DBRS Morningstar Finalises Provisional Ratings on PCL Funding IV PLC, Series 2020-1 Notes

DBRS Ratings Limited (DBRS Morningstar) finalised the provisional ratings on the Series 2020-1 Notes (the Rated Notes) issued by PCL Funding IV PLC (the Issuer or PCL IV):

-- GBP 340,000,000 Series 2020-1, Class A Notes rated AAA (sf)
-- GBP 23,000,000 Series 2020-1, Class B Notes rated A (high) (sf)
-- GBP 15,000,000 Series 2020-1, Class C Notes rated BBB (high) (sf)

DBRS Morningstar does not rate the Series 2020-1, Class D Notes also issued in this transaction.

The Series 2020-1 Notes comprises three rated classes of notes (Class A, Class B, and Class C; collectively, the Rated Notes) and the unrated noninterest-bearing Class D Notes. The ratings address the timely payment of interest and ultimate repayment of principal (in accordance with the terms of the notes) of the Rated Notes on or prior to the legal final maturity date.

Premium Credit Limited (PCL, the Originator), is an independent finance company providing nonlife insurance premium financing (IPF) in the United Kingdom and Republic of Ireland. PCL also finances payments of annual fees, such as professional associations and memberships, as well as school fees. The main underlying source of funds to make payments on the Series 2020-1 Notes will be the collections received on a portfolio of advances made by PCL to fund insurance premia and other payment plan receivables, which will be purchased by the Asset Trustee on an ongoing basis.

PCL’s securitisation programme is structured as a master trust with the Series 2012 VFN issued out of the PCL Funding I Limited special-purpose vehicle (SPV) (PCL I) and acts as PCL’s warehouse facility. Series 2017-2 is issued out of the PCL Funding III PLC (PCL III) SPV and is a term ABS. The Issuer is the fourth transaction to be included in the PCL master trust. Following the issuance of the 2020-1 Notes, the trust will have three transactions outstanding: PCL I, PCL III, and PCL IV. DBRS Morningstar discontinued the ratings assigned to PCL Funding II PLC (the Series 2017-1 Issuer) in June 2020 following the full repayment of the notes. PCL acts as the servicer for the asset pool with Link Financial Outsourcing Limited in place as Backup Servicer.

DBRS Morningstar based its ratings on a review of the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement.
-- Credit enhancement levels are sufficient to support DBRS Morningstar’s projected expected net losses under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay noteholders according to the terms of their investment. The break-even rates for the interest rate stresses, currency stresses, and default timings were determined using DBRS Morningstar’s proprietary cash flow engine.
-- The presence of a backup servicer for the asset trust and its capabilities with respect to servicing.
-- The credit quality, diversification of the collateral, and historical and projected performance of the seller’s portfolio.
-- DBRS Morningstar’s sovereign rating of United Kingdom of Great Britain and Northern Ireland at AAA with a Negative trend.
-- The transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting and servicing practices.
-- The legal structure and presence of legal opinions are deemed consistent with the DBRS Morningstar “Legal Criteria for European Structured Finance Transactions” methodology.

Following the end of the reinvestment period, if the notes are not called, the repayment of the notes starts on each payment date on a pro rata basis until the occurrence of certain events such as a breach of performance triggers. Under these circumstances, the principal repayment of the notes becomes fully sequential and the switch is nonreversible.

The Rated Notes pay interest indexed to the daily-compounded Sterling Overnight Index Average (Sonia) plus a margin. This margin is expected to step up after the end of the reinvestment period (September 2022).

As of the last review, the two current transactions were performing within DBRS Morningstar’s expectations. The Senior ETNs of Series 2012 VFN Issuer (Series 2012 VFN ETN) are currently rated AAA (sf). The ratings of the term Series 2017-2 Notes are AAA (sf) for Class A, A (high) (sf) for Class B, and BBB (high) (sf) for Class C.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The transaction structure was analysed with Da Vinci, DBRS Morningstar’s proprietary cash flow engine, considering the default rates at which the rated notes did not return all specified cash flows.

The ratings are based on information provided to DBRS Morningstar by the Issuer and by its agents as of the date of this press release. The ratings have been finalised based upon review of final information, data, legal opinions, and the executed version of the governing transaction documents. To the extent that the information or the documents provided to DBRS Morningstar as of this date differ from the final information, DBRS Morningstar may assign different final ratings to the notes.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that payment holidays and delinquencies may arise in the coming months for many ABS transactions, some meaningfully. The ratings are based on additional analysis as a result of the global efforts to contain the spread of the coronavirus.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information on DBRS Morningstar considerations for European ABS transactions and Coronavirus Disease (COVID-19), please see the following commentary: https://www.dbrsmorningstar.com/research/360734/.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 Securities” (3 September 2020).

DBRS Morningstar 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. Due to the inclusion of a revolving period in the transaction, the analysis is 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 at: http://www.dbrsmorningstar.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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for the ratings include performance and portfolio data relating to the receivables provided by the originator directly or through the arranger. DBRS Morningstar received vintage default, recovery, and net losses information split by product types and jurisdictions from 2007 to mid-2020. DBRS Morningstar also received the stratification tables in relation to the loan pool as of 31 August 2020.

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

DBRS Morningstar was supplied with one or more third-party assessments, However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 Morningstar ratings on this financial instrument.

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

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

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

-- The base case portfolio cumulative defaults (PD) and loss given default (LGD) were increased by a 25% and 50% increase on the applicable PD.

-- The risk sensitivity below illustrates the ratings expected for each series of Notes if the PD and LGD increase by a certain percentage over the base case assumptions. For example, if the LGD increases by 50%, the rating for each series of Class A Notes would be expected to decrease to AA (high) (sf), ceteris paribus. If the PD increases by 50%, the rating for each series of Class A Notes would be expected to decrease to AA (high) (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating for each series of Class A Notes would be expected to decrease to A (high) (sf), ceteris paribus.

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AAA(sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

Series 2020-1 Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

Series 2020-1 Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD, expected rating of BBB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD, expected rating of BB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating below CCC (low) (sf)

For further information on DBRS Morningstar 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 U.S. regulations only.

Lead Analyst: Mudasar Chaudhry, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 22 September 2020

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
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.dbrsmorningstar.com/about/methodologies.

-- Rating European Consumer and Commercial Asset-Backed Securitisations (3 September 2020), https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations

-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions

-- Rating CLOs and CDOs of Large Corporate Credit (21 July 2020) and DBRS Morningstar CLO Asset model (version 2.2.3),
https://www.dbrsmorningstar.com/research/364310/rating-clos-and-cdos-of-large-corporate-credit

-- Rating CLOs Backed By Loans to European SMEs (30 September 2020) and DBRS Morningstar SME Diversity Model (version 2.4),
https://www.dbrsmorningstar.com/research/367642/rating-clos-backed-by-loans-to-european-smes

-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020), https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators

-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers

-- Currency Stresses for Global Structured Finance Transactions (15 April 2020),
https://www.dbrsmorningstar.com/research/359639/currency-stresses-for-global-structured-finance-transactions

-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020),
https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions

-- Rating European Structured Finance Transactions Methodology (21 July 2020)
https://www.dbrsmorningstar.com/research/357428/rating-european-structured-finance-transactions-methodology.

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].