Press Release

DBRS Morningstar Upgrades Ratings of NewDay Funding Loan Note Issuer VFN-F1 V2 Class A Notes and Class F Notes, and VFN-F1 V1 Class F Notes

Consumer Loans & Credit Cards

December 23, 2022

DBRS Ratings Limited (DBRS Morningstar) upgraded its ratings of the Class F Notes of the sub-series V1 and the Class A and Class F Notes of the sub-series V2 of the VFN-F1 Loan Notes (collectively, the Notes) issued by NewDay Funding Loan Note Issuer Ltd. (the Issuer) as follows:

-- Series VFN F1-V1, Class F Notes to B (high) (sf) from B (low) (sf)
-- Series VFN F1-V2, Class A Notes to A (low) (sf) from BBB (low) (sf)
-- Series VFN F1-V2, Class F Notes to B (high) (sf) from B (low) (sf)

The ratings address the timely payment of scheduled interest and the ultimate repayment of principal by the relevant legal final maturity dates.

RATING RATIONALE
The rating actions follow a review of the transaction structures where subordination levels are commensurate with the rating upgrade after the following analytical considerations:

-- The transactions’ capital structure, including the form and sufficiency of available credit enhancement to support DBRS Morningstar’s expectation of charge-off, monthly principal payment, and yield rates under various stress scenarios.
-- The ability of the transactions 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 consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

TRANSACTION STRUCTURE
The Notes include respective scheduled revolving periods. 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. If the notes are not fully redeemed at the end of the respective scheduled revolving periods, the transactions enter into a rapid amortisation.

The VFN-F1 sub-series V1 and V2 transactions also include respective series-specific liquidity reserves that the originator initially funded at closing and which have been replenished to the target amounts of 1.4% and 1.7% of the Class A Notes’ balance, respectively, in the transactions’ interest waterfalls. The liquidity reserve is available to cover the shortfalls in senior expenses and interest due on the Class A 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 the excess spread and the originator’s ability to increase the credit card contractual rate, the levels of subordination and liquidity reserve are deemed commensurate with the ratings if further interest rate hikes occur 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 Notes. 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 to the Notes.

PORTFOLIO ASSUMPTIONS
Recent total payment rates, including the interest collections in the servicer report, continue to be higher than the 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 report in November 2022 showed a total yield of 31.9%, up 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 freezes). After considering 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 report in November 2022 showed a charge-off rate of 12.1% 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 structures 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 these transactions 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 transactions 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 rating actions include the following data provided by the arranger, NewDay Cards Ltd, or monthly servicer reports:
-- Securitised portfolio: Monthly receivables balances, total payment rates, gross yield, charge-off rates, and purchase rates up to November 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;
-- Stratification tables in relation to the securitised portfolio as of November 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.

At the time of the initial ratings, DBRS Morningstar was not supplied with third-party assessments for the NewDay Funding Loan Note Issuer, VFN-F1 V1 and VFN-F1 V2 transactions. 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 NewDay Funding Loan Note Issuer, VFN-F1 V1 and VFN-F1 V2 took place on 15 November 2022, when DBRS Morningstar confirmed its ratings on these notes.

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 transactions parameters on the ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings:

-- 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:

NewDay Funding Loan Note Issuer, VFN-F1 V1:
-- Class F Notes: B (sf), B (high) (sf), B (high) (sf), below B (low) (sf).

NewDay Funding Loan Note Issuer, VFN-F1 V2:
-- Class A Notes: BBB (high) (sf), BBB (high) (sf), BBB (high) (sf), BBB (sf).
-- Class F Notes: B (sf), B (high) (sf), B (high) (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 Dates:
-- NewDay Funding Loan Note Issuer, VFN-F1 V1: 15 December 2017
-- NewDay Funding Loan Note Issuer, VFN-F1 V2: 15 December 2017

 
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.

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].

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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