Fitch Rates Kubota Credit Owner Trust 2016-1

NEW YORK--()--Fitch Ratings has assigned the following ratings to the Kubota Credit Owner Trust 2016-1 (KCOT 2016-1) notes:

--$137,000,000 class A-1 'F1+sf';

--$201,500,000 class A-2 'AAAsf'; Outlook Stable;

--$201,500,000 class A-3 'AAAsf'; Outlook Stable;

--$60,000,000 class A-4 'AAAsf'; Outlook Stable.

KEY RATING DRIVERS

Quality of Receivables: For the 77.8% of the pool with FICO scores, the obligors have strong credit quality, as evidenced by the weighted average (WA) FICO score of 741 for the 2016-1 pool. The majority of the pool (approximately 83.2%) consists of new agricultural equipment (AG) equipment, which is the strongest performing collateral type. The pool is geographically diversified and has limited exposure to obligor concentrations.

Strong Managed Portfolio: KCC's managed portfolio has experienced consistent and low delinquencies and net losses dating back to 2008. Since recent recessionary static pool data were not available, Fitch supplemented the KCC data with proxy data from prime auto loan issuers with a similar FICO composition on the consumer portion (78%) of the pool, and John Deere and CNH Capital proxy data for the commercial portion (22%), to derive an expected base-case cumulative net loss (CNL), consistent with 2015-1.

Credit Enhancement: Initial hard credit enhancement (CE) for 2016-1 is 4.00% (unchanged from 2015-1) for the class A notes. The transaction also benefits from expected excess spread of 2.02% per annum (p.a.). Based on Fitch's stressed cash flow scenarios, the structure can support 6.34% in net loss coverage under the 1.20% base case proxy, resulting in loss multiples in excess of 5.0x, consistent with an 'AAAsf' rating for class A notes.

Quality Origination, Underwriting and Servicing: KCC has demonstrated adequate abilities as originator, underwriter and servicer, as evidenced by the historical delinquency and net loss performance of the managed portfolio.

Integrity of Legal Structure: The legal structure of the transaction should provide that a bankruptcy of the trust would not impair the timeliness of payments on the securities.

RATING SENSITIVITIES

Unanticipated increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than the base case and could result in potential rating actions on the notes. Fitch evaluated the sensitivity of the ratings assigned to KCOT 2016-1 to increased CNL over the life of the transaction. Fitch's analysis found that the transaction displays some sensitivity to increased defaults and CNL, showing a potential downgrade of one category under Fitch's moderate 1.5x base-case loss) scenario. The notes could experience downgrades of up to three rating categories, although still remain investment grade, under Fitch's severe (2.5x base-case loss) scenario.

DUE DILIGENCE USAGE

Additionally, Fitch was provided with third-party due diligence information from Deloitte & Touche. The third-party due diligence focused on comparing certain information with respect to 125 loans from the statistical data file. Fitch considered this information in its analysis, and the findings did not have an impact on Fitch's analysis. A copy of the ASB Due Diligence Form-15E received by Fitch in connection with this transaction may be obtained through the link contained on the bottom of the related rating action commentary (RAC).

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 18 Jul 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884963

Criteria for Rating U.S. Equipment Lease and Loan ABS (pub. 03 Dec 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=874138

Criteria for Servicing Continuity Risk in Structured Finance (pub. 17 Dec 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875586

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=883130

Rating Criteria for U.S. Auto Loan ABS (pub. 21 Mar 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878723

Related Research

Kubota Credit Owner Trust 2016-1 -- Appendix
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884861

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009916

ABS Due Diligence Form 15E 1
https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1009916&flm_nm=15e_1009916_1.pdf

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009916

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst:
Joyce Fargas, +1-212-908-0824
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Du Trieu, +1-312-368-2091
Senior Director
or
Committee Chairperson:
Tracy Wan, +1-212-908-0171
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com
or
Media Relations:
Hannah James, +1-646-582-4947
New York
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Joyce Fargas, +1-212-908-0824
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Du Trieu, +1-312-368-2091
Senior Director
or
Committee Chairperson:
Tracy Wan, +1-212-908-0171
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com
or
Media Relations:
Hannah James, +1-646-582-4947
New York
hannah.james@fitchratings.com