DBRS Morningstar Assigns Rating to Cavern Funding 2020 plc

DBRS Ratings Limited (DBRS Morningstar) assigned a AAA (sf) rating to the Class A Notes issued by Cavern Funding 2020 plc (the Issuer). The Issuer is a public company incorporated with limited liability under the laws of England and Wales, acting as a special-purpose entity specifically for the purpose of the transaction.

DBRS Morningstar did not assign ratings to the Class B or the Class C Notes issued in this transaction.

The rating on the Class A Notes addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date.

The transaction represents the issuance of Notes backed by assets of approximately GBP 400 million initially comprising of a prefunding amount and receivables related to hire purchase (HP), personal contract purchase (PCP), and lease purchase (LP) vehicle loan contracts granted by MI Vehicle Finance Limited (Mann Island, or the Seller) to borrowers in England, Wales, Scotland, and Northern Ireland. The underlying motor vehicles and motorcycles related to the finance contracts consist of cars, light commercial vehicles, motorcycles, and motorhomes. The receivables are serviced by Investec Asset Finance plc. The underlying auto loan receivables include the residual value (RV) component of PCP agreements.

Mann Island is a motor finance business and part of the Investec Asset Finance Group having been acquired in 2014. Mann Island's ultimate parent is Investec Bank plc.

The transaction features a prefunding period of six months contained within a revolving period of four years. During the prefunding period, the prefunding amount added to the replenishment ledger is available to purchase additional receivables that are subject to the eligibility criteria, concentration limits, performance triggers, and other conditions set out in the transaction documents.

KEY RATING CONSIDERATIONS
DBRS Morningstar based its rating on a review of the following analytical considerations:
--The transaction capital structure, including form and sufficiency of available credit enhancement;
--Relevant credit enhancement in the form of subordination, excess spread, and the availability of the general reserve. Credit enhancement levels are sufficient to support DBRS Morningstar-projected expected cumulative net losses and RV losses under various stress scenarios;
--The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested. For this transaction, the rating assigned to the Class A Notes addresses the payment of timely interest on a monthly basis and principal by the legal final maturity date;
--Mann Island’s capabilities with regard to originations, underwriting, and servicing;
--The transaction parties’ financial strength with regard to their respective roles;
--The credit quality of the collateral and historical and projected performance of the Seller’s portfolio;
--The sovereign rating of the United Kingdom, currently at AAA with a Negative trend; and
--The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that address the true sale of the assets to the Issuer.

TRANSACTION STRUCTURE
Prior to an event of default, the transaction incorporates separate waterfalls that facilitate the distribution of revenue and principal funds. Both waterfalls allow for the fully sequential payment of both interest and principal on the Class A and Class B Notes. After the payment of senior costs and interest on the Class A Notes, excess revenue funds are available to cure principal deficiencies.

Funds available to repay the Notes primarily represent monthly instalments from borrowers that include interest and principal components as well as vehicle sales proceeds arising from PCP handbacks, voluntary terminations, and repossessions following default. Liquidity support is multifaceted as, to supplement available revenue and a reserve fund, principal is initially diverted to fund the liquidity reserve, which can be used for shortfalls on senior expenses and interest on the Class A Notes. Furthermore, there is an additional, separate principal to interest mechanism to cover interest on these shortfalls too.

As all underlying contracts are fixed rate and fixed-rate notes have been issued, there is no interest rate risk applicable to the Notes.

DBRS Morningstar analysed the transaction cash flow structure in Intex DealMaker.

COUNTERPARTIES
HSBC Bank plc has been appointed as the Issuer’s account bank for the transaction. The Issuer's accounts include the transaction account. DBRS Morningstar privately rates HSBC Bank plc and has concluded that it meets the minimum criteria to act in its capacity and the transaction contains downgrade provisions relating to the account bank consistent with DBRS Morningstar criteria.

CORONAVIRUS CONSIDERATIONS

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 delinquencies may arise in the coming months for many asset-backed security (ABS) transactions, some meaningfully. The rating is 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 applied a haircut to its expected recovery rate and applied additional stresses to expected default rates associated with commercial customers.

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 updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366543/dbrs-morningstar-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 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.

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.

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 rating 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. 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: https://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 primary sources of information used for this rating include the Seller and the arranger, Investec Bank plc.

DBRS Morningstar received the following data and information:
--Static cumulative credit and VT gross loss and recovery data from Q1 2015 and up to Q3 2020, split by a variety of measures that included customer type and loan product type;
--Dynamic monthly delinquency and prepayment data at a portfolio level from June 2015 to August 2020 broken down by product type;
--Monthly origination data from June 2015 to August 2020;
--Loan-level characteristics and stratification data as at31 August 2020; and
--Loan-level PCP RV realisation data for a limited number of contracts that had matured; and
--A theoretical amortisation profile.

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 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.

This rating concern a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instruments.

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 for a worst case pool composition, as compared to the parameters used to determine the rating:
-- Expected default: 7.4%.
-- Expected recovery rate: 59%.
-- Loss given default (LGD): 67% for the AAA (sf) scenario.
-- RV loss at maturity: 45% for the AAA (sf) scenario.

Scenario 1: A 25% increase in the expected default and LGD.
Scenario 2: A 50% increase in the expected default and LGD
Scenario 3: A 25% increase in the RV loss.
Scenario 4: A 25% increase in the expected default and LGD and a 25% increase in the RV loss.
Scenario 5: A 50% increase in the expected default and LGD and a 25% increase in the RV loss.
Scenario 6: A 50% increase in the expected RV loss.
Scenario 7: A 25% increase in the expected default and LGD and a 50% increase in the RV loss.
Scenario 8: A 50% increase in the expected default and LGD and a 50% increase in the RV loss.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios will be:
-- Class A Notes: AA (sf), A (high) (sf), AAA (sf), AA (sf), A (high) (sf), AA (high) (sf), AA (sf), and A (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 U.S. regulations only.

Lead Analyst: Alex Garrod, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 15 October 2020

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-- 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.
-- Rating European Structured Finance Transactions Methodology (21 July 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/364305/rating-european-structured-finance-transactions-methodology.
-- 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.

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