DBRS Morningstar Assigns Rating of A (sf) with Negative Trend to Wolf Receivables Financing Plc Senior Notes

DBRS Ratings Limited (DBRS Morningstar) assigned an A (sf) rating with a Negative trend to the Senior Notes (the Rated Notes) issued by Wolf Receivables Financing Plc (the Issuer). DBRS Morningstar does not rate the Junior Notes (together with the Rated Notes, the Notes) also issued in the transaction.

The rating of the Senior Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal final maturity date. DBRS Morningstar’s ratings do not address payments of the Issuer’s indemnity to the facility agent, the Issuer’s tax indemnities, the Issuer’s currency indemnities, and the step-up margin (as defined in the transaction documents).

The transaction entails the issuance of the Notes collateralised by a pool of UK reperforming unsecured receivables. The receivables are well diversified, comprising around 357,000 accounts with circa GBP 884 average balance across 2,000 portfolios that were acquired by Lowell Portfolio 1 Limited (Lowell or the Sponsor) over a nine-year period with most of the receivables being acquired between 2017 and 2021. The receivables, mostly associated with a payment plan, are linked with a wide range of underlying product types with catalogue credit, credit card, personal unsecured loan, and telecommunications service agreements accounting for 33.2%, 31.4%, 14.2%, and 13.6% of the total receivables balance at cut-off, respectively. The remaining 7.3% comprise utility bills, store cards, overdrafts, and mail orders, with about 0.4% categorised as other. About 84% of the total receivables by balance at cut-off are regulated under the Consumer Credit Act and circa 10% are court assigned.

The receivables contain reperforming unsecured claims that were selected based on the following criteria: (1) accounts on payment plans that, over a six-month period before the cut-off date, have been paying at least 80% of the payment plan due amount (in aggregate) and made at least five monthly net positive payments; or (2) other accounts that have made six monthly net positive payments in six months prior to the cut-off date.

All of the borrowers by outstanding balance are located in the United Kingdom, with 13.9% of the borrowers by outstanding balance located in the North West and 10.51% in the Greater London area.

The receivables are mainly serviced by Lowell Financial Ltd (the Servicer), which is part of the Lowell Group, with a small portion serviced by external debt collection agencies and debt management companies.

The transaction benefits from an amortising liquidity reserve sized at the higher of 4.5% of the Senior Notes outstanding balance and GBP 500,000. The balance of the reserve at closing will be circa GBP 4.5 million. The liquidity reserve is available to cover senior fees and expenses as well as interest due on the Senior Notes. An interest rate cap agreement between the Issuer and an interest rate cap provider was put in place at closing at a strike rate of 1.5%.

The transaction features a step-up interest of 1% on the outstanding Senior Note amount from the fourth anniversary of the closing date.

Collections from the cut-off date of 31 December 2021 to the closing date of 22 April 2022 (corresponding to the January and February collection periods, March collections are not yet confirmed) are GBP 11.95 million (GBP 11.35 million net of senior servicer fees). The interest rate cap premium was paid by Lowell and the initial top up of the interest reserve account will be funded from the note proceeds. The actual collections between the cut-off date and the closing date will run through the transaction waterfall.

Equiniti Gateway Limited, trading as Equiniti Credit Services (Equiniti or the Backup Servicer), will act as the backup servicer.

The final maturity of the transaction is December 2034.

RATING RATIONALE
DBRS Morningstar based its rating on a review of the following analytical considerations:
-- The transaction’s capital structure and form and sufficiency of the available credit enhancement.
-- The credit quality of the receivables portfolio and the ability of the Servicer to perform collections and resolution activities. DBRS Morningstar estimated the expected collections from the unsecured receivables based on the
proposed business plan projections and historical performance data provided by the Servicer and its agents.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Rated Notes according to
the terms of the transaction documents.
-- The sovereign rating of the United Kingdom, which DBRS Morningstar rates at AA (high) and R-1 (high) with Stable trends as of the date of this press release.
-- The consistency of the transaction's legal structure with DBRS Morningstar’s “Legal Criteria for European
Structured Finance Transactions” methodology.

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.

DBRS Morningstar analysed the transaction cash flow structure using Intex DealMaker.

The cap documentation is not fully in line with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions’ methodology. However, DBRS Morningstar has determined that this does not affect the rating assigned to the notes.

Notes:
All figures are in GBP unless otherwise noted.

The principal methodology applicable to the rating is: “Rating European Nonperforming Loans Securitisations” (19 May 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.

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 provided by the Servicer and its agents include a receivables data tape as of the cut-off date of 31 December 2021, historical performance from Q1 2007 onwards, and the portfolio business plan.

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 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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar public rating on this financial instrument.

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 assign the rating (the Base Case):
-- Recovery Rates Used: Cumulative Base Case 10-year recovery amount of approximately
GBP 119.2 million at the A (sf) stress level and a 5% and 10% decrease in the Base Case 10-year recovery rate.
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would
lead to a downgrade of the Rated Notes (Senior Notes) to BBB (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would
lead to a downgrade of the Rated Notes (Senior Notes) to BBB (low) (sf).

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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.

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

Lead Analyst: Sinem Erol-Aziz, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 22 April 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 Nonperforming Loans Securitisations (19 May 2021),
https://www.dbrsmorningstar.com/research/378681/rating-european-nonperforming-loans-securitisations.

-- Legal Criteria for European Structured Finance Transactions (29 July 2021),
https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.

-- 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.

-- 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.

-- Derivative Criteria for European Structured Finance Transactions (20 September 2021),
https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-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.

-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (03 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].