Press Release

DBRS Morningstar Confirms Ratings on Securitisation of Catalogue Assets Limited Following Amendment

Consumer Loans & Credit Cards

January 12, 2023

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the notes (the rated notes) issued by Securitisation of Catalogue Assets Limited as follows:

-- Class A-S Variable Funding Notes (Class A-S VFN) at AAA (sf)
-- Class A-J Variable Funding Notes (Class A-J VFN) at A (sf)

The ratings on Class A-S VFN and Class A-J VFN address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date.

The transaction is a securitisation of home shopping receivables granted to private individuals by Shop Direct Finance Company Limited (Shop Direct) in the United Kingdom. Shop Direct offers two main credit products:
-- Direct Credit, offered under the very.co.uk brand and broadly similar to a credit card agreement where a customer is granted an initial credit limit, subject to interest charges.
-- Embedded Credit, providing weekly payment arrangements for goods predominantly purchased through the Littlewoods brand. Products sold through Littlewoods are typically advertised as interest free with weekly payment arrangements available, but the price of the product is higher than through direct channels recognising "embedded" interest charges.

The rating confirmations follow amendments to the transaction effective on 12 January 2023, which include:
-- The reduction of the “embedded credit” limit to 15% from 25%.
-- An extension of the end dates for Class A-S VFN and Class A-J VFN to 1 January 2026 from 1 January 2025. The end dates for the Class B, Class C1, and Class C2 Notes remain 1 January 2025, 1 January 2025, and 31 December 2023, respectively.
-- An extension of the legal final maturity date for Class A-S VFN and Class A-J VFN to 13 December 2032 from 13 December 2031. The legal final maturity date for the Class B, Class C1, and the Class C2 Notes remains 13 December 2031.

The revolving period ends on the latest of the notes’ end dates, 1 January 2026, provided that no revolving termination events have occurred. DBRS Morningstar does not rate the Class B, the Class C1, and the Class C2 Notes.

The rating confirmations also follow an annual review of the transaction and are based on the following analytical considerations:
-- No revolving termination events have occurred.
-- Portfolio performance, in terms of charge-off rates, monthly principal payment rates (MPPR), and yield rates, as of the December 2022 payment date;
-- Available credit enhancement to the rated notes to cover the expected losses at their respective rating levels; and
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the rated notes in full.

PORTFOLIO PERFORMANCE
As of the December 2022 payment date, the three-month moving average payment rate was 10.5%, well above its trigger level of 7.5%. The delinquency ratio, the five-month delinquency ratio, the dilution ratio, and the three-month moving average portfolio default rate were 8.8%, 3.3%, 59.7%, and 0.5%, respectively, well below their trigger levels of 22.5%, 10.0%, 175%, and 2.0%, respectively (or 1.75% on any three months over a 12-month period).

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar considered the historical performance of the transaction and the product weightings applicable to the portfolio to assess its asset and portfolio assumptions. As a result, DBRS Morningstar updated the base case charge-off rate, MPPR, and yield rate to 14.0%, 7.5%, and 22.0%, respectively.

The decrease in the expected charge-off rate reflects the borrowers’ improved credit performance over the last few years. The increase in the yield rate reflects the decrease in the “embedded credit” limit as well as an updated calculation to include interest proceeds from buy-now-pay-later options. DBRS Morningstar previously used an expected payment rate assumption that included nonprincipal proceeds; however, DBRS Morningstar now uses a MPPR that includes only principal proceeds. This change did not have a material impact on the transaction’s cashflow analysis.

CREDIT ENHANCEMENT
The maximum advance rates available to Class A-S VFN and Class A-J VFN are 64.0% and 73.0%, respectively, representing credit enhancement (excluding the liquidity reserve) of 36.0% and 27.0%, respectively.

The liquidity reserve target balance is calculated based on the aggregation of amounts calculated for each class of notes. These class-specific amounts consider the sum of the total margin for each class of the rated notes, Sonia along with a spread adjustment plus 2.0% and an additional 1.0%, which are then multiplied by the applicable commitment amounts (or, if zero, the applicable balance of the rated notes). These amounts are then calculated to cover three payment dates for Class A-S VFN and one payment date for the other classes of notes.

HSBC Bank plc (HSBC) acts as the account bank for the transaction. Based on DBRS Morningstar’s private rating on HSBC, 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 rating assigned to Class A-S VFN, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodologies applicable to the ratings are “Master European Structured Finance Surveillance Methodology” (21 December 2022), https://www.dbrsmorningstar.com/research/407695/master-european-structured-finance-surveillance-methodology, and “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.

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 methodologies consistently and conducted a review of the transaction in accordance with the principal methodologies.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

A review of part of transaction legal documents was conducted in the context of the amendment. Other legal documents that have remained unchanged since the most recent rating action have not been reviewed.

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/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 historical performance data on payment rates, yield rates, charge-off rates, debt management accounts, and dilutions from January 2011 to November 2022 provided by Shop Direct through the arranger, HSBC.

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 14 December 2021, when DBRS Morningstar confirmed its ratings on Class A-S VFN and Class A-J VFN at AAA (sf) and A (sf), respectively.

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 ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the base case):
-- Expected charge-off rate: 14.0%
-- Expected MPPR: 7.5%
-- Expected yield rate: 22.0%

Scenario 1: A 25% decrease in the expected MPPR.
Scenario 2: A 25% increase in the expected charge-off rate.
Scenario 3: A 25% decrease in the expected yield rate.
Scenario 4: A 15% increase in the expected charge-off rate, 15% decrease in the expected MPPR, and 15% decrease in the expected yield rate.

DBRS Morningstar concludes that the expected ratings on the notes under the four stress scenarios are:
Class A-S VFN: AA (high) (sf), AA (high) (sf), AA (high) (sf), AA (low) (sf)
Class A-J VFN: A (sf), A (low) (sf), A (low) (sf), BBB (high) (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: Natalia Coman, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 25 November 2013

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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