Presale:
Engenium Capital Equipment Dollar
Trust
Primary Credit Analyst:
Antonio Zellek, Mexico City (52) 55-5081-4484; [email protected]
Secondary Contact:
Leandro C Albuquerque, New York (1) 212-438-9729; [email protected]
Table Of Contents
$340.5 Million Asset-Backed Notes Due 2026
Rationale
Transaction Overview
Transaction Structure
Pool Analysis
Temporary Investments
S&P Global Ratings' Applied Losses: 25.69%
Counterparty Risks
Operational Risks
Payment Structure And Cash Flow Mechanics
Early Amortization Events
Events Of Default
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Table Of Contents (cont.)
Cash Flow Modeling Assumptions And Results
Sensitivity Analysis
Governing Law And Legal Review
Related Criteria And Research
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Presale:
Engenium Capital Equipment Dollar Trust
$340.5 Million Asset-Backed Notes Due 2026
This presale report is based on information as of June 29, 2016. 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 29, 2016
Class
Preliminary rating(i)
Type
Interest rate
USD notes due
2026
BBB+ (sf)
Senior
Fixed TBD
Preliminary amount (mil. $) Legal final maturity date
340.5 Dec. 20, 2026
(i)The rating is preliminary and subject to change at any time. It addresses the issuer's ability to pay timely interest and principal on the notes.
TBD--To be determined.
Profile
Expected closing date
July 15, 2016
Originator location
Mexico.
Structure type
Asset-backed notes backed by a revolving pool of equipment leases and loans denominated in U.S. dollars.
Payment frequency
Monthly.
Principal repayment term Semi-turbo on a monthly basis, beginning after the revolving period, two years after issuance.
Participants
Role
Name
Rating/ranking (if
applicable)
Rating
dependency
Issuer
Engenium Capital Equipment Dollar Trust
N/A
N/A
Sponsor
Engencap Holding, S. de R.L. de C.V.
NR
No
Originator/seller/servicer
Engencap, S. de R.L. de C.V.
NR
No
Originator/seller/servicer
Engencap Fin, S.A. de C.V., SOFOM ENR
NR
No
Originator/seller/lead servicer
Engencap Holding, S. de R.L. de C.V.
NR
No
Master servicer
Tecnología en Cuentas por Cobrar, S.A.P.I. de
C.V.
NR
No
Indenture trustee and first beneficiary of
the issuer
Bank of New York Mellon
AA-/Stable/A-1+
No
Issuer trustee
Banco INVEX S.A., Institución de Banca Múltiple,
INVEX Grupo Financiero (Invex)
mxA+/Stable/mxA-1
No
Bank account provider
Bank of New York Mellon
AA-/Stable/A-1+
Yes
Bank account provider
Citibank N.A.
A/Watch Pos/A-1
NR--Not rated. N/A--Not applicable.
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Rationale
The preliminary 'BBB+ (sf)' rating assigned to Engenium Capital Equipment Dollar Trust's U.S. dollar-denominated
notes due 2026 is based on:
• Initial credit enhancement in form of overcollateralization (O/C) of 23.80%, calculated as 1 – (liabilities/assets).
• Excess flows derived from the fact that the trust will purchase the receivables at their net present value with a
discount rate of 6.5%.
• An interest reserve funded upfront, enough to cover up to three months of interest, which could mitigate liquidity
risk.
• The transaction's payment structure, which, during the revolving period, would retain the collection proceeds net of
expenses and interest in a fund to purchase new receivables or to amortize the notes outstanding balance after the
revolving period to maintain the O/C at its target level.
• The transaction's eligibility criteria which, in our view, mitigate the risk that the pool's characteristics change
substantially.
• The concentration limits per obligor and industry included on the transaction documents, which we consider
consistent with the level of credit enhancement for the assigned rating level.
• The early amortization events and events of default included in the transaction that, if breached, may prevent the
release of remaining amounts to the originators.
• A cash accumulation event that, if triggered, would allocate excess cash in the trust to amortize the outstanding
principal on the notes.
• The transaction's legal structure, which constitutes a true sale of the assets through a trust agreement and several
contribution agreements, isolating the transferred assets from the originators' credit risk to a bankruptcy-remote
entity that we consider unlikely to be subject to a bankruptcy procedure under our criteria.
• The transaction's ability to withstand maximum losses consistent with its preliminary rating level.
• Engenium Capital's operational capabilities, which, after applying our criteria, result in a maximum potential rating
consistent with the assigned rating.
Transaction Overview
The transaction consists of U.S. dollar (USD)-denominated notes to be issued in an amount of US$340.5 million by
Engenium Capital Equipment Dollar Trust (The Irrevocable Administration and Source of Payment Trust No. 2711,
established in Banco Invex S.A., Institución de Banca Múltiple, Invex Grupo Financiero). The issuer is a trust organized
under Mexican law established to acquire the assets from the originators, enter into the documentation related to the
issuance, issue the notes, manage the trust estate, and pay all amounts due under the notes.
The notes will be backed by a revolving pool of equipment leases and loans originated and serviced by Engencap, S.
de R.L. de C.V.; Engencap Fin S.A. de C.V.; SOFOM ENR; and Engencap Holding, S. de R.L. de C.V. (together referred
to as Engenium Capital, formerly GE Capital Mexico's equipment loan financing business).
The notes, due Dec. 20, 2026, will pay a fixed interest rate to be determined at closing and will amortize principal on a
monthly basis after the two-year revolving period, though the obligation to repay principal is by final legal maturity.
Our preliminary rating on the notes addresses timely interest payments at every monthly payment date and principal
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repayment at legal final maturity.
During the revolving period, the trustee will allocate the collection proceeds, after covering expenses, fees, and
interest, to a segregated account to acquire additional receivables, which must meet the eligibility criteria. After the
revolving period, the available cash from the collection proceeds, net of expenses, fees, and interest, will be used to
amortize the principal balance up to the amount needed to maintain the O/C at its target level of 23.8%, pay additional
expenses, and then apply all excess cash, if any, to amortize the principal on the notes.
Engenium Capital will act as the servicer for the transaction and Tecnología en Cuentas por Cobrar, S.A.P.I. de C.V.
(TECC) will be the master servicer, providing supervision and monitoring Engenium Capital's performance as the
servicer as well as providing validation related to the bank accounts, assets meeting the eligibility criteria, and periodic
reporting.
The transaction structure also includes a master collection trust held in Invex into which obligors will deposit their
payments in U.S. dollars, which will in turn transfer on a daily basis the collections--which have been identified as
belonging to the issuing trust--to the issuing trust accounts held in Bank of New York Mellon (BONY) so that it can use
the proceeds to make the payments on the notes.
Formerly known GE Capital Mexico, Engenium Capital offers secured commercial loans, equipment financing, and
other financial services to companies in a variety of industries. Before becoming Engenium Capital, GE Capital Mexico
had 23 years' operating history in the country. In S&P Global Ratings' view, the company has adequate servicing
capabilities, loan administration and collection processing, internal controls, and policies and procedures in the
context of this transaction.
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Transaction Structure
The notes will be provided with the following credit enhancements:
• O/C of 23.80%;
• A floor O/C that would be equivalent to the greater of the target O/C above and 1% of the initial net book value of
all receivables at the initial cutoff date;
• Excess flows derived from the purchase of the receivables at their net present value discounted at 6.5%; and
• Interest reserves of up to three months of interest due.
Pool Analysis
As of the May 31, 2016, cut-off date, the collateral pool had a net present value (discounted at 6.5%) of approximately
US$414.06 million in equipment loans and leases and approximately US$8.18 million comprising 50% booked residual
values for transportation equipment only (buses, trailers, tractors, trucks, and forklifts; see table 4). Booked residual
values represent 1.98% of the pool and are available to cover losses, but our analysis considers stressed residual values
of only 15% of booked residuals based primarily on our view that such values would be negatively affected under a
stress scenario in which the servicer should be replaced, potential depreciations on the securitized equipment under
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stressful conditions, and the lack of broad market information, among others..
Obligor and industry concentrations
The transaction documents include concentration limits of 6% for the largest obligor, 4.25% for any single obligor, and
of 22.5% for the five largest obligors. As for industry concentration, the indenture includes a limit of 25.5% for the
single-largest industry.
The pool to be securitized meets these limits and in our view the transaction has sufficient credit enhancement to
withstand losses equivalent to the default of the top five plus 75% of the sixth largest obligor and the largest industry
(see table 8). In addition, we believe the pool is adequately diversified geographically, as the three most concentrated
states account for the largest economic activity in the country (see table 9).
Table 4
Assets
Amount (US$) % of pool
Operating leases (NPV)
211,745,343.11
51.14
Financial leases (NPV)
116,484,424.82
28.13
77,642,096.72
18.75
405,871,864.65
98.02
8,186,355.49
1.98
414,058,220.15
100
Loans (NPV)
Assets without residuals (NPV)
50% residuals transportation equipment only (NPV)
Total assets (securitization value)
Initial cash in the trust
26,675,340
NPV--Net present value (discounted at 6.50%).
Table 5
Pool Characteristics
No. of contracts
923
Average contract balance (US$, in NPV)
448,600.46
No. of obligors
249
Weighted avg. orig. term (months)
65
Weighted avg. remaining term (months)
40
Weighted avg. seasoning (months)
25
Max. remaining term (months)
77
NPV--Net present value (discounted at 6.50%).
Table 6
Industry Concentration
Industry
% of total trust assets(i)
1
Motor vehicle parts and accessories
23.42
2
Truck rental and leasing without drivers
5.91
3
Hotels and motels
5.88
4
Trucking, except local
5.05
5
Oil and gas field exploration services
4.94
(i)Concentrations were calculated as a percentage of total trust assets, considering US$26.67 million held in cash initially.
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Table 7
Equipment Types
Collateral group
% of total trust assets(i)
1
Manufacturing equipment
2
Construction equipment
16.49
9.27
3
Transportation - trailers
7.83
4
Printing equipment
6.65
5
Machine tools
6.08
6
Real estate
5.90
7
IT equipment - hardware
5.46
8
Plastic equipment
4.26
9
Telecommunications equipment
4.17
10
Transportation - tractor
4.09
(i)Concentrations were calculated as a percentage of total trust assets, considering US$26.67 million held in cash initially.
Table 8
Obligor Concentration
% of total trust assets(i)
Top obligor
5.58
Second-largest obligor
4.55
Third-largest obligor
4.33
Fourth-largest obligor
4.07
Fifth-largest obligor
2.98
Top five obligors
21.51
Top 10 obligors
33.49
(i)Concentrations were calculated as a percentage of total trust assets, considering US$26.67 million held in cash initially.
Table 9
Geographic Concentration
State
% of total trust assets(i)
1
Nuevo León
18.52
2
Estado de México
13.27
3
Ciudad de México
12.66
4
Puebla
9.37
5
Guanajuato
7.48
(i)Concentrations were calculated as a percentage of total trust assets, considering US$26.67 million held in cash initially.
Temporary Investments
In our view, permitted investments are limited consistently with our criteria for temporary investments; the
transaction's legal documents define permitted investments as: direct obligations or obligations unconditionally
guaranteed by the U.S. (or by any agency if such obligations are backed by the full faith and credit of the U.S.),
commercial paper, certificates of deposit, and money market funds. For all cases, the transaction documents provide
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for minimum ratings that are consistent with the assigned rating level.
S&P Global Ratings' Applied Losses: 25.69%
To derive the applied losses for this transaction, we applied the maximum of our base-case loss times a stress factor of
5.75 times (x), consistent with the assigned rating level as per our "Methodology And Assumptions For Rating Mexican
Equipment ABS," published Dec. 11, 2014, and the concentration limits for the top five obligors plus 75% of the sixth.
While in other equipment-backed transactions in Mexico we typically apply a stress factor of 5x, we adjusted it
upwards to 5.75x for the recommended rating level based on our view of higher potential risks derived from the
transition process faced by Engenium Capital after its acquisition by Linzor Capital Partners L.P. and other investors,
as well as Mexican borrower's meeting its debt payments denominated in a foreign currency (even though there is no
currency exposure for the transaction). This resulted in losses of 25.69% at a 'BBB+' stress scenario in Mexico. Our
stressed losses considered no recoveries.
Static pool data
After analyzing static loss data from the portfolio originated by GE Capital Mexico, S&P Global Ratings determined a
net base-case loss of 3.91% derived from the average of the maximum losses observed during the 2011-2015 vintages
for 180-day delinquencies, adjusted for the pool size factor of the securitized pool. We also considered the composition
of the pool to be securitized by origination year, which mainly comprised contracts originated between 2013 and 2015.
Counterparty Risks
We analyzed counterparty risks by applying our latest counterparty criteria, "Counterparty Risk Framework
Methodology And Assumptions," published June 25, 2013. The specific counterparty exposures in this transaction are
as follows:
Bank account
BONY is the bank account provider for the issuing trust accounts, and therefore it is a rating-dependent entity for the
transaction. There are no replacement mechanisms for the bank account provider. As a result, if the rating on the bank
account provider is lowered below 'BBB+', the transaction could be lowered to the rating on the bank.
The master collection trust accounts will be maintained by Invex at Citibank N.A. Although we deem this exposure to
be minimal, given the fact that collections will be transferred on a daily basis, Citibank is also considered a
counterparty for the transaction.
Commingling risk
Although all obligors will deposit their loan and lease payments into the master trust account, which will in turn
transfer collection proceeds to the issuing trust account on a daily basis, the transaction documents provide that if any
borrower deposits its payments into Engenium Capital's accounts, it will have two business days to transfer those
proceeds to the trust accounts, which is in line with our criteria.
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Direct-support obligations
There are no direct-support obligations for this transaction.
Derivatives
The notes do not have derivatives exposures.
Operational Risks
S&P Global Ratings analyzed the transaction parties and determined Engenium Capital to be the only performance key
transaction party (KTP). In our view, the transaction's maximum potential rating would be 'A' because of our view of a
"moderate" severity risk ranking, "high" portability risk ranking, and "moderate" disruption risk ranking.
Our severity risk assessment relies mainly on our view of the type of securitized assets, assuming they are fully
amortizing with minimal residual risk and that borrowers are responsible for maintenance, while our portability risk
ranking of "high" is constrained by the market depth of qualified KTPs in Mexico, which has a very limited history of
KTP responsibility and portfolio transfers. Finally, our "moderate" disruption risk assessment is based on our view of
Engenium Capital's "transitional" operating condition combined with its "satisfactory" key performance attributes.
The rating on the notes could be lowered if Engenium Capital experiences operational issues, which could lead us to
change our view of any of the servicers' key performance attributes, which in turn could change the transaction's
maximum potential rating to 'BBB'.
Payment Structure And Cash Flow Mechanics
Table 10
Payment Waterfall
1
Ordinary trust expenses, not to exceed US$210,000 per year.
2
Servicing fee of 1.00% per year of the net book value of receivables to Engenium Capital.
3
Any interest due and amounts payable on the notes.
4
Fund the reserve account to its target (three months of interest).
5
During the revolving period, payment to the revolving period account to cause the aggregate asset amount to equal the
outstanding balance of the notes (for an amount enough to meet with the target O/C).
6
After the revolving period, the required principal (in an amount enough to maintain the O/C at its target level).
7
Servicer expenses (to Engenium Capital only) not to exceed US$1 million per month.
8
Monthly costs and expenses owed to the indenture trustee or any of its affiliates.
9
To other third parties or to the issuer for further payment to third parties, including the Mexican trustee, an amount equal to the
sum of all other expenses, indemnification obligations, and all other monetary obligations owed by the issuer to any third party.
10
During the revolving period, any excess cash shall be applied as directed by Engenium Capital. After the revolving period, any
amounts remaining shall be applied to pay any outstanding principal amount.
11
Remaining amounts shall be transferred to the Mexican trustee to be applied as directed by the lead servicer.
O/C--Overcollateralization.
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Early Amortization Events
If any of the following occur, the transaction waterfall will be modified in order to pay items 1-3 described in the
payment waterfall and the remaining amounts will be used to pay note principal on a full turbo basis:
• A breach of the issuer's or any originator's obligations contained in any transaction document.
• If any written representation or warranty made by the issuer or any originator in any transaction document is
incorrect or misleading and it results in a material adverse effect.
• A default occurs of the payment when due on any debt for borrowed money for the issuer or any originator.
• A change in control on any of the originators that results in a change in its business affairs and policies.
• If one or more judgments, orders, or decrees are entered by a court under which an amount of US$50 million is
claimed, concerning the notes, the issuer or any originator or subsidiaries of the sponsor.
• If on any settlement date the six-month rolling average charge-off ratio is greater than 3.0%.
• If the weighted average life of the remaining contract term of eligible financed assets exceeds 45 months.
• Failure of the issuer to pay the outstanding note balance on the expected final maturity date.
• An event of default or servicer default has occurred and is continuing.
• If the issuer or originator suffers a bankruptcy event.
• Any involuntary petition, case, or proceeding is filed, presented, or commenced against the issuer or any originator
constituting a bankruptcy event, which is not dismissed for 60 consecutive days.
Events Of Default
• A default in the payment of interest of any note when due and payable with two business days' grace period.
• If the outstanding note balance exceeds the aggregate asset amount for a settlement date and continues to exceed
the aggregate asset amount for that settlement date for 35 business days (if the O/C falls below its target level of
23.8%).
• Default on the note principal when due and payable.
• If any transaction document is cancelled, rescinded, or for any reason ceases to be valid and binding or in full force
and effect.
• If the indenture trustee for any reason ceases to be the first beneficiary under the equipment trust agreement, free
and clear of all liens.
Cash Flow Modeling Assumptions And Results
We reviewed cash flow scenarios that were subject to stress cases that we believe are commensurate with the assigned
preliminary rating on the notes.
We assumed that the originators would not be able to substitute defaulted assets or transfer new receivables to the
trust, thus the transaction would have to be repaid with the initial portfolio. Given that, cash would be accumulated on
the revolving accounts until a cash accumulation or early amortization event was triggered.
To determine the preliminary rating, we applied three different default curves to test the transaction's capability to pay
interest, principal, and mechanisms to release or retain remaining amounts under different loss timing. The
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distributions of concentrated and back-ended loss curves were derived from the historical average distribution per the
analyzed vintages. Consistent with our criteria, we tested different loss distribution curves to assess the transaction's
capability to pay timely interest and principal and to test the structure's excess spread and mechanisms to prevent any
remaining amounts going to the sellers.
Finally, we compared the break-even losses the transaction was able to withstand under each of the tested loss curves
and compared them with the stress factors/thresholds corresponding to the rating level.
Table 11
Cash Flow Modeling Assumptions And Results
Scenario (preliminary rating)
BBB+ (sf)
Assumed fixed interest rate (%)(i)
3.75
Stress factor (x)
5.75
Base-case loss (%)
3.91
Net losses applied (derived from concentrations) (%)
Voluntary prepayments (%)
Residuals (%)
Recoveries (%)
Loss timing by months outstanding front-loaded curve (12/24/36/48/60) (%)
Approximate break-even level front-loaded curve (%)
Loss timing by months outstanding concentrated curve (12/24/36/48/60) (%)
Approximate break-even level concentrated curve (%)
Loss timing by months outstanding back-loaded curve (12/24/36/48/60) (%)
Approximate break-even level back-loaded curve 3 (%)
25.69
8
15
0
66.7/33.3/0/0/0
26.25
47.7/40/11.7/0.6/0
26.65
11.4/36.6/37.4/13.4/1.3
27.74
(i)The assumed fixed rate is for illustrative purposes only.
Our cash flow modeling results suggest that the transaction has sufficient credit enhancement combined with effective
early amortization triggers to withstand our stress scenarios consistent with the assigned preliminary 'BBB+ (sf)' rating.
Sensitivity Analysis
Besides analyzing break-even cash flows, we conducted a sensitivity analysis to see whether under a moderate stress
scenario in Mexico, all else being equal, our ratings on the notes would remain within two rating categories of the
assigned preliminary rating as allowed under our ratings stability criteria. We also addressed the preliminary rating's
sensitivity to some other variables such as the servicing fee, the interest rate on the notes, and losses above our
assumed levels for the assigned rating level.
Governing Law And Legal Review
The issuer, which is a Mexican trust, will be governed by Mexican law, while the notes will be governed by New York
law.
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Asset isolation
We have received legal comfort regarding asset isolation, bankruptcy remoteness, and enforceability, as applicable,
under the laws of the jurisdictions relevant to the transaction.
Special-purpose entity insolvency-remoteness
We have performed bankruptcy remoteness analysis at the issuer level. Through certain provisions in the transaction
documents, we are comfortable that this entity is a bankruptcy-remote special-purpose entity under our criteria "Asset
Isolation and Special-Purpose Entity Criteria—Structured Finance," published May 7, 2013.
Related Criteria And Research
Related Criteria
•
•
•
•
•
•
•
•
S&P Global Ratings' National And Regional Scale Mapping Tables, June 1, 2016
Methodology And Assumptions For Rating Mexican Equipment ABS, Dec. 11, 2014
Global Framework For Cash Flow Analysis Of Structured Finance Securities, Oct. 9, 2014
National And Regional Scale Credit Ratings, Sept. 22, 2014
Asset Isolation and Special-Purpose Entity Criteria—Structured Finance, May 7, 2013
Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012
Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
Understanding Standard & Poor’s Rating Definitions, June 3, 2009
Related Research
• S&P Global Ratings Definitions, May 3, 2016
• General Description of the Credit Rating Process, Feb. 29, 2016
• Latin American Structured Finance Scenario And Sensitivity Analysis 2015: The Effects Of Regional Market
Variables, Oct. 28, 2015
• Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors
On Credit Quality, July 2, 2014
• Sector Analysis: Mexican Lease-Backed Securitizations Show Solid Performance, May 16, 2013
• The Rating Process For Lease-Backed Transactions, Sept. 1, 2004
In addition to the criteria specific to this type of security (listed above), the following criteria articles, which are
generally applicable to all ratings, may have affected this rating action: "Post-Default Ratings Methodology: When
Does Standard & Poor's Raise A Rating From 'D' Or 'SD'?," March 23, 2015; "Global Framework For Assessing
Operational Risk In Structured Finance Transactions," Oct. 9, 2014; "Methodology: Timeliness of Payments: Grace
Periods, Guarantees, And Use of 'D' And 'SD' Ratings," Oct. 24, 2013; "Counterparty Risk Framework Methodology
And Assumptions," June 25, 2013; "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," Oct. 1, 2012;
"Methodology: Credit Stability Criteria," May 3, 2010; and "Use of CreditWatch And Outlooks," Sept. 14, 2009.
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