Rating Action: Moody's confirms 18 securities issued by NextGear auto floorplan securitizations

Global Credit Research - 10 Aug 2020

Approximately $2.7 billion securities affected

New York, August 10, 2020 -- Moody's Investors Service, ("Moody's") has confirmed the ratings of 18 securities issued by NextGear Floorplan Master Owner Trust from 2017 to 2020. The notes are backed by dealer floorplan loans which are originated by NextGear Capital, Inc., which is also the servicer and administrator for the transactions.

The complete rating actions are as follows:

Issuer: NextGear Floorplan Master Owner Trust, Series 2017-2

Class A-1 Notes, Confirmed at Aaa (sf); previously on Apr 23, 2020 Aaa (sf) Placed Under Review for Possible Downgrade

Class A-2 Notes, Confirmed at Aaa (sf); previously on Apr 23, 2020 Aaa (sf) Placed Under Review for Possible Downgrade

Class B Notes, Confirmed at A2 (sf); previously on Apr 23, 2020 A2 (sf) Placed Under Review for Possible Downgrade

Issuer: NextGear Floorplan Master Owner Trust, Series 2018-1

Class A-1 Floating Rate Notes, Confirmed at Aaa (sf); previously on Apr 23, 2020 Aaa (sf) Placed Under Review for Possible Downgrade

Class A-2 Fixed Rate Notes, Confirmed at Aaa (sf); previously on Apr 23, 2020 Aaa (sf) Placed Under Review for Possible Downgrade

Class B Fixed Rate Notes, Confirmed at A2 (sf); previously on Apr 23, 2020 A2 (sf) Placed Under Review for Possible Downgrade

Issuer: NextGear Floorplan Master Owner Trust, Series 2018-2

Class A-1 Notes, Confirmed at Aaa (sf); previously on Apr 23, 2020 Aaa (sf) Placed Under Review for Possible Downgrade

Class A-2 Notes, Confirmed at Aaa (sf); previously on Apr 23, 2020 Aaa (sf) Placed Under Review for Possible Downgrade

Class B Notes, Confirmed at A2 (sf); previously on Apr 23, 2020 A2 (sf) Placed Under Review for Possible Downgrade

Issuer: NextGear Floorplan Master Owner Trust, Series 2019-1

Class A-1 notes, Confirmed at Aaa (sf); previously on Apr 23, 2020 Aaa (sf) Placed Under Review for Possible Downgrade

Class A-2 notes, Confirmed at Aaa (sf); previously on Apr 23, 2020 Aaa (sf) Placed Under Review for Possible Downgrade

Class B notes, Confirmed at A2 (sf); previously on Apr 23, 2020 A2 (sf) Placed Under Review for Possible Downgrade

Issuer: NextGear Floorplan Master Owner Trust, Series 2019-2

Class A-1 Notes, Confirmed at Aaa (sf); previously on Apr 23, 2020 Aaa (sf) Placed Under Review for Possible Downgrade

Class A-2 Notes, Confirmed at Aaa (sf); previously on Apr 23, 2020 Aaa (sf) Placed Under Review for Possible Downgrade

Class B Notes, Confirmed at A2 (sf); previously on Apr 23, 2020 A2 (sf) Placed Under Review for Possible Downgrade

Issuer: NextGear Floorplan Master Owner Trust, Series 2020-1

Class A-1 Notes, Confirmed at Aaa (sf); previously on Apr 23, 2020 Aaa (sf) Placed Under Review for Possible Downgrade

Class A-2 Notes, Confirmed at Aaa (sf); previously on Apr 23, 2020 Aaa (sf) Placed Under Review for Possible Downgrade

Class B Notes, Confirmed at A2 (sf); previously on Apr 23, 2020 A2 (sf) Placed Under Review for Possible Downgrade

These actions conclude the review for downgrade initiated on April 23, 2020.

RATINGS RATIONALE

The rating actions reflect the increase in the overcollateralization percentage and reserve account balances for the series 2017-2, 2018-1, 2018-2, 2019-1, 2019-2, and 2020-1 notes pursuant to execution of amendments to the Indenture Supplements by NextGear on August 10, 2020. Subsequent to the amendments, the Class A and Class B notes in all series benefit from 14.17% of overcollateralization (OC) and 1.00% of reserve account (as a percentage of the collateral allocated to the corresponding series). The Class A notes additionally benefit from 7.33% of subordination from the Class B notes. This compares to 9.25% OC and 1.00% reserve account for the Class A and B notes and 7.75% subordination for the Class A notes prior to the amendment. Moody's revised loss at a Aaa stress pursuant to the amendments for the NextGear floorplan transactions is 22.50%.

Pursuant to the amendments, the credit enhancement stepup triggers and early amortization triggers related to payment rates and excess spread triggers will be measured as 6-month averages compared to 3-month averages prior to the amendments. The early amortization trigger level related to monthly payment rate remains at 25.00%, while the trigger level for excess spread remains at 0.00%. Similarly, the OC will step up from 14.17% by an additional 2.50% (as percentage of collateral amount) if the 6-month average monthly payment rate falls below the trigger level of 30.00%. This compares to a step-up from 9.25% by an additional 2.50% (as a percentage of the collateral amount) if the 3-month average monthly payment rate falls below the trigger level of 30.00% prior to the amendment.

Additionally, pursuant to the amendments, the servicing fee is subordinated in the payment priority and removed from the Base Rate calculation while NextGear or an affiliate is the servicer. The Base Rate is calculated as the sum of weighted-average note interest rates and the servicing fee percentage and is a component of the Excess Spread Percentage calculation. Although subordination of servicing fee will improve cash flows available to noteholders, it weakens the early amortization trigger related to excess spread.

The monthly payment rate as of June 2020 for the trust was approximately 65%, increasing from a monthly payment rate of approximately 28% as of April 2020 and resulting in an approximately 46% 6-month average monthly payment rate for the trust as of June 2020.

The rapid spread of the COVID-19 outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the performance of dealer floorplan loans from the collapse in US economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the COVID-19 outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was "Moody's Approach to Rating Floorplan Asset-Backed Securities" published in June 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1230114. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Factors that would lead to an upgrade or downgrade of the ratings:

Up

Moody's could upgrade the notes if levels of credit enhancement are higher than necessary to protect investors against current expectations of portfolio losses. Losses could decline from Moody's original expectations as a result of a lower number of dealer defaults or appreciation in the value of the assets securing a dealer's promise of payment. Additionally, a strengthening credit profile of manufacturers and/or dealers could decrease expectations for loss. Portfolio losses also depend greatly on US economic performance. Other reasons for better-than-expected performance include changes to servicing practices that enhance collections.

Down

Moody's could downgrade the notes if levels of credit enhancement 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 dealer defaults or deterioration in the value of the assets securing a dealer's promise of payment. Additionally, a weakening credit profile of manufacturers and/or dealers could increase expectations for loss. Portfolio losses also depend greatly on US economic performance. Other reasons for worse-than-expected performance include poor servicing, error on the part of transaction parties, inadequate transaction governance and fraud.

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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

The analysis relies on a Monte Carlo simulation that generates a large number of collateral loss or cash flow scenarios, which on average meet key metrics Moody's determines based on its assessment of the collateral characteristics. Moody's then evaluates each simulated scenario using model that replicates the relevant structural features and payment allocation rules of the transaction, to derive losses or payments for each rated instrument. The average loss a rated instrument incurs in all of the simulated collateral loss or cash flow scenarios, which Moody's weights based on its assumptions about the likelihood of events in such scenarios actually occurring, results in the expected loss of the 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 subsequently 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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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 www.moodys.com.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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 www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nicholas Monzillo Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Deepika Kothari Senior Vice President Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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