DBRS Assigns Final Ratings to Securitisation of Catalogue Assets Limited

DBRS Ratings Limited (DBRS) has today assigned an ‘A’ (sf) final rating to the Class A VFN Notes to be issued by Securitisation of Catalogue Assets Limited (“SOCA”). The transaction represents the first placed issuance under Shop Direct Finance Company Limited’s (“SDFC”) home shopping receivables program in the United Kingdom. The receivables to be securitised consist of home shopping receivables granted to private individuals.

The ratings are based upon review by DBRS of the following analytical considerations:

• Transaction capital structure and form and sufficiency of available credit enhancement.
• Relevant credit enhancement in the form of overcollateralization and subordination. Credit enhancement levels are sufficient to support the DBRS projected expected cumulative net loss assumption under various stress scenarios at 'A’ (sf) standard for the Class A VFN Notes to be issued by Securitisation of Catalogue Assets Limited.
• The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms in which they have invested.
• The transaction parties' capabilities with respect to originations, underwriting, servicing, and financial strength.
• The credit quality of the collateral and ability of the Servicer to perform collection activities on the collateral.
• The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with the DBRS Legal Criteria for European Structured Finance Transactions.

Transaction Summary
The structure envisages two classes of rated notes: Class A VFN and Class B VFN, DBRS rates Class A VFN only. Class A VFN Maximum Commitment Amount is equal to £1,150,000,000 while Class B VFN Maximum Commitment Amount is equal to £100,000,000. Assuming the initial drawdown amount to be equal to the maximum commitment amount, the initial Class A VFN credit support of 28.00% includes overcollateralization and Class B VFN subordination.

The transaction envisages a dynamic credit enhancement with a floor for the Class A Notes of 28.00% and there are certain performance triggers in place which, if breached, would initiate the amortization period:

1) Either: (a) the Portfolio Default Rate exceeds 2 per cent.; or (b) on any three Monthly Reference Dates in any 12-month period, the Portfolio Default Rate exceeds 1.75 per cent.;
2) The Delinquency Ratio equals or exceeds 22.5 per cent.;
3) The Five Month Delinquency Ratio equals or exceeds 10 per cent.;
4) The Dilution Ratio has twice exceeded 175 per cent.; and
5) The Three Month Moving Average Payment Rate is less than 7.5 per cent.

The transaction envisages two SPVs: a UK Investor Beneficiary and a Jersey Investor Beneficiary. SDFC operates as Servicer, Transferor and Transferor Beneficiary. SDFC will sell finance charge and non-finance charge receivables at a discount to Securitisation of Catalogue Assets Receivables Trust Ltd (“SOCA RT Ltd” or the “Receivables Trustee”). The Receivables Trustee will sell the finance charge receivables to Securitisation of Catalogue Assets Ltd (“SOCA Ltd”) operating as UK Investor Beneficiary. The UK Investor Beneficiary will sell Variable Funding Notes to the Jersey Investor Beneficiary in order to purchase these receivables. The Jersey Investor Beneficiary will issue VFNs backed by these assets to certain VFN Notes Purchasers.

The Originator
Shop Direct Group (“SDG”) is predominantly an “e-tailer” operating several internet based brands in the UK such as very.co.uk, isme.com and littlewoods.com. The company has evolved from a legacy catalogue business that repositioned itself as an “e-tailer” providing goods for the family and home through its own internet sites supported by a financial services proposition.

SDFC offers two main credit products, Direct Credit and Embedded Credit. Direct Credit is offered under the very.co.uk and isme.com brands and is broadly similar to a credit card agreement where a customer is granted an initial credit limit that is subject to interest charges. The customer is able to utilise their credit limit to make online purchases from the aforementioned brands and is then required to make at least the minimum contractual payment per 28 day cycle. The Embedded Credit product is administered separately to the Direct Credit product and provides weekly payment arrangements for goods predominantly purchased through SDG's Littlewoods brand. Products sold through Littlewoods are typically advertised as interest free with weekly payment arrangements available, however the price of the product is higher than through the Direct channels recognising "Embedded" interest charges. An "Embedded" customer is able to benefit from a predefined repayment schedule per purchase and is also afforded a credit limit in the same way as a Direct customer.

Back-Up servicing
PricewaterhouseCoopers (PWC) is named as the ‘initial standby servicer’ on the SDFC ABS transaction. DBRS notes that the stand-by arrangement is not a traditional back-up servicing agreement but rather a contingency plan and more akin to a back-up servicing facilitator role. DBRS believes that the stand-by arrangement developed for the transaction is sufficient to ensure continuity of servicing following a possible servicer default specifically related to an insolvency event.

DBRS gained additional comfort from various structural elements within the transaction including the short-term nature of the receivables as well as the limited commingling risk and the presence of a liquidity reserve. DBRS also stressed the servicing costs assumptions within the cash flow model.

Credit Analysis
DBRS reviewed the monthly historical performance of SDFC originations on a dynamic basis going back to January 2005. In order to refine our base case assumptions DBRS focused on data from 2011 onwards using data extracted from CAM: Customer Account Management system, i.e. the live system of Shop Direct Finance Company. DBRS subsequently reviewed various stress tests, including, but not limited to, significant multiples of its base case charge off assumption complemented by reductions in cash yield and principal payments. DBRS used the mid-point at each rating level.

Charge-Off Rate
Receivables are typically charged-off to recoveries at 180 days delinquent or when the customer is considered insolvent by SDFC. Charge-off may be delayed past 180 days for receivables that have maintained agreed debt management arrangements (“DMAs”). This is where monthly payments are rescheduled by an external debt advisor/counsellor on behalf of a customer across all their credit accounts (including SDFC). SDFC do not have a role in setting these monthly payments but they can choose whether or not to sign up to the arrangement. These accounts are capped at 3% in the transaction and will not necessarily be charged-off, but they will continue to roll through the delinquency buckets if the arrangement is broken. Importantly, rescheduled accounts continue to roll through the arrears buckets and do not simply get reset to performing.

To calculate the charge-off rate, write-offs, dilutions and DMA Overlay were used, and the opening monthly charged and uncharged balance was used for the denominator.

The average of DMA balances has been 0.85% during the reporting period and has been added to the charge-off rate to obtain the base case. The data show that highest charge-offs are experienced by newly-opened accounts and an improved performance for more seasoned customers.

DBRS has been provided with the following dilution data: Returns, Goods Lost in Transit, First Instalment Defaults and Frauds, with Returns being the largest category. DBRS used the average dilution rate over the observation period which is equal to 2.74%. Having applied stresses to account for charge-off rate volatility, the DBRS charge-off base case for the total portfolio was set at 19.00%.

Payment Rate
To calculate the PR, all customer payments were included within the numerator (including principal and interest) and the opening monthly charged and uncharged balance was used for the denominator. The low PR, which is close to the minimum contractual payment of 7.00% on the Direct Credit is indicative of the subprime nature of the pool.

Having applied stresses to account for payment rate volatility, the DBRS PR base case for the total portfolio was set at 7.50%, with a minimum monthly payment rate assumption of 2.50%.

Yield is calculated taking into account the Interest component and Admin Fees. The Direct product is interest bearing, while as indicated earlier Embedded customers pay interest only on BNPL and Extended Terms. For Direct product the interest yield is available and is calculated as a percentage of the charged and uncharged balance. For Embedded product the interest is added on to the purchase price and consequently we do not have a yield per se.

Admin fees are constituted almost entirely by arrears management charges. There are a small amount of other charges e.g. copy statements, post office fees, bounced payments, but they are negligible. Admin fees arise on both Embedded and Direct products, but are also subject to some degree of reversal on accounts being defaulted.

Yield
DBRS received portfolio and product level billed yield data, which after accounting for reversal, were used to determine the cash yield for the Direct and Embedded products.

Having applied stresses to account for yield volatility, the DBRS yield base case for the total portfolio was set at 11.50%.

Results of this testing indicate that the ability of the Trust to repay the notes is consistent with their respective ratings. In other words, the ability to repay the Class A VFN notes, for example, is not compromised even if the expected yield of the portfolio is reduced by 25%, the principal payment rate is reduced by 35% and charge-off amounts are increased to 3.0 times the base case, simultaneously.

Transaction Counterparty Risk

Servicer
SDFC will service the receivables in accordance with its customary practices and as compensation will receive an annualised servicing fee of 0.50% of the eligible receivables balance. The transaction documentation mitigates against the commingling of funds whereby the transferor creates a trust over amounts standing to the credit of the collections accounts in favor of the receivables trustee in respect of amounts representing collections. Amounts in the collection accounts are transferred to the trust account within a business day after reconciliation.

Swap Counterparty
There is no hedging agreement in place. The transaction is not exposed to substantial interest rate risk as the Class A VFN and Class B VFN notes pay a floating rate of interest whilst the portfolio can be repriced.

Bank Accounts
Borrowers initially pay sums into different collection accounts held at Santander UK PLC, Barclays Corporate Banking, RBS PLC and Natwest Bank. The reserves, authorized investments and collections will be ultimately held by RBS PLC operating as Account Bank. DBRS has conducted an internal assessment on the bank and concluded that the bank meets DBRS minimum criteria for account banks. The transaction contains downgrade provisions relating to the account bank consistent with DBRS criteria.

Legal Structure

Law(s) impacting the transaction
The transaction documentation is governed under the laws of England and Wales.

Transfer / Assignment of the Receivables
Under the Receivables Securitisation Agreement the Transferor and the Receivables Trustee have agreed that the Transferor shall from time to time sell and assign all receivables arising, from time to time, on Designated Accounts to the Receivables Trustee against payment to the Transferor and receipt by the Transferor of interests in the Finance Charge Receivables Trust or the Non-Finance Charge Receivables Trust.

Set-Off
SDFC is not a deposit taking financial institution and as such it is not exposed to set-off rights from the relevant debtors.

Notes:
All figures are in Sterling unless otherwise noted.

The principal methodology applicable is the Rating European Consumer and Commercial Asset-Backed Securitisations.

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

This can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include performance data relating to the receivables provided by Shop Direct Finance Company Limited through the arranger. DBRS received monthly dynamic historical performance data on balance, payment, loss and recovery data divided by ageing and pool composition relating to originations going back to January 2005. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

The full report providing additional analytical detail is available by clicking on the link or by contacting us at info@dbrs.com.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):
• Charge-Off Rate Used: Charge-off Rate of 19.00%, a 25% and 50% increase on the base case.
• Payment Rate Used: Base case Payment Rate of 7.50%, a 25% and 50% increase of the base case.
• Cash Yield Used: Cash Yield of 11.50%, a 25% and 50% increase on the base case.

DBRS concludes that for the Class A VFN Notes:
• A hypothetical increase of the base case Charge-Off Rate by 25%, ceteris paribus, would lead to a downgrade of the Class A VFN Notes to ‘BBB (sf)’.
• A hypothetical increase of the base case Charge-Off Rate by 50%, ceteris paribus, would lead to a downgrade of the Class AVFN Notes to ‘BBB (sf)’.
• A hypothetical decrease of the base case Payment Rate by 25%, ceteris paribus, would lead to a downgrade of the Class A VFN Notes to ‘BBB (sf)’.
• A hypothetical decrease of the base case Payment Rate by 50%, ceteris paribus, would lead to a downgrade of the Class A VFN Notes to ‘BB (sf)’.
• A hypothetical decrease of the base case Cash Yield by 25%, ceteris paribus, would lead to a downgrade of the Class A VFN Notes to ‘BBB (sf)’.
• A hypothetical decrease of the base case Cash Yield by 50%, ceteris paribus, would lead to a downgrade of the Class A VFN Notes to ‘BBB (sf)’.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Alessio Pignataro
Initial Rating Date: November 25, 2013
Initial Rating Committee Chair: Chuck Weilamann

Last Rating Date: Not applicable as no last rating date.

Lead Surveillance Analyst: Keith Gorman
Rating Committee Chair: Chuck Weilamann

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom

Registered in England and Wales: No. 7139960

The rating methodologies and criteria used in the analysis of this transaction can be found at:
http://www.dbrs.com/about/methodologies.

• Rating European Consumer and Commercial Asset-Backed Securitisations.
• Legal Criteria for European Structured Finance Transactions.
• Derivative Criteria for European Structured Finance Transactions.
• Operational Risk Assessment for European Structured Finance Servicers.
• Unified Interest Rate Model Methodology for European Securitisations.