HYUNDAI FUTURENET CO., LTD.
Fitch Ratings has assigned final ratings and Rating Outlooks to the asset-backed notes issued by
Fitch's base case cumulative net loss (CNL) proxy is derived by considering through-the-cycle 2007-2009 recessionary performance of
RATING ACTIONS
Entity / Debt
Rating
Prior
A-1
ST
F1+sf
New Rating
F1+(EXP)sf
A-2A
LT
AAAsf
New Rating
A-2B
LT
AAAsf
New Rating
A-3
LT
AAAsf
New Rating
A-4
LT
AAAsf
New Rating
B
LT
AAsf
New Rating
AA(EXP)sf
Page
of 1
VIEW ADDITIONAL RATING DETAILS
KEY RATING DRIVERS
Collateral Composition Quality - Strong and Stable: 2023-A is a prime portfolio with a weighted average FICO score of 770, improved over prior transactions. The 2023-A pool consists of 50% Hyundai brand vehicles, 44% Kia brand vehicles and 6% Genesis brand vehicles, generally consistent with 2022-C. The top five models represent 50% of the pool, consistent with recent transactions and lower than in most peer auto lease transactions. The undiscounted base RV as a percentage of securitization value (SV) totals 75.9%, up slightly from 2022-C.
Lease-End RV Risk - Stable Concentration: HCA's RV performance has been strong in recent years. The 2023-A RV maturity profile is slightly less concentrated than in 2022-C, with 58.4% of the base RV of the leases scheduled to mature over the most concentrated 12-month period, compared with 63.8% in 2022-C. To account for potential future volatility in the wholesale market, Fitch used the worst 18 months of historically observed residual dispositions composition in deriving its 'BBsf' RV proxy.
Forward-Looking Approach to Loss Proxy - Stable Credit and RV Performance: HCA's credit and residual loss performance has been strong in recent years. However, the economic environment and state of the auto industry, including the wholesale vehicle market, can have a material impact on ratings. Fitch took these risks into consideration, as well as future expectations and their impact on the transaction, in conservatively deriving the net credit and RV loss expectations for HALST 2023-A. Fitch's forward-looking base case credit loss proxy is 1.00% of the SV, and the 'BBsf' RV proxy is 11.00% of turned-in residual, both consistent with the prior transaction.
Payment Structure - Adequate Credit Enhancement: 2023-A is a sequential-pay structure. Hard credit enhancement (CE) is 17.00% and 12.25% for class A and B notes, respectively, consistent with 2022-C. Based on a 1.00% credit loss proxy stressed for each rating category, as well as stressed RV loss expectations of 25.2% for 'AAAsf' and 21.5% for 'AAsf', CE is sufficient to support each expected rating.
Operational and Servicing Risks - Adequate Origination, Underwriting and Servicing: Fitch's current Long-Term Issuer Default Rating for
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Unanticipated decreases in the value of returned vehicles and/or increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels that are higher than the base case and would likely result in declines of CE and loss coverage levels available to the notes.
Decreased CE may make certain note ratings susceptible to potential negative rating actions, depending on the extent of the decline in coverage. Hence, Fitch conducts sensitivity analyses by increasing a transaction's initial base case RV and credit loss assumptions and examining the rating implications on all classes of issued notes. The increases to the base case losses are applied such that they represent moderate and severe stresses, respectively, and are intended to provide an indication of the rating sensitivity of notes to unexpected deterioration of a trust's performance.
During the sensitivity analysis, Fitch examines a transaction structure through cash flow modeling to test the ability to cover stressed credit and RV losses. Fitch calculates loss coverage levels for each rating category by first applying credit defaults to the pool and then increasing residual realization haircuts until the first dollar of note principal is lost. As base case credit or RV losses are increased, the modeled loss coverage supported under the CE structure may fall below the target level for each rating category and would therefore be subject to a negative rating action.
The first rating sensitivity scenario is to increase the base case credit loss assumptions by a moderate and a severe stress. Under a moderate stress scenario of 1.5x the base case credit loss, the decrease in targeted loss coverage would likely not decrease enough to warrant a downgrade for class A; however, class B notes could see a one-notch downgrade. This resilience is partially due to the strength of the CE structure, as well as the trade-off that occurs when credit defaults are increased because, at this point, less of the collateral is subject to residual stresses upon lease end. Under the more severe credit loss stress of 2.5x the base case credit loss, changes in target coverage would likely result in a downgrade of up to one rating category for both class A and B notes.
Additionally, the ratings are sensitive to fluctuations in RV losses in auto lease ABS transactions. A moderate stress to the RV loss estimate, an increase in the base case to 25%, would likely result in a negative rating action of approximately two rating categories for class A notes and a downgrade of more than three rating categories for class B notes. Under the severe RV loss stress, an increase in the base case to 30%, class A and B notes would likely be subject to a downgrade of more than three rating categories with both class A and B notes falling to non-investment grade.
Fitch expects the North American auto lease ABS sector in the assumed adverse scenario to experience 'virtually no impact' on asset and ratings performance, indicating very few (less than 5%) Outlook changes. Fitch also expects the asset performance impact of the adverse case scenario to be more modest than the scenarios shown above, which increase RV losses.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Given that class A notes are rated 'AAAsf', upside stresses were not considered. However, if RV losses are 20% less than the 'BB' RV loss proxy, the expected ratings would be maintained for class A notes but at stronger rating multiples, and the expected ratings for class B notes would most likely move up one notch to a 'AA+sf' rating.
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
Fitch was provided with Form ABS Due Diligence-15E (Form 15E) as prepared by
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
The transaction, along with all auto and fleet lease transactions, has an ESG Relevance Score (RS) for Labor Relations and Practices of '3' (low impact on credit), which is higher than the baseline RS of '2' (no impact) for the general North American auto sector. The difference in RS for this ESG factor was driven by the presence of a titling trust structure, which gives rise to superior liens on the vehicles from the
The concentration in the collateral pool of 13.0% of electric vehicles or hybrid vehicles did not have an impact on Fitch's ratings analysis or conclusion on this transaction and has no impact on Fitch's ESG Relevance Score.
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
(C) 2023 Electronic News Publishing, source
