DBRS Morningstar Confirms Ratings of Securitisation of Catalogue Assets Limited

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings of the notes (the Rated Notes) issued by Securitisation of Catalogue Assets Limited (the Issuer), as follows:

-- Class A-S Variable Funding Notes (Class A-S VFN) at AAA (sf)
-- Class A-J Variable Funding Notes (Class A-J VFN) at A (sf)

The ratings on the Class A-S VFN and Class A-J VFN address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date, on 13 December 2030.

The transaction is a securitisation of home shopping receivables granted to private individuals by Shop Direct Finance Company Limited (Shop Direct) in the United Kingdom.

The confirmations follow amendments to the transaction effective on 22 December 2020 and which include:
-- An extension of the Class A-S VFN and Class A-J VFN End Dates from December 2022 to December 2023;
-- A switch of index on the Rated Notes and on the Liquidity Reserve Required Amount to Sterling Overnight Index Average (Sonia) from one-month GBP Libor at the February 2021 payment date. To compensate for the difference between the two indices, an adjustment spread will be added on the February 2021 payment date to the current margin on the Rated Notes, which will be maintained throughout the switch. Given that the index switch will happen on a later date, DBRS Morningstar’s confirmations are based on a conservative estimate of this adjustment spread at 5 basis points. Should the actual adjustment spread, priced close to the February 2021 payment date, be higher than DBRS Morningstar’s estimate, the current ratings might need to reviewed.

Furthermore, the current amendments extend and modify the effect of the September 2020 amendments to the transaction, including the following:
-- A reduction of the 7% threshold for Coronavirus Disease (COVID-19) accounts to 5%.

Similarly as in the May 2020 and September 2020 amendments, the calculation of the payment and delinquency ratios used in the triggers will not consider the accounts impacted by the coronavirus pandemic for the duration of the payment holiday. However, there is a threshold of 5% for the accounts impacted by the coronavirus pandemic that cannot be exceeded.

For further information on the May 2020 and September 2020 amendments, please see the following press releases: https://www.dbrsmorningstar.com/research/361781/dbrs-morningstar-comments-on-securitisation-of-catalogue-assets-limited-amendments and https://www.dbrsmorningstar.com/research/366536/dbrs-morningstar-comments-on-securitisation-of-catalogue-assets-limited.

The confirmations also follow an annual review of the transaction and are based on the following analytical considerations:
-- No revolving termination events have occurred.
-- Portfolio performance, in terms of charge-off rates, payment rates and yield rates, as of the December 2020 payment date;
-- Available credit enhancement to the Rated Notes to cover expected losses at their respective rating levels;
-- The ability of the transaction structure and triggers to withstand stressed cash flow assumptions and repay the Rated Notes in full and in accordance with the terms and conditions of the transaction documents.
-- Current economic environment and an assessment of sustainable performance, as a result of the coronavirus pandemic.

PORTFOLIO PERFORMANCE
As of the December 2020 payment date, the monthly payment rate was 11.9% and the three-month moving average was 11.1%. The delinquency ratio was 7.0% and the five-month delinquency ratio was 2.9%. The three-month moving average portfolio default rate was 0.6% and the annualised charge-off rate was 5.5%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar considered the historical performance of the transaction and the product weightings applicable to the portfolio to assess its asset and portfolio assumptions. The base case charge-off, payment rate, and yield assumptions were maintained at 15.5%, 9.0%, and 18.0%, respectively. These assumptions also incorporate DBRS Morningstar’s view on the performance deterioration due to the coronavirus pandemic.

CREDIT ENHANCEMENT
The maximum advance rates available to the Class A-S VFN and Class A-J VFN are 64.0% and 73.0%, respectively, representing credit enhancement, excluding the liquidity reserve, of 36.0% and 27.0%, respectively.

The liquidity reserve target balance is calculated based on the aggregation of amounts calculated for each class of Notes. These class-specific amounts consider the sum of the total margin for each of the Rated Notes, one-month GBP Libor (or SONIA along with the adjustment spread after the February 2021 payment date) plus 2.0% plus a further 1.0%, which are then multiplied by the applicable commitment amounts (or if zero, the applicable balance of the Rated Notes). These amounts are then calculated to cover three payment dates for the Class A-S VFN and one payment date for the other classes of notes.

HSBC Bank plc (HSBC) acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of HSBC, 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-S VFN, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in its 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 continue to increase in the coming months for many ABS transactions, some meaningfully. The ratings are based on additional analysis and, where appropriate, adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For this transaction, DBRS Morningstar considered also additional scenarios with respect to decreases in yield and payment rates.

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 2 December 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/370672/global-macroeconomic-scenarios-december-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 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 continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

DBRS Morningstar has conducted a review of the transaction legal documents provided in the context of the aforementioned amendment. A review of any transaction legal documents outside the scope of the amendment was not conducted as those legal documents have remained unchanged since the most recent rating action.

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 sources of data and information used for these ratings include performance data and monthly reports provided by Shop Direct through HSBC, the arranger.

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 on this transaction took place on 19 December 2019, when DBRS Morningstar confirmed its ratings on Class A-S VFN and Class A-J VFN at AAA (sf) and A (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Natalia Coman.

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 rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):
-- Base Case Charge-Off Rate: 15.5%
-- Base Case MPPR: 9.0%
-- Base Case Yield Rate: 18.0%

Scenario 1: A 25% decrease in the expected Principal Payment Rate.
Scenario 2: A 25% increase in the expected Charge-Off Rate.
Scenario 3: A 25% decrease in the expected Yield Rate.
Scenario 4: A 15% increase in the expected Charge-Off Rate, 15% decrease in the expected principal payment rate and 15% decrease in the expected yield rate.

DBRS Morningstar concludes that the expected ratings on the notes under the four stress scenarios are:
Class A-S VFN: AA (high) (sf), AAA (sf), AAA (sf), AA (sf)
Class A-J VFN: A (sf), A (sf), BBB (high) (sf), BBB (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: Natalia Coman, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 25 November 2013

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
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: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (22 April 2020)
https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology
-- 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 (21 July 2020)
https://www.dbrsmorningstar.com/research/364305/rating-european-structured-finance-transactions-methodology
-- 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
-- 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 Servicers (19 November 2020)
https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers
-- 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

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].