DBRS Morningstar Finalises Provisional Ratings on NewDay Partnership Funding 2020-1 plc

DBRS Ratings Limited (DBRS Morningstar) finalised the provisional ratings of AAA (sf), AA (sf), A (sf), and BBB (high) (sf) on the Class A3, Class B, Class C and Class D Notes, respectively, issued by NewDay Partnership Funding 2020-1 plc (the Issuer).

The provisional ratings of the Class A1 and Class A2 notes were discontinued and withdrawn as these notes were not issued on the transaction closing date.

As the issuer is part of the master issuance structure of NewDay Partnership Funding, where all series of notes are supported by the same pool of receivables and generally issued under the same requirements regarding servicing, amortisation events, priority of distributions, and eligible investments, DBRS Morningstar notes that the issuance by the Issuer will not result in a downgrade or withdrawal of the ratings on the outstanding note series listed below:

NewDay Partnership Funding 2017-1 plc:
Class A Notes: AAA (sf)
Class B Notes: AA (sf)
Class C Notes: A (sf)
Class D Notes: BBB (high) (sf)
Class E Notes: BB (sf)
Class F Notes: B (sf)

NewDay Partnership Funding Loan Note Issuer VFN-P1 V1:
Class A Notes: BBB (high) (sf)
Class E Notes: BB (sf)
Class F Notes: B (sf)

NewDay Partnership Funding Loan Note Issuer VFN-P1 V2:
Class A Notes: AAA (sf)
Class B Notes: AA (sf)
Class C Notes: A (sf)
Class D Notes: BBB (high) (sf)
Class E Notes: BB (sf)
Class F Notes: B (sf)

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

The notes are backed by a portfolio of cobranded credit cards (with limited legacy store cards and instalment credit) affiliated with high street and online retailers granted to individuals domiciled in the UK by NewDay Cards (the originator).

The ratings are based on the following analytical considerations:
-- The transaction’s capital structure, including form and sufficiency of available credit enhancement to support DBRS Morningstar’s expectation of charge-off, principal payment, and yield rates under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the notes.
-- The originator’s capabilities with respect to originations, underwriting, and servicing.
-- An operational risk review of the originator, which DBRS Morningstar deems to be an acceptable servicer.
-- The transaction parties’ financial strength regarding their respective roles.
-- The credit quality, diversification of the collateral, and historical and projected performance of the securitised portfolio.
-- DBRS Morningstar’s sovereign rating of the United Kingdom at AAA with a Negative trend.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

TRANSACTION STRUCTURE

The transaction includes 36-month scheduled revolving periods for the notes. During this period, the Issuer may purchase additional receivables provided that the eligibility criteria set out in the transaction documents are satisfied. The revolving period may end earlier than scheduled if certain events occur, such as the breach of performance triggers or servicer termination. The scheduled revolving period may be extended by the servicer by up to 12 months. If the notes are not fully redeemed at the end of the respective scheduled revolving periods, the transaction enters into a rapid amortisation.

As the notes carry floating-rate coupons based on the rate of Daily Compounding Sonia, the interest rate mismatch risk arising from the fixed-interest rate collateral is to a degree mitigated by the excess spread in the transaction and considered in DBRS Morningstar’s cash flow analysis.

The transaction includes a series-specific liquidity reserve that is available to the Issuer to cover the shortfalls in senior expenses and interests on the notes and would amortise down to a floor amount of GBP 250,000.

COUNTERPARTIES
Citibank N.A. has been appointed to act as account bank for the transaction. Based on DBRS Morningstar’s rating of Citibank N.A. of AA (low) and the downgrade provisions outlined in the transaction documents, DBRS Morningstar considers the risk arising from the exposure to the account bank to be commensurate with the ratings assigned.

PORTFOLIO ASSUMPTIONS
The estimated monthly principal payment rates (MPPRs) of the securitised portfolio have been largely stable above 20% over the reported period until March 2020. The most recent performance in June 2020 shows an estimated MPPR of 19.6%, after a record low level of 17.6% in May because of the coronavirus impact. The MPPRs appear to have stabilised but remain lower than historical levels. Based on the analysis of historical data, macroeconomic factors, and the portfolio-specific coronavirus adjustments, DBRS Morningstar revised the expected MPPR down to 16% from 20.5%.

Similarly, the portfolio yield is largely stable over the reported period until March 2020. The most recent performance in June 2020 shows an interest yield of 19.2%, a record low level because of the coronavirus, the forbearance measures of payment holiday and payment freeze offered, and higher delinquencies. DBRS Morningstar, nonetheless, maintained the expected cash interest yield at 19%, after consideration of the observed trend and potential yield compression due to the forbearance measures.

The reported historical charge-off rates have been below 5% since 2015 until March 2020. The most recent performance in June 2020 shows an annualised charge-off rate of 6.3%, a record high level over the past five years following a decline in receivables balance (and the denominator of charge-off calculation) because of the coronavirus pandemic. Based on the analysis of delinquency trends, macroeconomic factors and the portfolio-specific adjustment due to the coronavirus impact, DBRS Morningstar revised the expected charge-off rate upward to 7% from 5%.

DBRS Morningstar also elected to stress the asset performance deterioration over a longer period for the notes rated below investment grade in accordance with its “Rating European Consumer and Commercial Asset-Backed Securitisations” methodology.

DBRS Morningstar analysed the transaction structure in its proprietary cash flow tool.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and adverse financial impact on many borrowers. DBRS Morningstar anticipates that delinquencies would continue to arise, and payment and yield rates would remain subdued in the coming months for many credit card portfolios. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar assumed a decline in the expected MPPR and an increase in the expected charge-off rate.

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. 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.

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.

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” (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.

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” methodology at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The data and information used for these ratings include performance and portfolio data relating to the receivables provided by the originator directly or through one of the arrangers, BofA Securities.

DBRS Morningstar received monthly historical dynamic data for the entire and individual portfolios of each retailer as follows:
-- Receivables balances, payment rates, yield, and purchase rates from January 2007 to June 2020.
-- Delinquencies, from January 2012 to June 2020.
-- Charge-offs, from July 2009 to June 2020.

Additional data was also provided with regard to utilisation rate, credit limits, dilutions, and interest rates.
Stratification tables in relation to the loan pool as of 30 June 2020 were also received.

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

DBRS Morningstar was supplied with 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 these ratings 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 newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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

-- Expected Yield Rate of 19%
-- Expected MPPR of 16%
-- Expected Charge-Off Rate of 7%

Scenario 1: a 25% decrease in the Expected Yield Rate
Scenario 2: a 25% decrease in the Expected MPPR
Scenario 3: a 25% increase in the Expected Charge-Off Rate
Scenario 4: a 15% decrease in the Expected Yield Rate, 15% decrease in the Expected MPPR and 15% increase in the Expected Charge-Off Rate.

DBRS Morningstar concludes that the expected ratings under the four stress scenarios are:
-- Class A Notes: AAA (sf), AA (high) (sf), AA (high) (sf), AA (high) (sf).
-- Class B Notes: AA (low) (sf), A (high) (sf), AA (low) (sf), A (high) (sf).
-- Class C Notes: BBB (high) (sf), BBB (high) (sf), BBB (high) (sf), BBB (sf).
-- Class D Notes: BB (high) (sf), BBB (low) (sf), BBB (sf), BB (high) (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 US regulations only.

Lead Analyst: Jeffrey Cespon, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 24 September 2020

DBRS Ratings Limited
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Tel. +44 (0) 20 7855 6600
Registered in England and Wales: 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/355533/rating-european-consumer-and-commercial-asset-backed-securitisations
-- Rating European Structured Finance Transactions Methodology (28 February 2020),
https://www.dbrsmorningstar.com/research/357428/rating-european-structured-finance-transactions-methodology
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions
-- 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
-- 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

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].