DBRS Upgrades and Confirms Ratings on Small Business Origination Loan Trust 2018-1 DAC

DBRS Ratings Limited (DBRS) took the following rating actions on the notes issued by Small Business Origination Loan Trust 2018-1 DAC (SBOLT 2018-1 or the Issuer):

-- Class A Notes confirmed at A (high) (sf);
-- Class B Notes upgraded to A (high) (sf) from A (sf);
-- Class C Notes upgraded to A (low) (sf) from BBB (sf); and
-- Class D Notes confirmed at BB (high) (sf) (together, the Rated Notes).

The ratings on the Class A Notes address the timely payment of interest and the ultimate payment of principal on or before the Final Maturity Date (falling in December 2026). The ratings on the Class B Notes, the Class C Notes and the Class D Notes address the ultimate payment of interest and principal on or before the Final Maturity Date. The transaction documents permit the deferral of interest on non-senior bonds and this is not considered an event of default.

The rating actions follow an annual review of the transaction and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults and losses as of the April 2019 payment date.
-- Portfolio default rates, recovery rates and expected loss assumptions for the remaining collateral pool.
-- Current available credit enhancement (CE) to the Rated Notes to cover the expected losses at their respective rating levels.

The transaction is a cash flow securitisation collateralised by a portfolio of term loans and originated through the Funding Circle Ltd lending platform (Funding Circle or the Originator) to small and medium-sized enterprises (SMEs) and sole traders based in the United Kingdom (U.K.). All the loans are unsecured, fully amortising, pay on a monthly basis and bear a fixed interest rate. As of the April 2019 payment date, the transaction’s outstanding portfolio performing balance was GBP 126.7 million, including 3,045 loans to 2,998 obligors.

PORTFOLIO PERFORMANCE
As of the April 2019 payment date, loans between two to three months in arrears represented 1.20% of the outstanding portfolio balance, following an increasing trend since the first payment date in June 2018. The cumulative gross default ratio was 3.85% of the original outstanding portfolio balance, below the 6.5% threshold that would trigger sequential payment of principal on the Rated Notes.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis on the pool of receivables and updated its portfolio default rate and recovery rate assumptions on the outstanding portfolio to 39.3% and 23.4%, respectively, at the A (high) (sf) rating level, 36.5% and 23.4%, respectively, at the A (low) (sf) rating level and 24.4% and 32.9%, respectively, at the BB (high) (sf) rating level.

CREDIT ENHANCEMENT
CE to the Rated Notes (calculated as a percentage of the outstanding collateral balance) is provided by subordination of junior classes and the Cash Reserve. As of the April 2019 payment date, CE to the Class A Notes is 42.4%, CE to the Class B Notes is 36.4%, CE to the Class C Notes is 29.4% and CE to the Class D Notes is 22.4%. CE to the Rated Notes has increased since the DBRS initial rating, solely due to an increase in the size of the Cash Reserve. As of the April 2019 payment date, the Cash Reserve has increased to its target level of GBP 5.7 million over the life of the transaction, from GBP 3.6 million at the DBRS initial rating in May 2018. The Cash Reserve is available to cover any shortfalls of senior fees and expenses, interest and principal on the Rated Notes via the principal deficiency ledgers. As of the April 2019 payment date, the Class Z PDL has been debited by an amount of GBP 370,953.

As of the April 2019 payment date, the Rated Notes are amortising on a pro rata basis, as none of thresholds triggering the sequential amortisation of the principal have been breached. In particular, each Class of the Rated Notes stands at 61.4% of its original balance, which is below the 60.0% trigger required for sequential amortisation.

Citibank N.A., London Branch is the Issuer Account Bank for the transaction. Based on the DBRS private rating of Citibank N.A., London Branch, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS considers the risk arising from the exposure to the Issuer Account Bank to be consistent with the ratings assigned to the Rated Notes, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.

NatWest Markets Plc acts as the cap counterparty for the transaction. DBRS's public Long-Term Critical Obligations Rating of NatWest Markets Plc of “A” is above the First Rating Threshold as described in DBRS's "Derivative Criteria for European Structured Finance Transactions" methodology.

The transaction structure was analysed in DBRS’s proprietary Excel-based cash flow engine.

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

The principal methodology applicable to the ratings is: “Rating CLOs Backed by Loans to European SMEs”.

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

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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: https://www.dbrs.com/research/333487/rating-sovereign-governments.

The sources of data and information used for these ratings include investor reports provided by Citibank N.A., London Branch and loan-by-loan level data by Funding Circle.

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

At the time of the initial rating, DBRS was 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.

This is the first rating action since the Initial Rating Date.

The lead analyst responsibilities for this transaction have been transferred to Andrew Lynch.

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 (the Base Case):

-- Probability of Default (PD) Rates Used: Base Case PD of 9.38%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case Recovery Rate of 23.4% at the A (high) (sf) stress level for Class A Notes and Class B Notes, a Base case Recovery Rate of 23.4% at the A (sf) stress level for Class C Notes and a Base case Recovery Rate of 32.9% at the BB (high) (sf) stress level for Class D Notes, a 10% and 20% decrease in the base case Recovery Rate at each stress level. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

DBRS concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would each lead to a downgrade of the Class A Notes to A (low) (sf) and to a confirmation of the Class A Notes at A (high) (sf), respectively. A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a confirmation of the Class A Notes at A (high) (sf).

DBRS concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would each lead to a confirmation of the Class B Notes at A (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a confirmation of the Class B Notes at A (high) (sf).

DBRS concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would each lead to a downgrade of the Class C Notes to BBB (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a downgrade of the Class C Notes to BBB (high) (sf).

DBRS concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would each lead to a confirmation of the Class D Notes at BB (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a confirmation of the Class D Notes at BB (high) (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: Andrew Lynch, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President

Initial Rating Date: 26 April 2018

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Registered and incorporated under the laws of England and Wales: Company No. 7139960

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

-- Rating CLOs Backed by Loans to European SMEs
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Rating CLOs and CDOs of Large Corporate Credit
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Operational Risk Assessment for European Structured Finance Servicers
-- Master European Structured Finance Surveillance Methodology

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.