefore cannot be upgraded. Factors that could, individually or collectively, lead to negative rating action/downgrade: The covered bonds' 'AAA(EXP)' rating could be downgraded if the AP Fitch relies on increases to above the 'AAA' break-even AP of 80.5%. The covered bonds' 'AAA(EXP)' rating could also be downgraded if ALAG is downgraded below a certain level. The break-even AP to support the 'AAA(EXP)' rating may decrease if ALAG is downgraded but this would depend on the combination of timely payment rating level and recovery uplift used to support the rating. Best/worse case rating scenario International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. Criteria variation Fitch applied a variation to the Covered Bond Rating Criteria, and used the MACFM as opposed to the covered bond cash flow model in its cash flow analysis. Although conditional pass-through programmes should yield the same results in both models, MACFM was used to better capture RV risk, which is a key risk of the programme. This variation has no rating impact on the programme. References for substantially material source cited as key driver of rating The principal sources of information used in the analysis are described in the Applicable Criteria. Public ratings with credit linkage to other ratings The covered bonds' rating is driven by the credit risk of ALAG as measured by its Long-Term IDR. ESG considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.

Fitch Rates Arval ‘A’; Negative Outlook

Fitch Ratings has assigned Arval Service Lease SA a Long-Term Issuer Default Rating (IDR) of 'A', Short-Term IDR of 'F1' and Support Rating of '1'. The Outlook on the Long-Term IDR is Negative. Fitch also assigned Arval's upcoming senior unsecured notes to be issued under its EMTN programme an 'A(EXP)' long-term rating, in line with its Long-Term IDR, reflecting our expectations of average recoveries for the notes. The assignment of a final rating is contingent on the receipt of final documents conforming to the information already received. Arval is domiciled in France and is 100% owned by BNP Paribas Fortis SA/NV (A+/Negative/F1), itself a wholly-owned subsidiary of BNP Paribas S.A. (BNPP; A+/Negative/F1). Arval is a full-service leasing company with a principal focus on car leasing for corporates and SMEs, and to a lesser extent for individuals. KEY RATING DRIVERS IDRS AND SUPPORT RATING Arval's Long- and Short-Term IDRs are based on institutional support from BNPP. The Negative Outlook on Arval's Long-Term IDR mirrors that on BNPP's. The Negative Outlook on BNPP's Long-Term IDR reflects downside risks to our baseline economic scenario, as pressure on BNPP's ratings would substantially increase if the downturn resulting from the coronavirus crisis is deeper or more prolonged than we currently expect. Arval's Long-Term IDR is rated one notch below that of Arval's ultimate parent, BNPP and is driven by Fitch's assessment of institutional support from BNPP being available for Arval given its strategic importance. While many of Arval's standalone credit factors such as franchise, business model and risk appetite are comparable with its industry peers, Fitch's view of Arval's standalone creditworthiness is constrained by the company's high leverage (in the context of BNPP's centralised capital management). As a result, Fitch's assessment of Arval's standalone credit profile is materially lower than its support-driven ratings. Arval's Long-Term IDR is notched once from BNPP's, primarily driven by Fitch's assessment of the subsidiary's role in the group. Fitch sees Arval as strategically important to BNPP, given its recurring and relevant contribution to group revenue and pre-tax profit. However, the notching also recognises that Arval's offering is complementary to core banking and other financial services offered by BNPP, such as retail banking, consumer finance or corporate and institutional banking (CIB). It also factors in Arval's leading and autonomous franchise as a full-service fleet lessor. Arval has fairly strong synergies with BNPP, as highlighted by the significant share of revenue generated with clients from other group entities, including CIB and retail banking operations in France, Belgium or Italy. Fitch views the integration between Arval and BNPP as strong, as Arval is almost exclusively reliant on intragroup funding and its capitalisation profile is fully embedded into BNPP's capital planning and management. The fact that Arval shares some of the group's functions notably for legal, compliance and IT systems also underscores its integration within BNPP. Together these factors imply a high likelihood of support by BNPP, as a default on any of Arval's external debt would most likely imply significant reputational damage for BNPP. In view of this, extraordinary capital or liquidity support, if ever required, would be highly likely, in Fitch's opinion, as reflected in Arval's Support Rating of '1'. Arval's standalone profile is constrained by the company's high leverage with a capitalisation and leverage score under Fitch's finance and leasing company criteria in the 'b and below' rating category. However, Fitch also notes that Arval's current capitalisation reflects BNPP's centralised capital management and close integration into BNPP in terms of capital management and funding. While Arval's capital market access is unproven to date, the contemplated notes issuance should support improved funding flexibility. Positively, Fitch notes that beyond capitalisation & leverage and, to a lesser extent, funding, liquidity & coverage, all other qualitative and quantitative standalone assessment factors compare well with investment-grade rated European and US fleet lessor peers. Arval's 'F1' Short-Term IDR is equalised with BNPP's and corresponds to the lower of the two options mapping to a 'A' Long-Term IDR. BNPP's Short-Term IDR is driven by our assessment of the group's funding and liquidity profile at 'a+', which is consistent with an 'F1' Short-Term IDR. SENIOR UNSECURED NOTES We rate Arval's upcoming senior unsecured notes at 'A(EXP)', in line with its Long-Term IDR, reflecting our expectations of average recoveries for the notes. The expected issue rating is two notches below BNPP's senior preferred debt ratings, which benefit from an uplift above the bank's IDRs. There is no assurance that Arval's external senior unsecured creditors would benefit from the protection offered by the buffers of subordinated and senior non-preferred debt available at BNPP in case of resolution or failure of the group. In addition, according to Arval and BNPP, there is no intention to issue senior non-preferred debt instruments within Arval's capital structure, which would otherwise increase the level of protection available to protect its external senior unsecured creditors in case of failure. RATING SENSITIVITIES Factors that could, individually or collectively, lead to negative rating action/downgrade: Arval's IDRs and senior debt ratings will move in tandem with BNPP's and could be downgraded if BNPP's IDRs are downgraded. Arval's IDRs, Support Rating and debt ratings are also sensitive to changes in the subsidiary's integration within and importance to the BNPP group and could be downgraded if these diminish. Examples of this could be one or more of the following; a partial sale of Arval to third party investors, a more independent management structure and strategic direction, although Fitch does not currently expect this. Factors that could, individually or collectively, lead to positive rating action/upgrade: Fitch could upgrade Arval's Long-Term IDR and senior unsecured debt ratings and equalise them with BNPP's Long-Term IDR if its strategic importance for the group increased to the point where we would view Arval's product offering as core among BNPP's very diverse business lines. Fitch believes this could happen for instance if Arval becomes a material contributor to group revenue and profits and generates very high synergies with BNPP's core banking businesses, while BNPP would retain full control over Arval. Arval's ratings could be upgraded if BNPP's IDRs are upgraded, which is unlikely in the short term, given the Negative Outlook on the Long-Term IDR of the ultimate parent. ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. BEST/WORST CASE RATING SCENARIO International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS Arval's ratings are driven by institutional support available from BNP Paribas S.A.

Switch to Cash Accounting Confirms Pressures on Aircraft Lessors

The emerging trend of aircraft lessors switching a portion of their lease exposure to cash accounting from accrual accounting underscores the credit and liquidity risks facing the sector, Fitch Ratings says. Cash accounting, in and of itself, is not a credit concern, but is an indicator of increasing pressure on underlying airline lessees and the reduced likelihood of collecting on lease payments. Overall cash collections from lessees on cash accounting tend to be significantly lower than those utilizing accrual accounting. As of 3Q20, the percentages of fleet net book value that had been switched to cash from accrual accounting were 15% for AerCap (‘BBB-’/Outlook Negative), 10% for Avolon (‘BBB-’/Outlook Negative) and 6.6% for Air Lease Corp. (‘BBB’/Outlook Negative). Fitch believes rated lessors have sufficient headroom to withstand the non-payment of the portion of fleets on cash accounting, as the agency’s base and downside cases for default of 17% and 34%, respectively, already build in conservative assumptions around airline performance in a stressed scenario. However, a sizable increase of cash-based accounting may indicate a meaningful decline in future cash flow generation. The switch to cash-based accounting is usually preceded by a drawdown of security deposits, with lessors switching accounting methodologies when lease receivables exceed security packages. Fitch anticipates higher impairment risk for aircraft underlying leases subject to cash accounting, as lessors have typically depleted cash deposits from the lessees prior to switching the accounting standard, thereby lowering possible recoveries on aircraft if leases are rejected during a lessee’s restructuring. Most of the leases that transitioned to cash accounting relate to airlines which were granted lease deferrals earlier in 2020 amid the fallout from the pandemic, and subsequently became uncollectable due to insolvency or restructuring of the airlines. The switch to cash accounting is generally triggered when the lessor has determined that the collectability of lease payments can no longer be reasonably assured or when lease receivables exceed lessors’ security packages. In addition, lessors typically switch to cash accounting for lease contracts under which the airline pays the lessor for actual hours used at a specific rate (also known as “power by the hour”) instead of the monthly lease payment due to the unpredictability of the associated cash flows. Power by the hour arrangements are concessions typically granted by aircraft lessors to stressed airlines.

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