DBRS Morningstar Assigns Provisional Ratings to NewDay Funding Master Issuer plc, Series 2022-3

DBRS Ratings Limited (DBRS Morningstar) assigned provisional ratings to the notes to be issued by NewDay Funding Master Issuer plc (the Issuer) as follows:

-- Series 2022-3, Class A Notes at A (sf)
-- Series 2022-3, Class D Notes at BBB (low) (sf)
-- Series 2022-3, Class E Notes at BB (low) (sf)
-- Series 2022-3, Class F Notes at B (sf)

The provisional ratings are based on information provided to DBRS Morningstar by the Issuer and its agents as of the date of this press release. The ratings can be finalised upon review of final information, data, legal opinions, and the governing transaction documents. To the extent that the information or the documents provided to DBRS Morningstar as of this date differ from the final information, DBRS Morningstar may assign different final ratings to the notes.

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, direct-to-consumer credit cards granted to individuals domiciled in the UK by NewDay Cards Ltd. (NewDay Cards or the originator).

The ratings are based on the following analytical considerations:
-- The transaction’s capital structure, including the form and sufficiency of available credit enhancement to support DBRS Morningstar’s revised expectation of charge-off, monthly 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, the diversification of the collateral, and the securitised portfolio’s historical and projected performance.
-- DBRS Morningstar’s sovereign rating on the United Kingdom of Great Britain and Northern Ireland at AA (high), Under Review with Negative Implications.
-- The expected consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

TRANSACTION STRUCTURE
The notes will be issued out of NewDay Funding Master Issuer plc as part of the NewDay Funding-related master issuance structure, where all series of notes are supported by the same pool of receivables and are 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 servicer may extend the scheduled revolving period 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.

The transaction includes a series-specific liquidity reserve that the originator initially funds at [•]% of the Class A and Class D Notes’ balances at closing and will be replenished to the target amount of [•] % of Class A and Class D Notes’ balances in the transaction’s interest waterfalls. The liquidity reserve is available to cover the shortfalls in senior expenses and interest due on the Class A and Class D Notes and would amortise to the target amount, subject to a floor of GBP 250,000.

As the notes carry floating-rate coupons based on the rate of daily compounded Sterling Overnight Index Average (Sonia), there is an interest rate mismatch between the fixed-rate collateral and the floating-rate notes. While the potential risk is to a certain degree mitigated by excess spread and the originator’s ability to increase the credit card contractual rate, the Class A Notes benefit from higher subordination and a liquidity reserve than comparable notes classes of the NewDay Funding-related master issuance program with a one-notch higher rating at A (sf) to compensate for the higher note margins and higher sensitivity to further rapid interest rate hikes during the revolving period. This approach is consistent with DBRS Morningstar’s view to maintain the rating stability of a master issuance structure.

COUNTERPARTIES
HSBC Bank plc (HSBC Bank) is the account bank for the transactions. Based on DBRS Morningstar’s private rating on HSBC Bank and the downgrade provisions outlined in the transaction documents, DBRS Morningstar considers the risk arising from the exposure to the account bank to be commensurate with the ratings assigned.

PORTFOLIO ASSUMPTIONS
Recent total payment rates, including the interest collections in the servicer report, continue to be higher than historical levels. Nonetheless, it remains to be seen if these levels are sustainable in the current challenging macroeconomic environment of persistent inflationary pressures and interest rate increases. DBRS Morningstar therefore elected to maintain the securitised portfolio’s expected monthly principal payment rate (MPPR) at 8% after removing the interest collections.

The portfolio yield was largely stable over the reported period until March 2020. The most recent performance in September 2022 showed a total yield of 31.7%, increased from the record low of 25.0% in May 2020 due to higher delinquencies and the forbearance measures offered (such as payment holidays and payment freeze). After consideration of the observed trend and the removal of spend-related fees, DBRS Morningstar maintained the expected yield at 24.5%.

The reported historical annualised charge-off rates were high but stable at around 16% until June 2020. The most recent performance in September 2022 showed a charge-off rate of 11.7% after reaching a record high of 17.1% in April 2020. Based on the analysis of historical data and in consideration of the current challenging environment, DBRS Morningstar continued to maintain the expected charge-off rate at 18%.

DBRS Morningstar 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit 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/396929 (17 May 2022).

DBRS Morningstar analysed the transaction structure in Intex Dealmaker.

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” (19 October 2022).

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.

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/401817/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 the following data provided by the arranger, NewDay Cards, or monthly servicer reports:
-- Securitised portfolio: monthly receivables balances, total payment rates, gross yield, charge-off rates, and purchase rates up to August 2022;
-- Total managed portfolio: monthly historical dynamic data from June 2007 to August 2022 and static data from Q1 2008 to Q2 2022, including the own brands portfolio 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 eligible pool as of 26 August 2022.

DBRS Morningstar also received additional data with regard to utilisation rate, credit limits, dilutions, and card interest rates.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

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.

These ratings concern expected-to-be-issued new financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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 (the base case):

-- 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: A (low) (sf), BBB (high) (sf), BBB (high)(sf), BBB (high) (sf)
-- Class D: BBB (low) (sf), BB (high) (sf), BBB (low) (sf), BB (high) (sf)
-- Class E: BB (low) (sf), BB (low) (sf), BB (low) (sf), BB (low) (sf)
-- Class F: Below B (low) (sf), B (sf), B (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.

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

Lead Analyst: Michael Langholz, Senior Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 4 November 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 (19 October 2022), https://www.dbrsmorningstar.com/research/404212/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (15 July 2022),
https://www.dbrsmorningstar.com/research/399899/rating-european-structured-finance-transactions-methodology.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022), https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022), https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022),
https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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].