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Rating Action:

Moody's assigns definitive ratings to HPEFS Equipment Trust 2020-2 notes

30 Jun 2020

Approximately $1 billion asset-backed securities rated

New York, June 30, 2020 -- Moody's Investors Service (Moody's) has assigned definitive ratings to the notes issued by HPEFS Equipment Trust 2020-2 (HPEFS 2020-2). This is the third issuance for Hewlett-Packard Financial Services Company (HPEFS), a wholly owned subsidiary of Hewlett Packard Enterprise Company (HPE; Baa2/P-2, stable). The notes are backed by a pool of small-ticket equipment loans and leases primarily originated by HPEFS, which is also the servicer of the loans and leases backing the transaction and the administrator for the issuer.

The complete rating actions are as follows:

Issuer: HPEFS Equipment Trust 2020-2

Class A-1 Notes, Definitive Rating Assigned P-1 (sf)

Class A-2 Notes, Definitive Rating Assigned Aaa (sf)

Class A-3 Notes, Definitive Rating Assigned Aaa (sf)

Class B Notes, Definitive Rating Assigned Aa1 (sf)

Class C Notes, Definitive Rating Assigned Aa3 (sf)

Class D Notes, Definitive Rating Assigned Baa1 (sf)

RATINGS RATIONALE

The definitive ratings are based on the credit quality of the underlying equipment contracts and their expected performance, the historical performance of HPEFS's managed portfolio of similar collateral, the track record, experience and expertise of HPEFS as originator and servicer, the strength of the transaction structure, and the legal aspects of the transaction. Additionally, we base our P-1 (sf) rating of the Class A-1 notes on the cash flows that we expect the underlying receivables to generate during the collection periods prior to the Class A-1 notes' legal final maturity date in July 2021.

Moody's cumulative net loss expectation for the HPEFS 2020-2 collateral pool is 2.00% and the loss at a Aaa stress is 19.00% (inclusive of 3.50% residual value loss, as well as 15.50% credit loss). The current cumulative net loss expectation is higher by 0.10% than the cumulative net loss expectation at the time of the provisional ratings. The difference is a result of a change in the pool composition which made the final larger pool slightly weaker than the pool Moody's analyzed when the provisional ratings were assigned. The provisional ratings pool composition as well as the larger final pool were provided by the issuer. Even though Moody's increased its cumulative net loss expectation, Moody's did not change the loss at a Aaa stress.

The definitive rating for the Class C notes, Aa3 (sf), is higher than the provisional rating, (P)A1 (sf). This difference is a result of the transaction closing with a lower weighted average cost of funds (WAC) than Moody's modeled when the provisional ratings were assigned. The WAC assumptions, as well as other structural features, were provided by the issuer.

Key credit strengths of the transaction include the 1) high credit quality of the pool (86% of the discounted pool balance consists of contracts to obligors that are large institutions, a segment that has historically incurred very low losses in HPEFS's portfolio), 2) low remaining term of the assets, 3) an experienced servicer and 4) a strong transaction structure. Key credit challenges include a 1) high obligor concentration (top 10 obligors make up around 45% of the discounted pool balance), 2) exposure to small and medium business segment with limited performance data, 3) high residual value risk, 4) low expected recoveries upon default, 5) exposure to service providers and 6) the high level of allowable substitutions.

Moody's took into account the difficult operating environment for obligors in the pool stemming from the coronavirus pandemic through additional sensitivity testing and stress scenarios. For larger obligors in the pool we stressed the default assumption of those obligors in sectors particularly vulnerable to the economic shutdown including passenger aircraft, automotive, and consumer durables, and for the granular portion of the pool Moody's overweighted the performance of historical recessionary periods in determining our expected loss.

Additionally, in assigning a P-1 (sf) rating to the Class A-1 notes, Moody's considered the cash flows that we expect the underlying receivables to generate during the collection periods prior to the Class A-1 notes' legal final maturity date. At current size, the A-1 tranche can withstand approximately 30% reduction in expected cashflows prior to maturity without incurring a loss.

At closing the Class A, Class B, Class C, and Class D notes benefit from 23.60%, 17.75%, 11.95% and 6.00% of hard credit enhancement, respectively. Hard credit enhancement for the notes consists of a combination of overcollateralization of 5.00% which will build to a target of 10.50% of the outstanding pool balance with a floor of 5.00% of original pool balance, a 1.00% fully funded, non-declining reserve account and subordination, except for the Class D notes which do not benefit from subordination. The notes may also benefit from excess spread.

Our analysis has considered the effect of the coronavirus outbreak on the US economy as well as the effects that the announced government measures, put in place to contain the virus, will have on the performance of corporate obligors and related collateral.

The contraction in economic activity in the second quarter will be severe and the overall recovery in the second half of the year will be gradual. However, there are significant downside risks to our forecasts in the event that the pandemic is not contained and lockdowns have to be reinstated. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. It is a global health shock, which makes it extremely difficult to provide an economic assessment. Currently, Moody's expects real GDP in the US to contract by 5.7% in 2020.

Given the unprecedented reduction in business activity, the performance of contracts backing small ticket equipment ABS could deteriorate beyond levels currently forecasted. In addition, the servicer may continue to offer borrower assistance programs to affected borrowers, such as extensions, which can impact scheduled cash flows to bondholders.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was "Moody's Approach to Rating ABS Backed by Equipment Leases and Loans" published in May 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1218876. 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 ratings of the subordinate notes if, given our expectations of portfolio losses, levels of credit enhancement are consistent with higher ratings. Moody's then current expectations of loss may be better than its original expectations because of lower frequency of default by the underlying obligors or slower than expected depreciation in the value of the equipment that secure the obligor's promise of payment. Positive changes in the US macro economy and the performance of various sectors where the lessees operate could also affect the ratings.

Down

Moody's could downgrade the ratings of the notes if, given our expectations of portfolio losses, levels of credit enhancement are consistent with lower ratings. Losses could rise above Moody's original expectations as a result of a higher number of obligor defaults or greater than expected deterioration in the value of the equipment that secure the obligor's promise of payment. Transaction performance also depends greatly on the US macro economy. Other reasons for worse-than-expected performance include poor servicing, error on the part of transaction parties, inadequate transaction governance and fraud. Additionally, Moody's could downgrade the Class A-1 short term rating following a significant slowdown in principal collections that could result from, among other reasons, high delinquencies or a servicer disruption that impacts obligor's payments.

Additional research including a pre-sale report for this transaction is available at www.moodys.com.

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.

Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1235542.

The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each 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.

Aron Bergman
Vice President - Senior 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

Giyora Eiger
VP - Senior Credit Officer
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

No Related Data.
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