Press Release

DBRS Morningstar Confirms Rating on PCL Funding I Limited Following Restructure

Consumer Loans & Credit Cards

July 29, 2021

DBRS Ratings Limited (DBRS Morningstar) confirmed the AAA (sf) rating on the Class A Eligible Trust Notes (ETN) of the Series 2012 Variable Funding Notes (VFN) issued by PCL Funding I Limited (the Issuer). The rating on the Class A ETN addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- A structural amendment to the transaction, in the form of amendments to the VFN transaction documents and Asset Trust transaction documents, executed on 23 July 2021.
-- 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 Class A ETN to cover the expected losses at the AAA (sf) rating level.
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The assets securing the Class A ETN are a revolving portfolio of commercial and consumer financing agreements originated by Premium Credit Limited (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 Class A ETN is held by several committed lenders, and together with the unrated Class B ETN, forms the Senior ETN issued by PCL Funding I Limited, which acts as a warehouse facility for the benefit of PCL.

VFN AMENDMENTS
-- The committed revolving period for the ETN has been extended to July 2024. The legal final maturity of the ETN is defined as the date falling two years after termination of the revolving period, and as such has been implicitly extended to July 2026.
-- The Class A ETN facility limit has been decreased to GBP 610.0 million and the Class B ETN facility limit has been decreased to GBP 20.0 million.
-- The Class A ETN applicable margin has been decreased by 0.05%, both prior to and during the amortisation period.
-- The reference rate for the portion of Class A ETNs not funded via the issuance of commercial paper has been amended to Compounded Daily Sonia.
-- The concentration limit in place for commercial receivables has been amended to 70.0%.
-- The concentration limit in place for receivables other than personal lines and schemes has been amended to 75.0%.
-- The concentration limit in place for the ten largest obligors has been amended to 4.50%.
-- The concentration limit in place for a single intermediary other than the five largest has been amended to 3.75%.
-- The concentration limit in place for non-refundable receivables has been amended to 33.25%.

ASSET TRUST AMENDMENTS
-- Quarterly pay insurance receivables have been classified as eligible receivables (subject to a 1.0% concentration limit).
-- Minor amendments have been made to the servicing agreement to allow PCL the flexibility to reclassify certain DDMS receivables under its credit and collection policy, subject to such receivables being repurchased from the asset trustee.
-- Additionally, certain asset trust amendments originally executed on 25 October 2019 as part of a wider structural amendment have now become effective, following the refinancing of the debts originally issued by PCL Funding II PLC and PCL Funding III PLC. For more information, please see the following DBRS Morningstar press release:
https://www.dbrsmorningstar.com/research/352291/dbrs-morningstar-confirms-rating-on-pcl-funding-i-limited-following-restructure.

PORTFOLIO PERFORMANCE
As of the reporting date on 18 June 2021, the 13-week average delinquency, default, and payment rate ratios were 0.7%, 0.4%, and 5.0%, respectively. The delinquency and default ratios are below their respective performance trigger levels of 3.75% and 2.25%, respectively, while the payment rate ratio is above its performance trigger level of 3.5%.

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 18.0%, 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 Class A ETN continues to be 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.

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 ETN, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

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

The coronavirus 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.

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 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-2021-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 the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 the “Master European Structured Finance Surveillance Methodology” (8 February 2021).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period, the analysis considers potential portfolio migration based on the 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. The other transaction legal documents have remained unchanged since the most recent rating action and as such, a review has not been conducted.

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/381451/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating includes portfolio and performance data provided by Lloyds Bank plc in its capacity as asset trust facilitator, as well as reports provided by PCL.

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 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.

The last rating action on PCL 1 took place on 29 October 2020, when DBRS Morningstar confirmed the rating of the Class A ETN at AAA (sf).

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):

-- 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.

-- The base case PD and LGD of the current pool of loans for the Issuer are 14.1% and 18.0%, 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 AA (low) (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 AA (low) (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 A (low) (sf).

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 AA (low) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (low) (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 A (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: http://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.

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Andrew Lynch, Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 31 October 2012

DBRS Ratings Limited
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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: http://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 http://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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