DBRS Assigns New Ratings to Securitisation of Catalogue Assets Limited Notes Following Transaction Restructuring

DBRS Ratings Limited (DBRS) assigned ratings to the Class A-S Variable Funding Notes and the Class A-J Variable Funding Notes (collectively, the Rated Notes and together with the Class B Notes and Class C Notes, the Notes) issued by Securitisation of Catalogue Assets Limited (the Issuer). Furthermore, DBRS has discontinued the rating of the existing Class A Variable Funding Notes due to their repayment in full using the issuance proceeds of the Rated Notes.

The rating of the Class A-S Variable Funding Notes addresses the timely payment of interest and ultimate repayment of principal by the legal maturity date. The rating of the Class A-J Variable Funding Notes addresses the ultimate payment of interest and ultimate repayment of principal by the legal maturity date.

The rating actions follow the execution of a transaction restructuring agreement on 5 December 2018 that outlines certain amendments that include, amongst others:

-- The issuance of the Class A-S Variable Funding Notes and Class A-J Variable Funding Notes that will be used to fully redeem the existing Class A Variable Funding Notes. The maximum commitment amount of the Rated Notes remains aligned with the previous Class A Variable Funding Notes at GBP 1,325 million.
-- The Class A-S Variable Funding Notes have a maximum commitment amount of GBP 1,143.3 million with a maximum margin of 1.8%. The Class A-J Variable Funding Notes have a maximum commitment of GBP 181.7 million with a maximum margin of 2.8%.
-- Maximum advance rates of 64.0% and 73.0% available to the Class A-S Variable Funding Notes and Class A-J Variable Funding Notes respectively.
-- The end of the revolving period has been set at December 2021 for all Notes.
-- The concentration limit for embedded receivables (previously known as agency receivables) during the revolving period has been reduced from 35% to 30%.
-- An increase in the permitted amount of external debt agency rescheduled receivables to 3.5% from 3.0% (these now also include accounts where the obligor is subject to an individual voluntary arrangement).
-- The required liquidity reserve amount has been increased, reflecting higher liquidity support available to the Class A-S Variable Funding Notes.
-- The liquidity reserve release amount may now be made available to redeem the Notes (previously, the release was distributed to the Seller).
-- The role of the Issuer’s account bank has transitioned from The Royal Bank of Scotland plc (RBS) to HSBC Bank plc (HSBC).
-- Revised rating thresholds applicable to the Issuer’s account bank and eligible investments commensurate with the rating of the Class A-S Variable Funding Notes.

The rating actions are also based on the considerations listed below:

-- Portfolio performance with respect to charge-off rates, payment rates and yield rates.
-- The available credit enhancement to the Rated Notes.
-- The ability of the transaction structure and triggers to withstand stressed cash flow assumptions and repay the Rated Notes in full and in accordance with the terms and conditions of the transaction documents.
-- The availability of a back-up servicer for the transaction. Link Financial Outsourcing (LFO) is the named back-up servicer on the transaction and commits to transfer the portfolio to its own operational platform and commence servicing within 22 days, if there is a need to do so. DBRS understands that LFO estimates that a data transfer of the portfolio would take approximately two days. The back-up servicing agreement is considered ‘warm` by DBRS.

PORTFOLIO PERFORMANCE
The Rated Notes are backed by a pool of home shopping receivables granted to private individuals originated by Shop Direct Finance Company Limited in the United Kingdom. The portfolio consists of receivables classified as either direct or embedded. Direct receivables attract an interest rate while embedded typically do not and instead have defined payment profiles for purchases. Based on the performance data provided (as of the October 2018 reporting period), the reported monthly payment rate is calculated at 10.5% with the three-month moving average calculated at 10.0%. The five-month delinquency rate is calculated at 3.7% and the three-month moving average is calculated at 3.8%. The annualised default rate (excluding dilutions) is calculated at 10.8% and the three-month moving average is calculated at 12.8%.

DBRS considered the historic performance of the transaction and the product weightings applicable to the portfolio to assess its asset and portfolio assumptions.

PORTFOLIO ASSUMPTIONS
The base case principal payment rate, charge-off rate and yield rate assumed are 9.0%, 15.5% and 18.0%, respectively.

CREDIT ENHANCEMENT
Credit enhancement for the Rated Notes is provided through subordinated notes, the availability of amounts released from an amortising liquidity reserve and overcollateralisation. Subordination available to the Class A-S Variable Funding Notes consists of the Class A-J Variable Funding Notes, the Class B Notes and the Class C Notes. Subordination available to the Class A-J Variable Funding Notes consists of the Class B Notes and Class C Notes.

The maximum advance rate available to the Class A-S Variable Funding Notes is equal to 64.0% and 73.0% for the Class A-J Variable Funding Notes, representing credit enhancement, excluding the liquidity reserve of 36.0% and 27.0%, respectively. The liquidity reserve’s target balance is calculated based on the aggregation of amounts calculated for each class of Notes. These class-specific amounts consider the sum of the total margin for each of the Notes, one-month GBP Libor plus 2.0% plus a further 1.0% which are then multiplied by the applicable commitment amounts (or if zero, the applicable balance of the Notes). These amounts are then calculated to cover three payment dates for the Class A-S Variable Funding Notes and one payment date for the remainder.

HSBC has been appointed as the account bank and has replaced RBS as part of the transaction amendment. DBRS privately rates HSBC and considers that it meets DBRS’s minimum criteria to act in such capacity and the transaction contains downgrade provisions relating to this role consistent with DBRS’s criteria.

Notes:
All figures are in British pound sterling unless otherwise noted.

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

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

An asset and a cash flow analysis were both conducted. Because of the inclusion of a revolving period in the transaction, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

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

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include performance data and monthly reports provided by Shop Direct Finance Company Limited through the arranger (HSBC). DBRS received monthly dynamic historical performance data on balance, payment, loss and recovery data divided by aging and pool composition relating to originations.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on this transaction took place on 15 December 2017, when the rating of the Class A Variable Funding Notes was confirmed at A (sf).

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating:

-- Expected charge-off rate: 15.5%
-- Expected principal payment rate: 9.0%
-- Expected yield rate: 18.0%

Scenario 1: a 25% increase in the expected charge-off rate.
Scenario 2: a 25% increase in the expected charge-off rate and a 25% decrease in the expected principal payment rate.
Scenario 3: a 25% increase in the expected charge-off rate and a 25% decrease in the expected yield rate.
Scenario 4: a 25% increase in the expected charge-off rate, 25% decrease in the expected principal payment rate and 25% decrease in the expected yield rate.

DBRS concludes that the expected ratings under the four stress scenarios are:

-- Class A-S Variable Funding Notes: AAA (sf), AA (low) (sf), AA (high) (sf), A (sf)
-- Class A-J Variable Funding Notes: A (low) (sf), BBB (sf), BBB (sf), BBB (low) (sf)

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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 and US regulations only.

Lead Analyst: Alexander Garrod, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 25 November 2013

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

The rating methodologies 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
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Interest Rate Stresses for European Structured Finance Transactions

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.

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