ReadyCap Lending Small Business Loan Trust

Transcription

1 Presale: ReadyCap Lending Small Business Loan Trust Primary Credit Analysts: Deborah L Newman, New York (1) ; deborah.newman@standardandpoors.com Hector O Campos, New York (212) ; hector.campos@standardandpoors.com U.S. Commercial Credit: Winston W Chang, Lead Analytical Manager, New York (1) ; winston.chang@standardandpoors.com Table Of Contents $ Million Unguaranteed SBA 7(a) Loan-Backed Notes Series Rationale Transaction Strengths Transaction Weaknesses Mitigating Factors Rating Considerations Pool And Structural Characteristics Portfolio Analysis ReadyCap Lending LLC Structural Overview Payment Priority JUNE 11,

2 Table Of Contents (cont.) Credit Support Write-Downs Credit Analysis Interest Rate Mechanics Stress Scenarios Surveillance Standard & Poor's 17g-7 Disclosure Report Related Criteria and Research Appendix Other Defined Terms JUNE 11,

3 Presale: ReadyCap Lending Small Business Loan Trust (Editor's Note: This article was originally published on June 9, It was updated on June 11, 2015, with a corrected figure for the scenario default rate.) $ Million Unguaranteed SBA 7(a) Loan-Backed Notes Series This presale report is based on information as of June 9, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Rating As Of June 9, 2015 Class Preliminary rating (i) Preliminary amount (Mil. $) Interest rate (%) Overcollateralization (%) A AAA (sf) Lesser of prime minus 1.50% and one-month LIBOR plus 1.25% (i) The rating is preliminary and subject to change at any time. (ii) SDR--Scenario default rate. SDR (%) (ii) 40.0 (ii) Transaction Profile Expected closing date June 16, 2015 Stated maturity date Dec. 25, 2038 Collateral An amortizing pool of unguaranteed SBA Section 7(a) small business loans Note payment frequency Monthly on the 25th Underwriter J.P. Morgan Securities LLC Seller and servicer ReadyCap Lending LLC Servicing administrator Waterfall Asset Management LLC Depositor ReadyCap Lending SBL Depositor LLC Indenture trustee, back-up servicer, administrator Wells Fargo Bank N.A. Custodian Bank of New York Mellon Trust Co. N.A. Owner trustee Wilmington Trust N.A. Hedge counterparty None SBA--Small Business Administration. Rationale The 'AAA (sf)' preliminary rating assigned to ReadyCap Lending Small Business Loan Trust 's unguaranteed U.S. Small Business Administration (SBA) 7(a) class A loan-backed notes reflects our assessment of: Expected timely interest and ultimate principal payments on the notes, which we assessed using our Standard & JUNE 11,

4 Poor's Cash Flow Evaluator and assumptions commensurate with the preliminary rating assigned under various interest rate scenarios; Credit enhancement in the form of overcollateralization, a reserve account that will be funded over time with 90 days' interest on the notes, and excess spread; The transaction's legal structure, which is intended to be bankruptcy-remote; The diversified collateral portfolio, which consists of unguaranteed SBA Section 7(a) term loans; and The experience of ReadyCap Lending LLC's (ReadyCap Lending) management professionals, many of whom have more than 20 years of experience in the sector. Transaction Strengths We consider the following to be transaction strengths: The initial overcollateralization of 39.40%; The transaction's overcollateralization, which exceeds the required amount under Standard & Poor's 'AAA' stress; The payment structure, which provides that all available amounts are used to pay interest and principal on the notes if the overcollateralization falls below the 39.40%; Of the collateral principal balance, approximately 85% is more than five years seasoned. We have observed that defaults typically increase the first year after origination and remain elevated for a few years before declining during the remaining years of the loan's life. Transaction Weaknesses ReadyCap Lending did not originate the loans. Rather, the loans were acquired from CIT or the FDIC. Moreover, ReadyCap did not re-underwrite the loans when acquired. The commercial properties securing 13% of the loans in the pool (for which recovery credit is given) also secure other loans not part of the collateral pool, and such obligations are pari passu in right of payment to the collateral. Collateral was originated between 1994 and During this time, underwriting standards may have varied. For loans secured by collateral that is not real estate, the seller will obtain and file UCC financing statements naming the borrower as debtor but will not reassign the financing statements to the indenture trustee for the benefit of the noteholders. The indenture trustee will have the benefit of the seller's security interest in the collateral. Mitigating Factors Standard & Poor's has surveilled CIT small business securitizations and is familiar with the general performance of these loans. Recovery credit was calculated based on the overall LTV. About 85% of the collateral is at least five years seasoned. Standard & Poor's did not assign any recovery credit to loans secured by collateral that is not commercial real estate. JUNE 11,

5 Rating Considerations In our analysis, we considered the following factors, among others: The back-up servicer, Wells Fargo Bank N.A., will be in place at closing and on a monthly basis will review and confirm the following information in the servicer report: that the servicer report is complete; the payments to be made on such payment date; and the amounts available for payment on the notes, the total number of SBA 7(a) loans and the pool balance, the total number of 30-, 60-, 90-, and 150 or more-day delinquencies, and the principal balances of any REO properties. The servicer may, according to specified criteria, substitute new eligible loans for any loans that are 150 days or more delinquent for up to 10% of the portfolio balance during the 90-day period following the closing date. Standard & Poor's did not give credit to any potential substitutions in its analysis. The overcollateralization in excess of the Standard & Poor's 'AAA' stress. Waterfall Asset Management LLC (Waterfall) will act as the servicing administrator and provide recommendations related to delinquent and defaulted loans. Pool And Structural Characteristics The collateral pool presented to Standard & Poor's for its rating analysis consisted of the loan type, industry, collateral type, and geographic distributions (as of April 30, 2015) shown in Table 1. Table 1 Portfolio Characteristics Range or total Average or weighted average Total percentage Number of unguaranteed interests 1,380 Aggregate SBA 7(a) loan balance $802,442,795 Aggregate unguaranteed interest balance $189,492,080 Principal balances of the SBA 7(a) loans $52,765-$3,791,684 $581,480 (1) Principal balances of the unguaranteed interests $13,191 to $925,117 $137,313 (2) Latest maturity date of the unguaranteed interests related to the SBA 7(a) loans Current loan rates of the unguaranteed interests related to the SBA 7(a) loan Current credit score of borrowers in respect of the unguaranteed interests related to the SBA 7(a) loans (3) Loan age (in months) of the unguaranteed interests related to the SBA 7(a) loans Remaining term (in months) of the unguaranteed interests related to the SBA 7(a) loans Original term (in months) of the unguaranteed interests related to the SBA 7(a) loans Geographic distribution in excess of 5.00% of the aggregate unguaranteed interest balance 18-Nov % to 8.750% 4.90% 453 to to to to Texas Florida 9.75 Arizona JUNE 11,

6 Table 1 Portfolio Characteristics (cont.) Primary collateral type of the SBA 7(a) loan in excess of 5.00% of the aggregate unguaranteed interest balance Real estate Non-real estate 5.54 SBA 7(a) loan purpose in excess of 5.00% of the aggregate unguaranteed interest balance Acquisition/start-up Expansion Refinance 9.77 NAICS code description of the SBA 7(a) loan purpose in excess of 5.00% of the aggregate unguaranteed interest balance Child day care services Offices of dentists Hotels, motels, and tourist centers Veterinarians 6.81 Eating places 6.20 Offices of physicians 5.02 Percentage of unguaranteed interests related to fixed-rate SBA 7(a) loans 0.64 Percentage of unguaranteed interests related to adjustable rate SBA 7(a) loans Percentage of unguaranteed interests related to SBA 7(a) loans made to non-individual borrowers $178,634, Portfolio Analysis The series collateral portfolio consists of unguaranteed loans under the Section 7(a) Loan Program of the U.S. SBA. The SBA is a U.S. government agency that supports entrepreneurs and small businesses with loans made through partner banks, credit unions, and other lenders. ReadyCap Lending LLC is the servicer for the series 's loan collateral. The seller/servicer acquired approximately 81.0% of the series 's loan collateral from CIT. The remaining series loan collateral was acquired from the Federal Deposit Insurance Corp. and originated by Community South Bank. The SBA Section 7(a) loan program provides financial help for businesses with special requirements. ReadyCap Lending LLC ReadyCap Lending, headquartered in New Providence, N.Y., is a wholly owned subsidiary of Sutherland Asset Management Corp. (Sutherland). Sutherland is a real estate finance company that acquires, originates, manages, and finances commercial real estate loans. Waterfall provides management and advisory services to Sutherland. ReadyCap Lending is one of 14 nonbank small business lending companies. ReadyCap Lending purchased the Small Business Lending Company license and the portfolio of SBA 7(a) loans from CIT on June 27, In November 2014, ReadyCap Lending purchased a pool of loans from the FDIC, which included the loans from Community South Bank. JUNE 11,

7 ReadyCap Lending is focused on originating and acquiring SBA loans, portfolios, and servicing rights. This is the first securitization transaction sponsored by ReadyCap Lending. Structural Overview ReadyCap Lending Small Business Loan Trust is a special-purpose entity that was formed as a Delaware statutory trust. The issuer's only purposes are to acquire the collateral portfolio, issue the rated notes and equity, enter into the transaction documents, and engage in certain related transactions. Standard & Poor's expects the issuer's special-purpose entity provisions to be consistent with its bankruptcy-remoteness criteria. In rating this transaction, Standard & Poor's will review the legal matters that it believes are relevant to its analysis, as outlined in its criteria. Payment Priority The trustee will distribute on each payment date available funds (which exclude a servicing fee on the balance of each SBA loan and a premium protection fee on the guaranteed portion of the SBA loan where applicable, among other fees) in the note account in a specified order of priority (see table 2). Table 2 Payment Priority Priority Payment 1 (A) (i) the Owner Trustee Fee and unreimbursed out-of-pocket expenses of the Owner Trustee and indemnification amounts, (ii) the Indenture Trustee/Administrator Fee and unreimbursed out-of-pocket expenses of the Indenture Trustee, Administrator and Custodian, (iii) the Back- Up Servicing Fee and unreimbursed out-of-pocket expenses and indemnification amounts, (iv) Custodian Fee and unreimbursed out-of-pocket expenses of the Custodian and (v) the Servicing Administrator Fee and unreimbursed out-of-pocket expenses and indemnification amounts (expenses subject to Annual Expense Cap) and (B) any accrued and unpaid (i) Owner Trustee Fees and unreimbursed out-of- pocket expenses of the Owner Trustee (such unreimbursed out-of-pocket expenses subject to the Annual Expense Cap), (ii) Indenture Trustee/Administrator Fees and unreimbursed out-of-pocket expenses of the Indenture Trustee, the Administrator and Custodian (such unreimbursed out-of-pocket expenses subject to the Annual Expense Cap), (iii) the Back-Up Servicing Fees, expenses and indemnification amounts, (iv) Custodian Fee and unreimbursed out-of-pocket expenses and indemnification amounts of the Custodian (such unreimbursed out-of-pocket expenses subject to the Annual Expense Cap) and (v) the Servicing Administrator Fee and unreimbursed out-of-pocket expenses and indemnification amounts of the Servicing Administrator, respectively, for prior Payment Dates 2 Servicer transition costs, if any (subject to a $100,000 cap for the duration of the transaction) 3 Current and any carry-forward class A note interest 4 To the reserve account until the amount on deposit equals the reserve account target amount. 5 If a Certificate Interest Payment Date, Current Interest 6 Class A note principal until reduced to zero 7 Any fees and expenses not paid in Item 1 above due to the annual expense cap. 8 Unpaid applied loss amounts due to prior write downs, if any 9 Any remainder to ownership certificates Credit Support Overcollateralization and excess spread provide credit support to the notes. The excess spread amount available at any time will be determined by gross defaults, prepayments, recoveries, and JUNE 11,

8 the interest rate. We apply rating-level specific assumptions that incorporate these factors in our cash flow stress tests. Write-Downs Losses on the loans, if the portfolio balance exceeds the outstanding class A note balance, will reduce the overcollateralization. If the portfolio balance falls below the outstanding note balance at any payment date, the applied loss amounts may result in a write-down of the notes' principal amount until the note principal balance is reduced to zero. If in future periods sufficient collections allow the portfolio balance to be restored to exceed the outstanding note balance, these subsequent recoveries can be applied to increase the note principal balance to reimburse the write-downs. However, no catch-up note interest will be due for the periods when the note principal balance was written down. In our credit and cash flow analysis, we did not observe instances of such write-downs in the stress cases we conducted. If a given run had exhibited a write-down in our stress scenarios, we would have deemed it a defaulted run because the notes would not receive the full interest amount. Credit Analysis Historically, Standard & Poor's analyzed pools of small business loans using an actuarial approach based on the seller's historical lending data. We began using our Small Business Portfolio Evaluator in 2005 to incorporate SBA-data-driven analysis. This model uses Monte Carlo simulations to determine a specific default distribution for small business loan pools (for more information, see "Small Business Portfolio Evaluator (Update)," published April 9, 2014). To give credit to the series loan pool's diversification, we ran the entire portfolio through the model. In March 2014, we introduced our revised methodology for U.S. small business loan-backed securitizations in which we applied a targeted output approach and a scoring framework to derive an asset probability of default (PD) scaling factor of 75% - 125% for an SBA loan pool. The scoring framework incorporates multiple factors for the performance history score (80% weighting to overall score), including the originator's default rate relative to the SBA data, the number of years of historical origination, default data, and whether the performance history incorporates a period of moderate economic stress. For the underwriting quality score (20% weighting), we consider factors such as the loan-to-value ratio, the percentage of the pool with personal guarantees, the average debt service coverage ratio, the frequency of changes to the underwriting criteria, and any regular outside audits of underwriting practices. Approximately 81% of the series loans were acquired from CIT. We considered CIT's historical data and assigned a performance history score of 3.0 and an underwriting quality score of 4, which is the most conservative assumption. Given the 80/20 weighting of these two scores, the overall scoring framework is 3.2, which corresponds with a % asset PD scaling factor (out of a possible 75%-125% scaling factor range for an SBA loan pool). However, given that (i) the CIT loans comprise only 80% of the collateral, (ii) we do not have the relevant data to determine the appropriate scaling factor for the loans acquired from the FDIC and originated by Community South, (iii) ReadyCap was recently established, and (iv) ReadyCap did not originate the loans, we applied a scaling factor of 125%. JUNE 11,

9 Interest Rate Mechanics The underlying loans pay interest based on prime plus a margin stated in each loan agreement. The interest rate on the class A notes is the lesser of one-month LIBOR plus 1.25% and prime minus 1.50%. We examined historical data for both LIBOR and prime and observed that their relationship has been fairly consistent since the early 1990s, generally with prime being approximately 3.00% higher than LIBOR. However, in a few instances (i.e., the Lehman bankruptcy in 2008), prime has been less than 3.00% higher than LIBOR. We factored these observations into our cash flow analysis for this portfolio. In addition, we ran sensitivity scenarios under which the class A note rate would be capped at prime plus 1.20% for multiple periods of three or four years over the transaction's life to examine the effect of this spread compression on the structure's ability to repay interest and principal. We found the result to be within an acceptable range for the 'AAA' rating category. Stress Scenarios In reviewing the credit enhancement and subordination levels, Standard & Poor's cash flow modeling assumptions included stressed loan defaults and recoveries after considering industry diversity within the pool, the pool's geographic concentration, and the obligor concentration, as well as assumed recoveries on certain collateral types in the pool. The transaction's ability to pass the cash flow stress scenarios relied on the assumption that the servicer and the trustee, as back-up servicer, will perform as required under the transaction documents. We also varied the prepayment assumptions to include slow- and fast-pay scenarios in addition to base prepayment scenarios. Under the various stresses described above, the transaction's cash flows indicate timely interest and principal payments on the class A notes, commensurate with the assigned preliminary rating. Surveillance We will maintain surveillance on the rated notes until they mature or are retired. The purpose of surveillance is to assess on an ongoing basis whether the portfolio of loans is performing within the initial parameters and assumptions applied for the given rating level. The issuer is required under the terms of the transaction documents to supply periodic reports and notices to Standard & Poor's to maintain continuous surveillance on the rated notes. Standard & Poor's 17g-7 Disclosure Report SEC Rule 17g-7 requires an NRSRO, for any report accompanying a credit rating relating to an asset-backed security as defined in the Rule, to include a description of the representations, warranties and enforcement mechanisms available to investors and a description of how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities. The Standard & Poor's 17g-7 Disclosure Report included in this credit rating report is available at JUNE 11,

10 Related Criteria and Research Related criteria Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014 Methodology And Assumptions For U.S. Small Business Loan-Backed Securitizations, March 28, 2014 Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, May 7, 2013 Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 Methodology: Credit Stability Criteria, May 3, 2010 Legal Criteria For U.S. Structured Finance Transactions, Oct. 1, 2006 Related Research Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, July 2, 2014 Credit Rating Model: Small Business Portfolio Evaluator, Aug. 20, 2010 Appendix Standard & Poor's Small Business Portfolio Evaluator and cash flow results The Small Business Portfolio Evaluator is an integral part of Standard & Poor's methodology for rating and monitoring small business securitization transactions. The Small Business Portfolio Evaluator is a one-period portfolio default model, which stochastically simulates default events for each small business--or obligor--using a Gaussian copula framework, which is a formula for determining correlation. The model aggregates the notional amount of the defaulted assets for each simulation trial, producing a probability distribution of portfolio default rates. This probability distribution of default rates describes the likelihood of any particular portfolio default rate occurring. After calculating the probability distribution, the model derives a set of scenario default rates (SDRs). The model uses these SDRs as a factor in determining, for each credit rating, the assumed gross level of asset defaults. We generally would expect that a tranche with that rating should be able to withstand that relevant assumed gross level of asset defaults consistent with our rating criteria. Interest rate scenarios The cash flow analysis that Standard & Poor's evaluates uses different interest rate stress scenarios to test the impact of different interest rate environments on the transaction structure's ability to pay timely interest and ultimate principal on the rated notes. Standard & Poor's interest rate assumptions are based on historical interest rate levels and changes in those rates. Specifically, Standard & Poor's subjected the transaction's cash flows to interest rate paths that increased over time, declined over time, declined and then increased, increased and declined, and followed the forward curve (see "Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," Sept. 17, 2009). Cash flow results Standard & Poor's used its proprietary cash flow model to calculate a break-even default rate (BDR) for each tranche based on the portfolio's projected composition. The BDR represents the maximum cumulative portfolio default rate JUNE 11,

11 that a tranche can withstand while subjected to the interest rate scenarios described in the "Interest rate scenarios section" above and to the default stresses shown in Appendix 1 and still pay timely interest and ultimate principal by the notes' stated maturity date. The BDRs may change over the transaction's life if the assets' weighted average recovery rate, coupon, or spread changes. The BDRs will also change as the par amount and the portfolio's weighted average life change. Table 3 Annual Defaults As A Percentage Of Cumulative Defaults Default pattern Year 1 Year 2 Year 3 Year 4 Year 5 I II III IV For a tranche to be eligible for a Standard & Poor's rating, the BDR for each tranche must be higher than the portfolio's SDR for the specific rating, indicating that the portfolio can withstand a higher percentage of defaults than what is required for that rating level. Based on the ramped-up portfolio's expected composition, the Small Business Portfolio Evaluator calculates the SDRs and Standard & Poor's proprietary cash flow model produces the BDRs. Other Defined Terms BDR Standard & Poor's uses its proprietary cash flow model to calculate a BDR for each tranche based on the portfolio's projected composition. The BDR represents the maximum cumulative portfolio default rate that a tranche can withstand while subjected to the interest rate and default stresses described in the "Interest rate scenarios" section above and the default stresses shown in Appendix 1 and still pay timely interest and ultimate principal by the notes' stated maturity date. The BDRs may change over the transaction's life if the assets' weighted average recovery rate, coupon, or spread changes. The BDRs will also change as the par amount and portfolio's weighted average life change. BDR cushion The BDR cushion is the excess of the BDR above SDR at the assigned rating for a given class of rated notes. Standard & Poor's rating The Standard & Poor's rating is the public rating, which is typically the issuer credit rating. SDR The SDR is the minimum level of portfolio defaults each tranche must withstand to support the specific rating level using the Standard & Poor's Small Business Portfolio Evaluator. (See the Standard & Poor's Small Business Portfolio Evaluator And Cash Flow Results section for more information.) Subordination Subordination is calculated as the notes' total face amount (including the subordinated notes) that have payment priorities subordinate to the assessed class of notes divided by the notes' total face amount (including the subordinated JUNE 11,

12 notes). Target portfolio The target portfolio consists of collateral that has already been purchased and/or collateral for which a commitment to purchase has been initiated, as well as hypothetical portfolio information, that the arrangers present to Standard & Poor's for its rating analysis. JUNE 11,

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