DBRS Morningstar Finalises Provisional Ratings on Pavillion Point of Sale 2021-1A PLC

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by Pavillion Point of Sale 2021-1A PLC (the Issuer):

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (high) (sf)
-- Class C Notes at A (high) (sf)
-- Class D Notes at BBB (high) (sf)
-- Class E Notes at BB (low) (sf)
-- Class F Notes at B (sf)
-- Class X Notes at B (sf)

DBRS Morningstar did not rate the Class Z Notes, Class R Notes, Class S1 Certificate, Class S2 Certificate, or Class Y Certificate also issued in this transaction.

The ratings on the Class A and Class B Notes address the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date. The ratings on the Class C, Class D, Class E, Class F, and Class X Notes address the ultimate payment of interest and repayment of principal by the legal final maturity date.

The collateralised notes are backed by a portfolio of interest-free, unsecured, amortising point-of-sale loans granted to private individuals domiciled in the UK and serviced by Clydesdale Financial Services Limited (CFS, trading as Barclays Partner Finance; the originator and servicer), an indirect wholly owned subsidiary of Barclays PLC (Barclays).

The ratings are based on the following analytical considerations:
-- The transaction's capital structure, including form and sufficiency of available credit enhancement;
-- Credit enhancement levels that are sufficient to support DBRS Morningstar's projected expected net loss assumptions under various stressed scenarios;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the notes;
-- The originator's capabilities with regard to originations, underwriting, and servicing as well as the financial strength of its parent;
-- The transaction parties’ financial strength with regard to their respective roles;
-- The credit quality of the collateral, and historical and projected performance of the portfolio;
-- DBRS Morningstar's sovereign rating on the United Kingdom of Great Britain and Northern Ireland, currently at AA (high) with a Stable trend; and
-- The consistency of the transaction's legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

TRANSACTION STRUCTURE
The transaction includes an 11-month revolving period until January 2023. During the revolving period, the originator may offer additional receivables that the Issuer will purchase, provided that the eligibility criteria and portfolio 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, insolvency of the originator, or replacement of the servicer.

The transaction allocates payments in separate interest and principal priorities and benefits from a liquidity reserve, with a target balance equal to 1.25% of the outstanding Class A and Class B Notes’ balance. The liquidity reserve can be used to cover shortfalls in senior expenses, servicing fees, swap payments, interest payments on the Class A Notes, Class S1 Certificate payments, Class S2 Certificate payments, and interest payments on the Class B Notes when interest collections are not sufficient. Principal funds can also be reallocated to cover the above shortfalls if the interest collections and the liquidity reserve are insufficient.

At the end of the revolving period, the notes will be repaid on a fully sequential basis.

COUNTERPARTIES
Barclays Bank PLC (Barclays Bank) is the account bank for the transaction. DBRS Morningstar currently has a Long-Term Issuer Rating of “A” and a Long Term Critical Obligations Rating of AA (low) with Stable trends on Barclays Bank. Based on 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 assigned ratings, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Barclays Bank is also the interest rate swap counterparty for the transaction, which meets DBRS Morningstar’s criteria to act in such capacity. The transaction documents also contain downgrade provisions that are not fully consistent with the criteria as the replacement swap provider may not have DBRS Morningstar rating.

DBRS Morningstar analysed the transaction structure in Intex Dealmaker.

COVID-19 CONSIDERATIONS
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 asset-backed security transactions.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 9 December 2021. The 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/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

ESG CONSIDERATIONS
In December 2020, the Financial Conduct Authority issued a section 166 notice and required CFS to appoint a skilled person to undertake a review of its lending portfolio to establish whether there was any evidence of any actual and/or potential customer harm caused by (1) poor broker practices and inadequate affordability processes, or (2) weaknesses in the current broker oversight framework and affordability assessment. The unaudited analysis of the portfolio shows that under 1% of receivables have potential indicators of customer distress with an additional 2% still under assessment. Under the terms of the purchase, Barclays (via its subsidiaries) agrees to indemnify the Issuer for any purchased receivables that are affected by remediation matters.

DBRS Morningstar considers that the legal and regulatory risk implication from the skilled person's review is relevant under ‘Transaction Governance’ in DBRS Morningstar’s environmental, social, and governance (ESG) analytical framework for structured finance transactions, but not significant enough to cause any rating notching compared with the level implied by the cash flow analysis.

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” (29 October 2021).

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.

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 considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 the ratings include the following data provided by the arranger, Barclays:
-- Static monthly vintage defaults from January 2015 to September 2021;
-- Static monthly vintage recoveries from January 2015 to September 2021;
-- Static monthly vintage delinquencies from January 2015 to September 2021;
-- Static monthly vintage net losses from January 2015 to September 2021;
-- Dynamic monthly prepayments from January 2015 to September 2021;
-- Dynamic monthly delinquencies from January 2015 to September 2021;
-- Dynamic monthly defaults from January 2015 to September 2021;
-- Dynamic monthly recoveries from January 2015 to September 2021;
-- Dynamic monthly net losses from January 2015 to September 2021; and
-- Loan-by-loan detail and stratification table as at 31 December 2021 and related amortisation schedule.

DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its 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 newly issued financial instruments. These are the first DBRS Morningstar ratings since the Initial Rating Date.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

Sensitivity Analysis: 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 Default Rate of 2.2%: A 25% and a 50% increase.
-- Expected Loss Given Default (LGD) of 90%: A 25% increase.

Scenario 1: A 25% increase in the expected Default Rate.
Scenario 2: A 50% increase in the expected Default Rate.
Scenario 3: A 25% increase in expected LGD.
Scenario 4: A 25% increase in the expected Default Rate and 25% increase in expected LGD.
Scenario 5: A 50% increase in the expected Default Rate and 25% increase in expected LGD.

DBRS Morningstar concludes that the expected ratings under the five stress scenarios are:
-- Class A Notes: AA (high) (sf), AA (sf), AA (high) (sf), AA (high) (sf), AA (low) (sf)
-- Class B Notes: AA (low) (sf), A (high) (sf), AA (high) (sf), AA (low) (sf), A (sf)
-- Class C Notes: A (low) (sf), BBB (high) (sf), BB (high) (sf), BB (high) (sf), BB (sf)
-- Class D Notes: BBB (low) (sf), BB (high) (sf), BB (low) (sf), B (high) (sf), B (sf)
-- Class E Notes: B (high) (sf), B (sf), B (sf), B (low) (sf), below B (low) (sf)
-- Class F Notes: B (sf), B (low) (sf), below B (low) (sf), below B (low) (sf), below B (low) (sf)

The rating on the Class X Notes would not be affected by a hypothetical change in either the Expected Default Rate or Expected LGD.

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 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: Jeffrey Cespon, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 8 March 2022

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: https://www.dbrsmorningstar.com/about/methodologies.

-- Rating European Consumer and Commercial Asset Backed Securitisations (29 October 2021),
https://www.dbrsmorningstar.com/research/387042/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (30 July 2021),
https://www.dbrsmorningstar.com/research/382486/rating-european-structured-finance-transactions-methodology.
-- 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 Originators (16 September 2021),
https://www.dbrsmorningstar.com/research/384512/operational-risk-assessment-for-european-structured-finance-originators.
-- 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.
-- 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.
-- 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: 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].