DBRS Finalises Provisional Ratings of Latitude Australia Credit Card Loan Note Trust – Series 2019-1

DBRS finalised its provisional ratings of the Series 2019-1 Notes (the Notes) issued by Latitude Australia Credit Card Loan Note Trust (the Issuer) as follows:

-- Series 2019-1 Class A1 Notes at AAA (sf)
-- Series 2019-1 Class A2 Notes at AAA (sf)
-- Series 2019-1 Class B Notes at AA (sf)
-- Series 2019-1 Class C Notes at A (sf)
-- Series 2019-1 Class D Notes at BBB (sf)
-- Series 2019-1 Class E Notes at BB (sf)

The ratings of the Notes address the timely payment of interest and ultimate repayment of principal by the legal maturity date.

The transaction represents the issuance of notes backed by credit card receivables related to credit agreements originated or acquired by Latitude Finance Australia (Latitude) to customers in Australia and assigned to the Latitude Australia Credit Card Master Trust. DBRS previously assigned ratings to the Issuer’s Series 2017-1 Notes in April 2017, the Series 2017-2 Notes in September 2017 and the 2018-1 Notes in March 2018.

The majority of credit card accounts within the portfolio were originated by GE Capital Australia prior to its acquisition by a consortium comprising Deutsche Bank AG and funds managed by Värde Management L.P. and KKR & Co. L.P. in November 2015. After the acquisition, the business was renamed Latitude and accounts were subsequently originated by Latitude.

With respect to the Series 2019-1 Notes, the Class A1 Notes benefit from a minimum credit support of 32.5%, which includes subordination of the Class A2 Notes, the Class B Notes, the Class C Notes, the Class D Notes and the Class E Notes (collectively 28.0%) and the series-specific Originator VFN (4.5%). Upon closing, part of the initial balance of the Series Originator VFN subordination, equal to 1.0% of the rated notes, will be used to fund a specific ledger that provides liquidity support to the transaction. This liquidity support would only be available as credit enhancement if not utilised for liquidity purposes.

The ratings are based on DBRS’s review of the following considerations:
-- The transaction capital structure including the form and sufficiency of available credit enhancement.
-- Credit enhancement levels are sufficient to support DBRS’s expected charge-off, payment and yield rates under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Notes.
-- The transaction parties’ capabilities with respect to originations, underwriting, servicing and cash management.
-- The credit quality of the collateral and Latitude’s ability to perform collection activities on the collateral.
-- The sovereign rating of the Commonwealth of Australia, currently rated AAA with a Stable trend by DBRS.
-- The consistency of the legal structure with DBRS’s “Legal Criteria for European Structured Finance” methodology and presence of legal opinions expected to address the assignment of the assets to the Issuer .

The transaction cash flow structure was analysed in DBRS’s proprietary tool.

DBRS considers the Australian credit card market to share a similar consumer credit protection framework to European jurisdictions. Furthermore, the performance and operation of Latitude’s portfolio is deemed comparable with other originators where DBRS has previously assigned structured finance ratings. Subsequently, DBRS has elected to continue to reference its “Rating European Consumer and Commercial Asset-Backed Securitisations” methodology when assessing the transaction.

Notes:
All figures are in Australian dollars unless otherwise noted.

The principal methodologies applicable to the ratings are: “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.

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 monthly historical dynamic data from Q1 2007 to Q2 2019 from Bank of America Merrill Lynch in its capacity as Arranger. The data was then further broken down by product type from Q1 2010 onward; static data was supplied in relation to charge-offs and payment rate. This data was supplemented with additional data, including the investor reports from the Series 2017-1, Series 2017-2 and 2018-1 Notes that allowed DBRS to assess (1) the stock and flow of hardship arrangements (repayment plans), (2) portfolio attrition rates, (3) delinquency and roll-rate analysis, (4) recoveries on charged-off accounts, (5) fraud/dilutions and (6) portfolio mix through the provision of stratification tables.

All information used for these ratings was sourced by Latitude directly or indirectly through the Arranger, Bank of America Merrill Lynch.

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

DBRS was not supplied with third-party assessments.

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.

These ratings concern a newly issued financial instrument. These are the first DBRS ratings on this financial instrument.

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 ratings, DBRS considered the following stress scenarios, as compared to the parameters used to determine the ratings:

-- Expected Charge-Off Rate: 6.25%, stressed with a 25% and 50% increase on the expected charge-off rate.
-- Expected Monthly Principal Payment Rate: 11.25%, stressed with a 25% and 50% decrease on the expected payment rate.
-- Yield Rate: 12.5%, stressed with a 25% and 50% decrease on the expected yield rate.

Scenario 1: a 25% increase in charge-off rates and a 25% decrease in the expected yield rate;
Scenario 2: a 50% increase in charge-off rates and a 50% decrease in the expected yield rate;
Scenario 3: a 25% decrease in principal payment rates and a 25% decrease in expected yield rate;
Scenario 4: a 50% decrease in principal payment rates and a 50% decrease in expected yield rate;
Scenario 5: a 25% decrease in principal payment rates and a 25% increase in charge-off rates;
Scenario 6: a 50% decrease in principal payment rates and a 50% increase in charge-off rates.

DBRS concludes that the expected ratings under the six stress scenarios above are:

-- Class A1 Notes: AAA (sf); AAA (sf); AAA (sf); A (high) (sf); AAA; A (high) (sf)
-- Class A2 Notes: AA (high) (sf); A (high) (sf); AA (sf); BBB (low) (sf); AA (low) (sf); BBB (sf)
-- Class B Notes: A (high) (sf); BBB (sf); A (low) (sf); BB (sf); A (low) (sf); BB (high) (sf)
-- Class C Notes: BBB (sf); BB (sf); BBB (low) (sf); B (high) (sf); BBB (low) (sf); BB (low) (sf)
-- Class D Notes: BB (sf); B (sf) BB (low) (sf); below B; BB (sf); B (sf)
-- Class E Notes: B (sf); below B; B (sf); below B; B (high) (sf); below B

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: Alex Garrod, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 2 September 2019

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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
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- 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