Fitch Affirms Chailease Group's Ratings; Outlook Stable

Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Taiwan-based Chailease Holding Company Limited at 'BBB-'.

Fitch has also affirmed the Long-Term IDR of Chailease Holding's Taiwan operating subsidiary, Chailease Finance Co, Ltd., at 'BBB'.

The National Long-Term Ratings on Chailease Finance, and its two key subsidiaries - Fina Finance & Trading Co., Ltd. and Chailease Consumer Finance Co., Ltd. (CCF) - have also been affirmed at 'A+(twn). The Outlook on all the long-term ratings is Stable.

The National Ratings on Chailease Finance and Fina Finance are assigned on the basis of the common rating approach, while CCF's National Rating is based on institutional support under Fitch's criteria. Fitch has also affirmed the ratings on the medium-term note (MTN) programme and senior unsecured notes issued by Chailease International Financial Leasing Corp. (Chailease International Finance) and the senior unsecured notes issued by Chailease Finance.

Key Rating Drivers

Chailease Holding

Chailease Holding's 'BBB-' Long-Term IDR is based on its consolidated credit profile, with Taiwan accounting for half of its consolidated leasing portfolio at end-1H22, mainland China making up 34% and south-east Asia 14%. Its IDR reflects the strength of its longstanding franchise in Taiwan's SME financing sector, expanding mainland China business and developing south-east Asian franchise, as well as its sound underwriting and management quality that underpins its consistent business model.

The rating also considers the risk associated with the group's appetite for growth in markets outside Taiwan, and the increasing complex cross-border business, which could introduce operational and funding challenges from exposures to emerging markets that have weaker operating environments for non-bank financial institutions.

Chailease Holding maintained broadly stable financial performance in 2021 and 1H22, despite pandemic-related challenges, particularly from its exposures to emerging markets. Pressure on asset quality in south-east Asia eased in 1H22 with improving impaired-loan ratios, while growth in mainland China slowed due to weaker economic activities amid continued Covid-19 restrictions.

The group's funding profile outside Taiwan is less established. Its reliance on short-term wholesale funding can heighten refinancing risks, especially in less-developed markets where leasing companies may have difficulty accessing stable funding during market stress. The group manages subsidiaries' liquidity on an individual basis, reflecting the different product mix and liquidity environment in each market.

In China, it has adopted a conservative funding and liquidity strategy that requires strict maturity matching between assets and liabilities and a low leverage, measured by debt/tangible equity ratio, of below 3.0x. In south-east Asia, except for Thailand, the group relies heavily on bank borrowings for funding, with some of these borrowings depending on guarantees from Chailease Holding.

Chailease Holding's consolidated leverage was 4.3x at end-1H22 after removing the effect of the dividend payout related to the 2021 earnings. We expect the group to maintain its consolidated leverage ratio at below 5x, supported by its resilient profitability and effective capital management.

Chailease Finance

Chailease Finance's 'BBB' IDR is underpinned by its strong franchise in Taiwan, resilient business model in SME financings, and sound financial performance. The company has demonstrated pricing strength, supported by an effective management strategy and competitive market position. Its underwriting, risk control and risk pricing have been effective in managing the cyclicality and vulnerability inherent in its SME-focused business model through economic cycles. These strengths are counterbalanced by the company's appetite for growth and reliance on short-term wholesale funding.

Chailease Finance's leverage ratio was 4.7x at end-1H22 after removing the effect of the 2021 dividend payout. Its consolidated assets increased strongly by 23% on average in 2018-1H22, but the company was able to sustain a stable capital and leverage profile, with its consolidated debt to tangible equity ratio at below 5.5x, underpinned by healthy profitability and pre-emptive capital infusion. The company's pre-tax return on average assets was stable at above 4% during 2018-1H22, thanks to contained credit cost and strengthened operating efficiency.

Fitch views the 1.9% reserve to total loans ratio at end-1H22 as adequate relative to Chailease Finance's impaired loan ratio of 2.2%, considering a steady recovery rate at about 70%-80%. The company is operating with a negative short-term funding gap, but its cash and unused committed credit lines can fully cover the gap for the next 12 months.

Fina and CCF

The National Long-Term Ratings on Fina and CCF are aligned with that of Chailease Finance. Fina accounted for 36% of Chailease Finance's consolidated assets at end-1H22, while CCF accounted for 8%. The two subsidiaries are highly integrated with Chailease Finance and are managed under a consolidated basis by the same management team. Both Fina and CCF maintained stable asset quality in 2021 and 1H22 with adequate leverage usage. Their borrowings are all unsecured. Chailease Finance guaranteed 7.5% of CCF's borrowings at end-1H22.

The Stable Outlook on all the long-term ratings reflects Fitch's expectation that the operating environment in Taiwan and China will be steady, and Chailease group's credit profile will remain stable in the near to medium term.

Senior Debt Ratings

The senior unsecured notes issued by Chailease International Finance are guaranteed by Chailease Holding. The notes are rated at the same level as Chailease Holding's Long-Term IDR as the debt constitutes direct, unconditional and unsecured obligations of Chailease Holding.

Chailease Finance's senior unsecured debt is rated at the same level as its National Long-Term Rating, as the debt constitutes its direct, unconditional and unsecured obligations.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Chailease Holding

Chailease Holding's IDR would be downgraded if its consolidated debt / tangible equity ratio rose and is sustained significantly above 5x, which could arise from the group's aggressive regional expansion without commensurate capital enhancement or a material unexpected deterioration in its asset quality and profitability across the group.

Deterioration in the credit strength of the group's Taiwanese operations could also pressure its ratings.

The IDR is also sensitive to greater exposure to weaker operating environments, particularly through aggressive expansion to other emerging markets, such as China or south-east Asia.

Signs of weaker sentiment towards the group that reduce the group's ability to access funding, which may arise from contagion effects from its regional businesses, would also lead to negative rating action.

Chailease Finance, Fina Finance and CCF

The National Ratings on Chailease Finance and Fina Finance will move in tandem under a common ratings approach.

Chailease Finance's IDRs and National Ratings would be downgraded if its debt/tangible equity ratio rises and is sustain at above 5.5x as a result of excessive risk-taking without commensurate capital enhancement.

Signs of deteriorating sentiments towards the company that reduce its ability to access funding in Taiwan, which may be caused by the uncertainties and contagion effects from the group's overseas businesses, would also lead to negative rating action.

Deterioration in the company's competitive position or the group's financial strength, or any meaningful compromise in underwriting discipline could also pressure the ratings.

A decline in Chailease Finance's propensity to support CCF could lead to a negative action on CCF's National Rating. This could include ownership dilution or any sign of weakening in integration and management control.

Senior Debt Ratings

The rating on the senior unsecured debt issued by Chailease International Finance and guaranteed by Chailease Holding will be downgraded if Chailease Holding's Long-Term IDR is downgraded.

Chailease Finance's senior unsecured debt will be downgraded if its National Long-Term Rating is downgraded.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Chailease Holding

Fitch may consider upgrading Chailease Holding if the company manages to moderate its risk appetite, demonstrates effective underwriting and risk control along with an improved funding and liquidity profile in its exposure in emerging markets.

Positive rating action could also come from an improvement in the company's scale and competitive position in China, supported by a stable operating environment.

Chailease Finance, Fina Finance and CCF

The National Ratings on Chailease Finance and Fina Finance will move together under a common ratings approach.

An upgrade of Chailease Finance's IDR is less likely in the near term as its credit profile is constrained by a small absolute size compared with higher-rated peers. However, over the medium term, the company's ratings would benefit from strengthening in the franchise, lower leverage, and better funding and liquidity management.

CCF's National Rating will only be upgraded if Chailease Finance's National Long-Term Rating is upgraded assuming the close relationship between the two remains intact.

Senior Debt Ratings

The rating on the senior unsecured debt issued by Chailease International Finance and guaranteed by Chailease Holding will be upgraded if Chailease Holding's Long-Term IDR is upgraded.

Chailease Finance's senior unsecured debt will be upgraded if its National Long-Term Rating is upgraded.

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. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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

CCF's National Rating is driven by institutional support from Chailease Finance.

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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONS

14

Rating Action Commentary

Fitch Rates Master Credit Card Trust II, Series 2022-4 and 2022-5

Thu 20 Oct, 2022 - 5:34 pm ET

Fitch Ratings - New York - 20 Oct 2022: Fitch Ratings has assigned ratings to Master Credit Card Trust II (MCCT II) 2022-4 and 2022-5's U.S.-dollar, floating-rate class A, and fixed-rate class B and C notes. The transactions are securitizations of credit card receivables and are sponsored by the Bank of Montreal (BMO; AA-/F1+/Negative). The Rating Outlooks for all classes are Stable.

RATING ACTIONS

Entity / Debt

Rating

Prior

Master Credit Card Trust II, Series 2022-5

A

LT

AAAsf

New Rating

AAA(EXP)sf

B

LT

AAsf

New Rating

AA(EXP)sf

C

LT

BBBsf

New Rating

BBB(EXP)sf

Master Credit Card Trust II, Series 2022-4

A

LT

AAAsf

New Rating

AAA(EXP)sf

B

LT

AAsf

New Rating

AA(EXP)sf

C

LT

BBBsf

New Rating

BBB(EXP)sf

Page

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VIEW ADDITIONAL RATING DETAILS

KEY RATING DRIVERS

Receivables' Performance and Collateral Characteristics: The underlying collateral characteristics play a vital role in the performance of a credit card ABS transaction. Fitch closely examines such collateral characteristics as credit quality, seasoning, geographic concentration, delinquencies and utilization rate on the cards. MCCT's performance continued to be strong through the August 2022 collection period and remained well within steady state assumptions for the trust despite the negative economic impacts from the coronavirus pandemic.

As of the August 2022 collection period, net charge-offs remained low at 2.33% but up from 1.78% one year ago. 60+day delinquencies remained low at 0.94%. The monthly payment rate (MPR) remained high at 62.00%, near a recent record high for the trust at 64.54% in May 2022.

Credit enhancement (CE) continues to be sufficient with robust loss multiples that are in line with the current ratings. The Stable Rating Outlook on the notes reflects Fitch's expectation that performance will remain supportive of these ratings.

Originator and Servicer Quality: BMO is an effective servicer, evidenced by historical delinquency and loss performance of MCCT II's receivables. Deterioration in the credit quality of BMO may affect the performance of the collateral pool backing the series 2022-4 and 2022-5 notes.

Counterparty Risk: Fitch's ratings of the notes depend on the financial strength of certain counterparties. Fitch believes this risk is mitigated as evidenced by the ratings of the applicable counterparties to the transaction.

Interest Rate Risk: Interest rate risk is mitigated by the available CE. CE supporting the class A notes is 5.50%, derived from 2.00% subordination of class B notes and 3.50% subordination of class C notes, excess spread and a cash collateral account (CCA) to be funded by the trust when excess spread falls below 4.00%. Class B notes will benefit from 3.50% CE derived through the subordination of class C notes, excess spread and the CCA. Class C notes' CE is derived from excess spread and the CCA. The CCA will not be funded at closing.

Fitch analyzed characteristics of the underlying collateral to better assess overall asset performance. This supplements Fitch's analysis of the originator's historical data when determining the following steady state performance assumptions and stresses:

Steady State:

Annualized Charge-offs - 6.00%;

MPR - 42.00%;

Annualized Gross Yield - 20.00%;

Purchase Rate - 100.00%.

Rating Level Stresses (for AAAsf, AAsf and BBBsf, respectively):

Charge-offs - 4.50x/3.75x/2.25x;

Payment Rate - 65.00%/59.80%/46.80%;

Gross Yield - 35.00%/30.00%/20.00%;

Purchase Rate - 50.00%/45.00%/35.00%.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Series 2022-4

Rating Sensitivity to increased charge-off rate:

Current ratings for class A, class B, and class C notes (Steady state 6.00%): 'AAAsf'/'AAsf'/'BBBsf', respectively;

Increase base case by 25%: 'AA+sf'/'AA-sf/'BBBsf';

Increase base case by 50%: 'AAsf'/'A+sf'/'BBB-sf';

Increase base case by 75%: 'AA-sf'/'Asf'/'BB+sf'.

Rating Sensitivity to reduced purchase rate:

Current ratings for class A (100% base assumption): 'AAAsf'/'AAsf'/'BBBsf';

Reduce purchase rate by 50%: 'AAAsf'/'AAsf'/'BBBsf';

Reduce purchase rate by 75%:'AA+sf'/'AA-sf'/'BBBsf';

Reduce purchase rate by 100%: 'A+sf'/'A-sf'/'BBB-sf'.

Rating Sensitivity to increased charge-off rate and reduced MPR:

Current ratings for class A (charge-off steady state: 6.00%; MPR steady state: 42.00%): 'AAAsf'/'AAsf'/'BBBsf';

Increase charge-off rate by 25% and reduce MPR by 15%: 'AA+sf'/'A+sf'/'BBBsf';

Increase charge-off rate by 50% and reduce MPR by 25%: 'A+sf'/'A-sf'/'BB+sf';

Increase charge-off rate by 75% and reduce MPR by 35%: 'A-sf'/'BBBsf'/'BB-sf'.

Series 2022-5

Rating Sensitivity to increased charge-off rate:

Current ratings for class A, class B, and class C notes (Steady state 6.00%): 'AAAsf'/'AAsf'/'BBBsf', respectively;

Increase base case by 25%: 'AA+sf'/'AA-sf/'BBBsf';

Increase base case by 50%: 'AAsf'/'A+sf'/'BBB-sf';

Increase base case by 75%: 'AA-sf'/'A-sf'/'BB+sf'.

Rating Sensitivity to reduced purchase rate:

Current ratings for class A (100% base assumption): 'AAAsf'/'AAsf'/'BBBsf';

Reduce purchase rate by 50%: 'AAAsf'/'AAsf'/'BBBsf';

Reduce purchase rate by 75%:'AA+sf'/'AA-sf'/'BBBsf';

Reduce purchase rate by 100%: 'A+sf'/'A-sf'/'BBB-sf'.

Rating Sensitivity to increased charge-off rate and reduced MPR:

Current ratings for class A (charge-off steady state: 6.00%; MPR steady state: 42.00%): 'AAAsf'/'AAsf'/'BBBsf';

Increase charge-off rate by 25% and reduce MPR by 15%: 'AAsf'/'A+sf'/'BBBsf';

Increase charge-off rate by 50% and reduce MPR by 25%: 'A+sf'/'A-sf'/'BB+sf';

Increase charge-off rate by 75% and reduce MPR by 35%: 'A-sf'/'BBBsf'/'BB-sf'.

Fitch has revised its global economic outlook forecasts as a result of the war in Ukraine and related economic sanctions. Downside risks have increased, and therefore, Fitch has published an assessment of the potential rating and asset performance impact of a plausible, albeit worse than expected, adverse stagflation scenario on Fitch's major structured finance and covered bond (CVB) subsectors (see 'What a Stagflation Scenario Would Mean for Global Structured Finance').

Fitch expects the North American credit card ABS sector in the assumed adverse scenario to experience 'Virtually No Impact' on ratings performance, indicating very few (less than 5%) Rating Outlook changes. Fitch expects 'Virtually No Impact' on asset performance, indicating asset performance to remain broadly unaffected, and less than a 10% likelihood of sector outlook revision by YE 2023. Fitch expects the asset performance impact of the adverse case scenario to be more modest than the most stressful scenario shown above, which increases defaults by 75% and reduces MPR by 35%.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

2022-4 Rating Sensitivity to decreased charge-off rate:

Current ratings for the class A, B and C notes (steady state: 6.00%): 'AAAsf'/'AAsf'/'BBBsf', respectively;

Decrease base case by 50%: 'AAAsf'/'AAAsf'/'AA+sf', respectively.

2022-5 Rating Sensitivity to decreased charge-off rate:

Current ratings for the class A, B and C notes (steady state: 6.00%): 'AAAsf'/'AAsf'/'BBBsf', respectively;

Decrease base case by 50%: 'AAAsf'/'AAAsf'/'AA+sf', respectively.

Some of the outstanding subordinate tranches of Master Credit Card Trust II may be able to support higher ratings based on the output of the Global Credit Card Cash Flow Model. Since the credit card program is set up as continuous funding program and requires that any new issuance does not affect the rating of existing tranches, the enhancement levels are set to maintain a constant rating level per class of issued notes and may provide more than the minimum enhancement necessary to retain issuance flexibility. Therefore, Fitch may decide not to assign or maintain ratings above the current outstanding ratings in anticipation of future issuances.

Best/Worst Case Rating Scenario

International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven 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 seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

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.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.

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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Additional information is available on www.fitchratings.com

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.