DBRS Morningstar Takes Rating Actions on VFN-F1 V2 Loan Notes Issued by NewDay Funding Loan Note Issuer Ltd Following Re-Tranching; Removes Under Review with Negative Implications Status

DBRS Ratings Limited (DBRS Morningstar) took the following rating actions on the Sub-series V2 VFN-F1 Loan Notes (the Notes) issued by NewDay Funding Loan Note Issuer Ltd:

Class A Notes: downgraded to BBB (low) (sf) from AAA (sf)
Class B Notes: discontinued and withdrawn
Class C Notes: discontinued and withdrawn
Class D Notes: discontinued and withdrawn
Class E Notes: confirmed at BB (low) (sf)
Class F Notes: downgraded to B (low) (sf) from B (high) (sf)

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

The rating actions above follow the execution of an amendment which, among other things, re-tranches the Notes by reducing the funding amounts of Class B, Class C and Class D Notes to zero with a corresponding increase in the Class A Notes. DBRS Morningstar removed the relevant ratings of the Notes from Under Review with Negative Implications (UR-Neg.), where they were first placed on 28 May 2020 and maintained on 28 August 2020. For more information, please refer to www.dbrsmorningstar.com.

The amendment seeks to revise the advance amounts, margins and scheduled maturity dates of certain classes of the Notes over several stages in the next few years until March 2024. DBRS Morningstar’s rating actions above reflect the expected changes at the first stage of the amendment in December 2020: the downgrade of the Class A notes is the result of the subordination reduction to 16.3% from the current 49.8% while the downgrade of the Class F notes reflects the revised asset assumptions discussed below. DBRS Morningstar may take further ratings actions commensurate with the changes effected after December 2020.

DBRS Morningstar notes that notwithstanding further amendments and/or changes in asset assumptions, there could be potential positive future rating movements for the Class A Notes as a result of expected reductions in advance rates and increases in the subordination level when the later stages of the amendment are in effect.

DBRS Morningstar based its ratings on information provided by the issuer and its agents as of the date of this press release.

The notes are backed by a portfolio of own-branded credit cards granted to individuals domiciled in the United Kingdom by NewDay Cards (the originator).

The ratings are based on the following analytical considerations:
-- The transaction’s amended capital structure, including form and sufficiency of available credit enhancement to support DBRS Morningstar’s revised 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 of Great Britain and Northern Ireland at AA(high) with a Stable trend.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

TRANSACTION STRUCTURE
The notes are part of the master issuance structure of NewDay 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.

During the transaction revolving period, additional receivables may be purchased, provided that the eligibility criteria 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 redemption date may be extended. If the Notes are not fully redeemed on the scheduled redemption date, the transaction enters into a rapid amortisation.

The interest rate mismatch risks between the fixed-interest rate collateral and floating-rate coupons of the notes are, to a degree, mitigated by the excess spread in the transaction and considered in DBRS Morningstar’s cash flow analysis.

The transaction includes a liquidity reserve that is available to cover the shortfalls in senior expenses and interest on the (post-amendment) Class A notes.

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

COUNTERPARTIES
HSBC Bank plc is the account bank. Based on DBRS Morningstar’s private rating of HSBC Bank 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 AND CASH FLOW ASSUMPTIONS/COVID-19 CONSIDERATIONS
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to increases in unemployment rates and adverse financial impact on many borrowers. DBRS Morningstar anticipates that delinquencies could continue to rise, and payment and yield rates could 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.

The most recent performance in September 2020 shows an improved total payment rate of 12.4% including the interest collections, after a record low level of 10.4% in April because of the impact of coronavirus. The payment rates appear to have stabilised but remain slightly below historical levels. After removing the interest collections, the estimated monthly principal payment rates (MPPRs) of the securitised portfolio have been stable above 8%. Based on the analysis of historical data, macroeconomic factors, and the portfolio-specific COVID-19 adjustments, DBRS Morningstar maintains the expected MPPR at 8%.

Similarly, the portfolio yield is largely stable over the reported period until March 2020. The most recent performance in September 2020 shows a total yield of 28.9%, after a record low of 26.5% in May because of the forbearance measures of payment holiday and payment freeze offered and higher delinquencies. Based on the observed trend and the potential yield compression because of the forbearance measures, DBRS Morningstar revised the expected cash interest yield down to 24.5% from 28%.

The reported historical charge-off rates have been high but stable around 16% until March 2020. The most recent performance in September 2020 shows an annualised charge-off rate of 13.5%, after reaching a record high of 17.6% in April 2020 because of coronavirus. Based on the analysis of delinquency trends, macroeconomic factors, and the portfolio-specific adjustment because of the impact of coronavirus, DBRS Morningstar revised the expected charge-off rate upward to 18% from 16%.

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.

The DBRS Morningstar Sovereign group released on 16 April 2020 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/364318/global-macroeconomic-scenarios-july-update, 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 the 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: “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: 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” methodology at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include the following data provided by NewDay Cards or from the monthly servicer reports
-- Receivables balances, payment rates, yield, and purchase rates from January 2007 to September 2020;
-- Delinquencies, from December 2007 to March 2020;
-- Recoveries, from January 2012 to March 2020; and
-- Charge-offs, from July 2009 to September 2020.

Additional data was also provided with regard to utilisation rate, credit limits, dilutions, and interest rates.

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

At the time of the initial rating, 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 for the Notes took place on 28 August 2020, when the relevant ratings listed above were maintained UR-Neg., except the AAA (sf)-rated Class A Notes, which were not placed UR-Neg. The last rating actions for the Class A Notes took place on 11 June 2019 when DBRS Morningstar confirmed the AAA (sf) rating on the notes.

The ratings were disclosed to NewDay Cards and amended following that disclosure before being assigned.

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 ratings:

-- Expected Yield Rate of 24.5%
-- Expected MPPR of 8%
-- Expected Charge-Off Rate of 18%
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, a 15% decrease in the Expected MPPR, and a 15% increase in the Expected Charge-Off Rate.

DBRS Morningstar concludes that the expected ratings under the four stress scenarios are:

-- Class A Notes: BB (sf), BB (high)(sf), BB (high) (sf), BB (low)(sf).
-- Class E Notes: below B (low)(sf), B (high)(sf), B (sf), below B (low)(sf)
-- Class F Notes: below B (low)(sf), below B (low)(sf), below B (low)(sf), below 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: Jeffrey Cespon, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 15 December 2017

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 this transaction can be found at: https://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.
-- Rating European Structured Finance Transactions Methodology (21 July 2020),
https://www.dbrsmorningstar.com/research/364305/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: 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].

This press release was amended on 20 November 2020 to modify the wording of the following disclosure to bring it in line with the DBRS Morningstar standard language: "At the time of the initial rating, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis."