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Rating Action:

Moody's assigns Aaa (sf) and A2 (sf) ratings to notes backed by PHH Canada fleet leases

15 Sep 2010

Approximately C$314 million of asset backed securities affected.

New York, September 15, 2010 -- Moody's Investors Service has assigned ratings to the Series 2010-2 Asset Backed Notes issued by Fleet Leasing Receivables Trust (the Trust). The complete rating action is as follows:

Issuer: Fleet Leasing Receivables Trust (the "Trust")

C$300,000,000 (maximum) Series 2010-2 Class A Asset Backed Notes, rated Aaa (sf)

C$14,010,000 (maximum) Series 2010-2 Class B Asset Backed Notes, rated A2 (sf)

RATINGS RATIONALE

The variable funding notes are backed by a diversified pool of open-end fleet leases and related leased vehicles. The lessees under the leases are corporations and government agencies with a substantial number of them rated. The historical performance of the collateral has been extremely good. The net losses on PHH Canada's entire lease portfolio since 2004 have been minimal.

The leases were originated by PHH Vehicle Management Services Inc. (PHH Canada), a Canadian corporation and a wholly-owned indirect subsidiary of PHH Corporation (Ba2, outlook stable). PHH Canada, as servicer, will service the leases and administer the disposition of vehicles.. PHH Canada provides vehicle leasing and fleet management services to corporations and government agencies diversified across industries in Canada. PHH Canada has substantial experience as a securitization sponsor, having program assets funded by the ABCP market for over 15 years . PHH Canada also completed its first term ABS transaction through the Trust in January 2010.

The ratings are based on an assessment of the quality of the collateral, the credit enhancement in the deal and the structural features including a cash spread account, a yield supplement account and a backup servicer arrangement.

Key credit metrics considered by Moody's include the weighted average rating of the lessees, the diversity score (a measure of the diversity of the pool of lessees) and the break-even recovery rate on liquidated collateral in the event of a lessee default. Approximately 48% of the pool by dollars consists of lessees rated by Moody's, and this 48% has an overall weighted average rating of Baa2. Assuming that the weighted average rating of the remaining 52% of the pool is B2, then the weighted average rating of the entire pool would be Ba2. The diversity score for the pool is 57, meaning the pool of lessees will have a similar default profile as a pool of 57 independent and equal-sized lessees with the same rating as the weighted average rating of the pool. We stress break-even recovery rates for the various rating levels. The estimated break-even recovery rate for Class A is approximately 54% to 63% and for Class B is approximately 62% to 68%.

Moody's V Score: The V Score for this transaction is Medium, the same as that for the fleet leasing sector in North America. The V Score indicates "Medium" uncertainty about critical assumptions such as data quality and disclosure, transaction and analytical complexity as well as market value risk. Historical losses on the collateral are extremely low due to the average good credit quality of the corporate lessees and volatility is also mild but historical data do not reflect the impact of the relatively high obligor and industry concentration in the pool under a stressed, mass obligor default scenario. As a result, an overall score of Medium is assigned to this transaction in spite of the fact that there has been no downgrade in the past ten years in the sector and the governance of the transaction is better than average among ABS transactions.

Moody's V Scores provide a relative assessment of the quality of available credit information and the potential variability around the various inputs to a rating determination. The V Score ranks transactions by the potential for significant rating changes owing to uncertainty around the assumptions due to data quality, historical performance, the level of disclosure, transaction complexity, the modeling and the transaction governance that underlie the ratings. V Scores apply to the entire transaction (rather than individual tranches).

Moody's Parameter Sensitivities: For this exercise, we analyze stress scenarios assessing the potential model-indicated ratings impact if (a) the assumed weighted average rating of the lessees were to immediately decline from Ba1 to Ba2, Ba3 and B1 and (b) the assumed recovery rates were to decrease from 75% to 70%, 65% and 60%. The following descriptions provide a summary of the results.

Using such assumptions, the Aaa (sf) initial rating for the Class A notes might change as follows based purely on the model results: (a) If the assumed weighted average rating of lessees is Ba1, there will be no change in rating as recovery rate decreases to 60%; (b) If the weighted average rating of lessees is Ba2, there will be no change in rating as recovery rate decreases to 60%; (c) If the weighted average rating of lessees is Ba3, the maximum change will be one notch to Aa1 as recovery rate decreases to 60%; and (d) If the weighted average rating of lessees is B1, the maximum change will be four notches to Baa2 as recovery decreases to 60%.

The A2 (sf) initial rating for the Class B notes might change as follows based purely on the model results: (a) If the assumed weighted average rating of lessees is Ba1, there will be no change in rating as recovery rate decreases to 70%; (b) If the weighted average rating of lessees is Ba2, there will no change in rating as recovery rate decreases to 70%; (c) If the weighted average rating of lessees is Ba3, there will be no change in rating as recovery rate decreases to 70%; and (d) If the weighted average rating of lessees is B1, the maximum change will be five notches to Ba1as recovery decreases to 70%.

Parameter Sensitivities are not intended to measure how the rating of the security might migrate over time, rather they are designed to provide a quantitative calculation of how the initial rating might change if key input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged. Parameter Sensitivities only reflect the ratings impact of each scenario from a quantitative/model-indicated standpoint. Qualitative factors are also taken into consideration in the ratings process, so the actual ratings that would be assigned in each case could vary from the information presented in the Parameter Sensitivity analysis.

The principal methodology used in rating the transaction is summarized below. Other methodologies and factors that may have been considered in the process of rating this issue can also be found in the Rating Methodologies sub-directory on Moody's website.

Two approaches were utilized to quantitatively assess the risks to the transaction. The primary method is the standard Binomial Expansion Technique (BET). Additional, the CDOROM model was used in a separate analysis in conjunction with the BET (Hybrid CDOROM Approach). The Hybrid CDOROM approach provides greater sensitivity to actual obligor concentration and ratings, thus serving as a check of the idealized BET approach.

As all the underlying collateral consists of a pool of open-end leases (i.e. leases where the lessees are responsible for any residual value losses), the potential credit loss of this transaction is primarily driven by the default likelihood of the lessees, the recovery rate when a lessee defaults, and the diversity of the pool of lessees. An approach similar to that used in CLO transactions is used. The CLO approach hinges on the idea of using a 'hypothetical pool' to map the credit and loss characteristics of an actual pool and then employing a mathematical technique called binomial expansion to determine the expected loss of the bond to be rated. Using the binomial expansion technique, the probability of default of each possible scenario is calculated based on a mathematical formula, and the cashflow profile for each scenario is determined based on an assumed recovery rate. Then each cashflow scenario is fed into a liability model to determine the actual loss on the bond under each scenario, and the probability weighted loss or expected loss of the bond is determined. The expected loss of the bond is then compared with Moody's Idealized Cumulative Expected Loss Rates Table to determine a rating for the bond.

The hypothetical pool is characterized by a diversity score. The diversity score measures the diversity of the actual pool by mathematically converting the obligor concentrations of the actual pool into the number of equally-sized uncorrelated obligors which would represent the same credit risk as the actual pool. This process is summarized as follows. Each lessee is assigned its applicable industry category. Lessees in the same industry are assumed to be correlated with each other, while lessees in different industries are assumed to be independent. The number of lessees in the same industry is reduced to reflect the correlation among them. For example, when calculating the diversity score, six equal-sized lessees in the same industry are counted as three independent obligors, while six equal-sized lessees in six different industries are counted as six independent obligors. The size of the lessees is also accounted for by reducing the number of lessees with below average lessee size. In general, the higher the diversity score, the lower the collateral loss volatility will be and consequently, the lower the expected loss of a security, other factors being the same.

Each possible default scenario is determined by both the diversity score and the average probability of default of the pool. The weighted average probability of default of the pool is determined by the probability of default of each lessee or obligor, which is estimated using the actual lessees' credit ratings, if rated. For non-rated lessees, the average rating is assumed to be lower than that of the rated lessees. For example, if the average rating for the rated lessees is Baa2, we could assume a rating of Baa3 or lower as the average rating for the non-rated lessees. The estimated weighted average rating for the entire hypothetical pool is then used to estimate the probability of each default scenario.

The actual net loss on the bonds under each default scenario is determined taking into consideration of recoveries in case of default. When a lessee defaults, recoveries are obtained as the related leased vehicles are reprocessed and sold to repay the defaulted lease obligation. We conduct detailed recovery analyses based on the types of vehicles leased and various default scenarios for lessees. Based on those recovery analyses, we determine the ratings after considering the breakeven recovery rates for the different classes of notes at their associated credit enhancement levels.

Moody's Investors Service did not receive or take into account a third party due diligence report on the underlying assets or financial instruments in this transaction.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating. However, the credit rating action was based on a limited history of historical data. The historical managed pool performance data dates back to 2004. In addition, 52% of the initial pool does not carry a rating by Moody's, which makes it more difficult to predict the likelihood of default by those lessees and the ultimate recovery rates.

Additional research including a pre-sale report for the previous transaction is available at www.moodys.com. The special report, "Updated Report on V Scores and Parameter Sensitivities for Structured Finance Securities" is also available at moodys.com. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Michael McDermitt
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Xiaochao Wang
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

Moody's assigns Aaa (sf) and A2 (sf) ratings to notes backed by PHH Canada fleet leases
No Related Data.
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