Press Release

DBRS Morningstar Finalises Provisional Ratings on NewDay Funding Master Issuer Series 2021-1

Consumer Loans & Credit Cards

February 09, 2021

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings of AAA (sf), AAA (sf), AA (sf), A (low) (sf), BBB (low) (sf), BB (low) (sf), and B (high) (sf) on the Class A1, Class A2, Class B, Class C, Class D, Class E, and Class F Notes of Series 2021-1 (collectively, the Notes) issued by NewDay Funding Master Issuer plc (the Issuer).

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

The Notes are backed by a portfolio of own-branded credit cards granted by NewDay Cards, the originator, to individuals domiciled in the UK.

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 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 origination, 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 to be issued out of a newly established NewDay Funding Master Issuer as part of the NewDay Funding-related master issuance structure, 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.

The transaction includes a scheduled revolving period. During this period, additional receivables may be purchased and transferred to the securitised pool, 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 Class A2 Notes are denominated in U.S. dollars (USD), there is a balance-guaranteed, cross-currency swap to hedge the currency and interest rate risk between the British pound sterling (GBP) denominated receivables and the USD-based Class A2 Notes. For the GBP-denominated classes of the Notes, which carry floating-rate coupons based on the rate of Daily Compounding Sterling Overnight Index Average (Sonia), the interest rate mismatch risk arising from the fixed-interest rate collateral is mitigated to a degree by the excess spread in the transaction and is considered in DBRS Morningstar’s cash flow analysis.

The transaction includes a series-specific liquidity reserve that is available to cover the shortfalls in senior expenses, swap costs if applicable, and interests on the Class A1, Class A2, Class B, Class C, and Class D Notes and would amortise down to a floor amount of GBP 250,000.

COUNTERPARTIES
HSBC Bank plc is the account bank and swap collateral account bank for the transactions. 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 and swap collateral account bank to be commensurate with the ratings assigned.

Banco Santander S.A., London Branch is the swap counterparty for the Class A2 swap. DBRS Morningstar has a Long-Term Issuer Debt rating of A (high) on Banco Santander S.A., which meets its criteria to act in such capacity. The swap documentation also contains downgrade provisions consistent with DBRS Morningstar’s criteria.

PORTFOLIO ASSUMPTIONS AND 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 December 2020 servicer report of the securitised portfolio shows an improved total payment rate of 12.9% including the interest collections after reaching a record low level of 10.4% in April 2020 due to the impact of the 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 coronavirus adjustments, DBRS Morningstar maintains the expected MPPR at 8%.

Similarly, the portfolio yield has been largely stable over the reported period until March 2020. The most recent performance in December 2020 shows a total yield of 27.5%, increased from the record low of 26.5% in May 2020 because of higher delinquencies and the forbearance measures of payment holiday and payment freeze offered. Based on the observed trend and the potential yield compression because of the forbearance measures, in November 2020, DBRS Morningstar revised the expected yield down to 24.5% from 28%.

The reported historical charge-off rates had been high but stable at approximately 16% until March 2020. The most recent performance in December 2020 showed a historical low annualised charge-off rate of 8.7%, after reaching a record high of 17.6% in April 2020. Based on the analysis of delinquency trends, macroeconomic factors, and the portfolio-specific adjustment because of the impact of coronavirus, in November 2020, 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.

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

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 28 January 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/372842/global-macroeconomic-scenarios-january-2021-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings.

DBRS Morningstar's 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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 the arrangers, NewDay Cards, or from the monthly servicer reports:
-- Securitised portfolio: Receivables balances, payment rates, yield, charge-off rates, and purchase rates for the month of December 2020,
-- Total managed portfolio: Monthly historical dynamic data from June 2007 to November 2020 and static data from Q1 2008 to Q3 2020, including the organic and acquired portfolios in respect of receivables balances, payment rates, gross charge-offs, gross yield, delinquencies, purchase rates, and recoveries, and
-- Stratification tables in relation to the total pool as of 30 November 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.

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 a newly issued financial instrument.

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 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: AA (high) (sf), AA (sf), AA (high) (sf), AA (low) (sf)
--Class B Notes: AA (low) (sf), A (high) (sf), A (high) (sf), A (sf)
--Class C Notes: BBB (high) (sf), BBB (high) (sf), BBB (high) (sf), BBB (sf)
--Class D Notes: BB (high) (sf), BB (high) (sf), BB (high) (sf), BB (sf)
--Class E Notes: B (sf), BB (low) (sf), B (high) (sf), below B (low) (sf)
--Class F Notes: below B (low) (sf), B (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.

DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Michael Langholz, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 25 January 2021

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.

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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