Press Release

DBRS Morningstar Confirms Ratings on PCL Funding I Limited and PCL Funding III PLC

Consumer Loans & Credit Cards

October 29, 2020

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the notes issued by PCL Funding I Limited (PCL 1) and PCL Funding III PLC (PCL 3) as follows:

PCL FUNDING I LIMITED
-- Series 2012 Variable Funding Notes (VFN) Class A Eligible Trust Notes (ETN) confirmed at AAA (sf)

PCL FUNDING III PLC
-- Series 2017-2 Class A Notes confirmed at AAA (sf)
-- Series 2017-2 Class B Notes confirmed at A (high) (sf)
-- Series 2017-2 Class C Notes confirmed at BBB (high) (sf)

The ratings on the notes address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity dates.

The rating actions follow annual reviews of the transactions and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, losses, payment rate, and excess spread.
-- Updated probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the notes to cover the expected losses at their respective rating levels.
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The two transactions form part of Premium Credit Limited (PCL)’s securitisation programme, which is structured as a master trust. The assets securing the notes are a revolving portfolio of commercial and consumer financing agreements originated by PCL primarily in the United Kingdom, and for the purpose of financing non-life insurance premiums, sport and leisure membership fees, professional membership fees, and private school tuition. The Series 2012 VFN Class A ETN issued by PCL 1 is held by several committed lenders, and together with the unrated Class B ETN, forms the Senior ETN issued by PCL 1, which acts as a warehouse facility for the benefit of PCL. The revolving periods for PCL 1 and PCL 3 are scheduled to end in October 2022 and June 2021, respectively, with the corresponding legal final maturity dates following two years after the termination of the revolving period in each case.

PORTFOLIO PERFORMANCE
As of the October 2020 payment date, the three-month average delinquency, default, payment rate, and excess spread ratios were 1.0%, 0.9%, 4.9%, and 8.2%, respectively. The delinquency and default ratios are below their respective Stage II performance trigger levels of 4.5% and 2.5%, while the payment rate ratio and excess spread ratios are above their respective Stage II performance trigger levels of 3.5% and 1.75%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted an analysis of the revolving pool of receivables and has updated its base case PD and LGD assumptions to 14.1% and 18.4%, respectively. DBRS Morningstar’s analysis reflects an assessment of the worst-case collateral pool in accordance with the concentration limits and incorporates default risks related to the obligor, insurance carrier, and/or intermediary.

CREDIT ENHANCEMENT
The Series 2012 VFN Class A ETN issued by PCL 1 is subject to an advance rate of 88%, and additionally benefits from a reserve fund sized to cover nine weeks of senior fees and stressed interest payments on the Senior ETN, as well as excess spread.

The credit enhancements to the Series 2017-2 Class A, Class B, and Class C notes issued by PCL 3 are 15.0%, 9.3% and 5.5%, respectively, and provided by subordination of junior classes. The Series 2017-2 Class A, Class B, and Class C notes also benefit from a reserve fund sized to cover three months of senior fees and stressed interest payments, as well as excess spread.

HSBC Bank plc acts as the asset trust and issuer account bank for each transaction. Based on the DBRS Morningstar private rating of HSBC Bank plc, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Class A Notes in each transaction, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

The transaction structures were analysed in Da Vinci, DBRS Morningstar’s proprietary cash flow engine.

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 ABS transactions, some meaningfully. 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.

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.

On 8 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated ABS transactions in Europe. For more details please see https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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 the “Master European Structured Finance Surveillance Methodology” (22 April 2020). DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions 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 transactions, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

DBRS Morningstar reviewed minor structural amendments to PCL 1 executed on 8 October 2020, as well as asset trust-wide amendments executed on 15 June 2020 in the context of the COVID-19 pandemic. The latter involved modifications to the existing performance triggers, additional cash trapping in the asset trust reserve fund, and modifications to the concentration limits (for PCL 1 only). For more information, please see the following press release: https://www.dbrsmorningstar.com/research/362674/dbrs-morningstar-comments-on-pcl-funding-i-limited-and-pcl-funding-iii-plc-following-amendments. A review of the remaining transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

Other methodologies referenced in these transactions 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 sources of data and information used for these ratings include portfolio and performance data provided by Lloyds Bank plc in its capacity as asset trust facilitator, as well as monthly investor reports provided by HSBC Bank plc. In particular, DBRS Morningstar received historical termination and recovery data relating to PCL originations by semi-annual vintage and split by business line, dating back to 2007.

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

At the time of the initial ratings, DBRS Morningstar was not 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.

The last rating action on PCL 1 took place on 31 October 2019, when DBRS Morningstar confirmed the ratings of the Class A ETN at AAA (sf). The last rating action on PCL 3 took place on 29 October 2019, when DBRS Morningstar confirmed the ratings of the Class A, Class B, and Class C notes.

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

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

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.

-- For both transactions, the base case PD and LGD are 14.1% and 18.4%, respectively

-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Series 2012 VFN Class A ETN would be expected to fall to A (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Series 2012 VFN Class A ETN would be expected to fall to A (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Series 2012 VFN Class A ETN would be expected to fall to BBB (high) (sf).

PCL 1:
Series 2012 VFN Class A ETN Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (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 BBB (high) (sf)

PCL 3:
Series 2017-2 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)
-- 50% increase in PD, expected rating of AA (high) (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 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 2017-2 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)
-- 50% increase in PD, expected rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)

Series 2017-2 Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BB (high) (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 and 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (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:
https://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: Andrew Lynch, Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Dates: 31 October 2012 (PCL 1), 30 October 2017 (PCL 3)

DBRS Ratings Limited
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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 these transactions can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at https://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].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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