DBRS Morningstar Confirms Ratings on BFS Funding I Limited

DBRS Ratings Limited (DBRS Morningstar) confirmed its AA (sf) ratings on the Sterling Variable Funding Note, the Euro Variable Funding Note, and the U.S. Dollar Variable Funding Note (together, the VFNs) issued by BFS Funding I Limited (the Issuer).

The transaction is a securitisation collateralised by a portfolio of trade receivables granted by subsidiaries of Bibby Financial Services Limited. Bibby Invoice Finance UK Limited (BIF UK) acts as the master servicer and the master seller of the trade receivables portfolio.

The Issuer acquired the trade receivables through the issuance of VFNs in British pound sterling, euros, and U.S. dollars (together, the Approved Currencies) purchased directly by Bank of America Merrill Lynch International DAC or Barclays Bank plc (Barclays) or indirectly by HSBC Bank plc and Lloyds Bank plc via their respective conduits (Regency Assets DAC and Gresham Receivables (No. 37) UK Limited). The funding commitment for each bank or conduit is the equivalent to GBP 150 million. Subordinated loans in the Approved Currencies provided by BIF UK and proceeds from the Mezzanine B and Mezzanine C Notes in British pound sterling also helped to finance the purchase of the portfolio.

The transaction originally closed in October 2015 and has been in a revolving period since. The revolving period ends on 31 August 2023 provided that no amortisation event or issuer event of default occurs. The legal final maturity date is one year after the end of the revolving period (i.e., at the latest in August 2024).

An amendment to the transaction took place on 14 October 2021, whereby the index on the Sterling Variable Funding Note and on the Mezzanine B and Mezzanine C Notes switched to the Sterling Interest Rate, which is compounded daily Sonia plus the appropriate Credit Adjusted Spread, from three-month GBP Libor for the Sterling Variable Funding Note and one-month GBP Libor for the Mezzanine Notes. Additional language was added for a future replacement benchmark rate regarding the three-month USD Libor in the case of the U.S. Dollar Variable Funding Note. These changes occurred in the context of the Financial Conduct Authority’s discontinuation of the Libor index and the absence of a guarantee that the Libor index will continue to exist after 2021 for the GBP Libor and after 2023 for the USD Libor.

The confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance of the transaction, in terms of delinquencies, defaults, dilutions, and days sales outstanding, as of 30 September 2021;
-- Current sizing of the reserves sufficient to withstand stresses at the AA (sf) rating level; and
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

PORTFOLIO PERFORMANCE
As of 30 September 2021, the gross receivables balance was equivalent to GBP 908 million and the three-month average delinquency ratio, default ratio, dilution ratio, and days sales outstanding were 9.6%, 1.9%, 3.6%, and 43.0, respectively, below their respective trigger levels of 18.5%, 3.5%, 6.0%, and 70.0.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar evaluates the adequacy of available credit enhancement through compliance with transaction definitions of the loss reserve, the dilution reserve, and the carrying cost reserve as well as the level of factors incorporated in these definitions. The loss and dilution stress factors expected at the AA (sf) rating level are 2.25.

CREDIT ENHANCEMENT
Credit enhancement is provided by the subordination of the Mezzanine B and Mezzanine C Notes, the subordinated loan, and overcollateralisation in the form of various reserves. DBRS Morningstar’s calculation takes into account the gross receivables balance of the portfolio as well as available cash held in the Issuer’s accounts. As of 30 September 2021, the credit enhancement on the VFNs was 58.9% and the required reserve percentage was 31.5%.

Barclays acts as the account bank for the transaction. Based on the account bank reference rating of Barclays at A (high) (which is one notch below its DBRS Morningstar public Long Term Critical Obligations Rating of AA (low)), 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 ratings assigned to the VFNs, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to 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 trade receivables transactions.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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

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.

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

Due to the inclusion of a revolving period in the transaction, the analysis continues to be based on the eligibility criteria and maximum potential borrowing set forth in the transaction legal documents.

DBRS Morningstar conducted a review of the transaction legal documents received in the context of the aforementioned 14 October 2021 amendment. A review of any other transaction legal documents was not conducted as they have remained unchanged since the most recent rating action.

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 DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include monthly reports, foreign-exchange model, and credit enhancement model provided by BFI UK.

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 this transaction took place on 16 October 2020, when DBRS Morningstar confirmed its ratings on all VFNs at AA (sf).

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 rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
-- DBRS Morningstar expected loss stress factor and a dilution stress factor commensurate with the rating level as per the standards described in its “Rating European Trade Receivables Securitisation Transactions” methodology. Changes in the transaction documents with respect to the loss stress factor and the dilution stress factor can have a direct impact on the rating of the Facility.
-- The loss and dilution stress factors expected at the AA (sf) rating level are 2.25.

Facility Risk Sensitivity:
-- A decrease of the loss stress factor and the dilution stress factor to 2.00 from 2.25, expected rating of A (sf)
-- A decrease of the loss stress factor and the dilution stress factor to 1.75 from 2.25, expected rating of BBB (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.

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

Lead Analyst: Natalia Coman, Assistant Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 23 October 2015

DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (8 February 2021), https://www.dbrsmorningstar.com/research/373435/master-european-structured-finance-surveillance-methodology.
-- Rating European Trade Receivables Securitisation Transactions (9 November 2020), https://www.dbrsmorningstar.com/research/369804/rating-european-trade-receivables-securitisation-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Currency Stresses for Global Structured Finance Transactions (18 February 2021), https://www.dbrsmorningstar.com/research/373856/currency-stresses-for-global-structured-finance-transactions.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021), https://www.dbrsmorningstar.com/research/384512/operational-risk-assessment-for-european-structured-finance-originators.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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].