Fitch Expects to Rate Conn's Receivables Funding 2016-B, LLC; Issues Presale
--$391,840,000 class A notes 'BBBsf(EXP)'; Outlook Stable;
--$111,960,000 class B notes 'BBsf(EXP)'; Outlook Stable;
--$48,980,000 class C notes 'Bsf(EXP)'; Outlook Stable;
--class R notes 'NR'.
KEY RATING DRIVERS
Collateral Quality: The 2016-B trust pool consists of 100% fixed-rate consumer loans originated and serviced by Conn's Appliances, Inc. The pool exhibits a weighted average FICO score of 608 and a weighted average borrower rate of 21.52%.
The base case default rate for the 2016-B pool is assumed to be 24.75% and Fitch applied a 2.2x stress at the 'BBBsf' level, reflecting the high absolute value of the historical defaults, along with the variability of default performance in recent years and the high geographic concentration.
Rating Cap at 'BBBsf': Due to higher loan defaults in recent years, management changes at Conn's, and the credit risk profile of Conn's, Fitch placed a rating cap on this transaction at the 'BBBsf' category.
Dependence on Trust Triggers: The trust depends on the three trust triggers -- the Cumulative Net Loss Trigger, the Annualized Net Loss Trigger, and the Recovery Trigger -- in order to ensure the payments due on the notes during times of degrading collateral performance.
Liquidity Support: Liquidity support is provided by reserve account, which will be fully funded at closing at 1.50% of the initial pool balance. The reserve account will step down to 1.25% of the original collateral balance once overcollateralization (OC) reaches 30% of the current collateral balance and will step down to 1.00% of the original collateral balance once OC reaches 40% of the current collateral balance.
Servicing Capabilities: Conn Appliances, Inc. has a long track record as an originator, underwriter, and servicer. The credit risk profile of the entity is mitigated by the backup servicing provided by Systems & Services Technologies, Inc. (SST).
Unanticipated increases in the frequency of defaults or chargeoffs on customer accounts could produce loss levels higher than the base case and would likely result in declines of credit enhancement (CE) and remaining loss coverage levels available to the investments. Decreased CE may make certain ratings on the investments susceptible to potential negative rating actions, depending on the extent of the decline in coverage.
Fitch conducts sensitivity analysis by stressing a transaction's initial base case chargeoff assumption by 1.5x, 2.0x, and 2.5x, and examining the rating implications. The 1.5x, 2.0x, and 2.5x increase of the base case chargeoffs are intended to provide an indication of the rating sensitivity of the notes to unexpected deterioration of a transaction's performance.
During the sensitivity analysis, Fitch examines the magnitude of the multiplier compression by projecting the expected cash flows and loss coverage levels over the life of investments under higher than the initial base case chargeoff assumptions. Fitch models cash flows with the revised chargeoff estimates while holding constant all other modeling assumptions.
Under the 1.5x base case stress scenario, class A notes would retain the current rating, while class B notes would experience a one-notch downgrade. Under the 2.0x base case stress scenario, class A notes would be downgraded one notch, while class B notes would downgraded one category to 'Bsf'. Under the 2.5x base case stress scenario, class A notes would be downgraded to 'B+sf', and class B and class C notes would fall to 'CCCsf'.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
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 accessing the appendix referenced under "Related Research" below. 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,' dated May 31, 2016.