Morningstar DBRS Finalizes Provisional Credit Ratings on Kinetic Advantage Master Owner Trust, Series 2024-1

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on the following class of notes issued by Kinetic Advantage Master Owner Trust, Series 2024-1 (KAMOT 2024-1 or the Issuer):

-- $175,000,000 Class A Notes at BBB (sf)

CREDIT RATING RATIONALE/DESCRIPTION
(1) Transaction capital structure, proposed ratings, and form and sufficiency of available credit enhancement.
-- Credit enhancement is in the form of OC, the reserve fund, and available excess spread. Credit enhancement levels are sufficient to support the Morningstar DBRS-projected expected net loss assumption under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested. For this transaction, the credit ratings address the payment of timely interest on a monthly basis and the payment of the principal by the legal final maturity date.

(2) The transaction parties' capabilities with regard to originations, underwriting, and servicing, and financial strength of the sponsor/servicer.
-- Morningstar DBRS has performed an operational review of Kinetic and considers the entity to be an acceptable originator and servicer of motor vehicle contracts. The transaction also has an acceptable backup servicer.
-- The Kinetic senior management team has considerable experience in this niche market.

(3) Vehicles are purchased on a daily basis by independent automobile dealers. The dealers generally are familiar with the price they can sell the vehicles for; thus, the portfolio's marked-to-market nature is beneficial in a volatile used car market. Vehicles are from a diverse mix of manufacturers and generally fit the profile of what the dealer thinks will sell in their community.

(4) Dealers are generally thinly capitalized dealerships. These dealers sole source of revenue and profits is often limited to used vehicles. Unlike franchised dealers, independent dealers don’t typically have a significant parts and services business to generate additional revenues when sales of vehicles are slow or the margin on those vehicles is insufficient.

(5) The managed portfolio is currently well diversified. There is a variety of concentration limits within the structure to protect Noteholders from a material shift in collateral mix.
-- Among others, the structure includes a provision for the largest dealer that is limited to 3.00% of the NLA. The second through tenth dealer concentrations are each limited to 2.00% of the NLA (a total of 18.00%). All other dealers are subject to a 1.00% limit.

(6) Loan terms are mainly short term. The loans typically have initial terms of 60 days and can be extended up to 180 days. The due date for payment is generally determined based on the earlier of the contracted term of the loan (generally 90 to 180 days maximum) or the sale or other disposition of the vehicle. In addition, Kinetic typically requires its dealers to make principal payments, known as curtailments, to reduce the credit outstanding under their floorplan financing agreement as financed vehicles age.

(7) The Morningstar DBRS expected net loss rate is 18.00% for the transaction.
-- Kinetic had unusually high SOT/charge-off rate in the first half of 2023, culminating in June 2023. Kinetic managed through a complex situation due to market conditions, an increase in interest rates, a desire for growth and the speed within which the company opened business in new markets. As a result of the performance and a tightening of underwriting and servicing policies, portfolio performance has improved.
-- The portfolio includes accounts that could possibly be characterized as Sold and Unpaid Receivables. SAUs ultimately become defaulted receivables and those defaulted receivables, after recoveries if any are deemed charge-offs. As of December 2023, the annualized SAU was 2.16%.
-- The trust has an early amortization trigger whereby the average of the annualized charge-off rates for the receivables for the three consecutive collection periods preceding such determination date (net of any charge-off recoveries) is greater than 12.00% of the Adjusted Pool Balance on an annualized basis.
-- The transaction assumptions consider Morningstar DBRS’ baseline macroeconomic scenarios for rated sovereign economies, available in its commentary Baseline Macroeconomic Scenarios for Rated Sovereigns: March 2024 Update, published on March 27, 2024. These baseline macroeconomic scenarios replace Morningstar DBRS’ moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

(8) The Morningstar DBRS expected yield is 11.11% for the transaction.
-- Gross yield on the managed portfolio is 30.37% while the weighted average interest yield is 14.41% as of December 2023.

(9) The monthly payment rate on the managed portfolio is largely driven by repayment terms on the individual loans. The monthly payment rate was 38.38% as of December 2023. While there are different terms for each dealer, the loan terms for this product type require the loan to be repaid by the dealer upon the earlier of the sale of the underlying vehicle or the contractual loan terms, which require contractual payments at day 30, 60, 90, and in most cases, final payment at day 180.

(10) The transaction structure includes two payment rate triggers: an incremental credit enhancement trigger and an early amortization event.
-- The three-month payment rate early amortization trigger for this series is 25.00%.
-- The incremental credit enhancement trigger will cause an increase in credit enhancement if the three-month payment rate trigger declines below 30.00%.

(11) The legal structure and presence of legal opinions that address the true sale of the assets to the Issuer, the non-consolidation of the special-purpose vehicle with Kinetic, that the trust has a valid first-priority security interest in the assets, and the consistency with Morningstar DBRS' Legal Criteria for U.S. Structured Finance.

Morningstar DBRS’ credit rating on securities referenced herein addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the Class A Note Interest and Class A Outstanding Principal Amount.

Morningstar DBRS’ credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. The associated contractual payment obligation that is not a financial obligation is the Additional Interest for the Class A Notes.

Morningstar DBRS’s long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024; https://dbrs.morningstar.com/research/427030).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology applicable to the credit rating is Rating U.S. Wholesale Securitizations (September 13, 2023; https://dbrs.morningstar.com/research/420570/rating-us-wholesale-securitizations).

Other methodologies referenced in this transaction are listed at the end of this press release.

The Morningstar DBRS Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. Morningstar DBRS analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://dbrs.morningstar.com/research/430189.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS, Inc.
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The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

Rating U.S. Structured Finance Transactions (February 22, 2024), https://dbrs.morningstar.com/research/428503/rating-us-structured-finance-transactions

Operational Risk Assessment for U.S. ABS Servicers (March 21, 2024), https://dbrs.morningstar.com/research/430003/operational-risk-assessment-for-us-abs-servicers

Operational Risk Assessment for U.S. ABS Originators (March 21, 2024), https://dbrs.morningstar.com/research/430004/operational-risk-assessment-for-us-abs-originators

Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.