Press Release

DBRS Morningstar Upgrades and Confirms Ratings on Cardiff Auto Receivables Securitisation 2022-1 plc

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January 23, 2023

DBRS Ratings Limited (DBRS Morningstar) took the following rating actions on the notes issued by Cardiff Auto Receivables Securitisation 2022-1 plc:

-- Class A Notes confirmed at AAA (sf)
-- Class B Notes upgraded to AA (low) (sf) from A (high) (sf)
-- Class C Notes upgraded to A (sf) from A (low) (sf)
-- Class D Notes confirmed at BBB (low) (sf)
-- Class E Notes confirmed at BB (sf)

The ratings address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date.

The rating actions follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the December 2022 payment date;
-- Probability of default (PD), loss given default (LGD), and residual value (RV) haircut assumptions on the remaining receivables;
-- Current available credit enhancement to the rated notes to cover the expected losses at their respective rating levels.

The transaction is a securitisation of auto loan receivables related to personal contract purchase (PCP) agreements for new and used vehicles granted by Black Horse Limited (Black Horse or the servicer) to private borrowers in England and Wales. PCP agreements afford the borrower the option to turn in the purchased vehicle at contract maturity as an alternative to making a final balloon payment, exposing the issuers to RV risk. Ancillary products (insurance, maintenance) are not included in the portfolio.

The transaction is static and its legal final maturity date is at the October 2028 payment date.

PORTFOLIO PERFORMANCE
Delinquencies have been minimal since closing. As of the December 2022 payment date, loans two to three months in arrears and loans more than three months in arrears were marginal at 0.02% and 0.03% of the outstanding portfolio balance, respectively. Gross cumulative credit defaults amounted to 0.1% of the initial portfolio balance, with cumulative recoveries of 51.7% to date. There were no losses on voluntary terminations (VTs) and PCP handbacks.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and maintained its base case PD assumption at 6.2% and slightly decreased its base case LGD assumption to 18.1% from 18.2%.

The transaction is subject to VT risk, as under the UK Consumer Credit Act, the borrower has the right to terminate a consumer loan agreement after paying at least half of the total amount payable, provided that the vehicle returns to the finance provider in good condition. As of the December 2022 payment date, 82.8% of the PCP receivables had an original term of four years or longer, which poses an increased VT risk as shown in DBRS Morningstar’s subsequent commentary titled “U.K. Autos: Elongated PCP Terms Increase the Risk of Voluntary Termination”, available at https://www.dbrsmorningstar.com/research/326850/uk-autos-elongated-pcp-terms-increase-the-risk-of-voluntary-termination. DBRS Morningstar factored this risk into its base case PD and LGD assumptions.

The RV haircuts are 41.9%, 34.1%, 29.3%, 21.5%, and 16.0% at the AAA (sf), AA (low) (sf), A (sf), BBB (low) (sf), and BB (sf) rating levels, respectively.

CREDIT ENHANCEMENT
The subordination of the respective junior obligations provides credit enhancement to the rated notes. The transaction continues to deleverage steadily, resulting in increased credit enhancement (CE) available to the rated notes.

As of the December 2022 payment date, the CE on the rated notes had increased as follows since the closing date:
-- CE on the Class A Notes to 46.8% from 32.0%,
-- CE on the Class B Notes to 31.1% from 21.3%,
-- CE on the Class C Notes to 23.4% from 16.0%,
-- CE on the Class D Notes to 16.1% from 11.0%, and
-- CE on the Class E Notes to 11.0% from 7.5%.

The transaction benefits from liquidity support provided by a cash reserve funded at closing through a subordinated loan granted by Black Horse. The reserve is nonamortising and was funded to an amount equal to 0.75% of the respective initial notes’ balance (while the relevant class of notes is outstanding), or GBP 4.2 million. The reserve is available to cover senior fees and expenses, senior swap payments, and interest payments on the rated notes. As of the December 2022 payment date, the reserve was at its target level.

Lloyds Bank plc (Lloyds Bank) acts as the account bank for the transaction. Based on the account bank reference rating of AA on Lloyds Bank (one notch below its DBRS Morningstar Long Term Critical Obligations Rating (COR) of AA (high)), 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 ratings assigned to the notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Black Horse acts as the swap counterparty and Lloyds Bank acts as the swap guarantor for the transaction. DBRS Morningstar's Long Term COR of AA (high) on Lloyds Bank is above the first rating threshold as described in DBRS Morningstar's "Derivative 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 methodology applicable to the ratings is: Master European Structured Finance Surveillance Methodology (21 December 2022), https://www.dbrsmorningstar.com/research/407695/master-european-structured-finance-surveillance-methodology.

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.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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 loan-level data and investor reports provided by Black Horse.

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 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.

The last rating action on this transaction took place on 14 February 2022, when DBRS Morningstar finalised its provisional ratings on the rated notes.

The lead analyst responsibilities for this transaction have been transferred to Natalia Coman.

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 rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):

-- DBRS Morningstar expected a lifetime base case PD, LGD, and RV haircut for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD of the current pool of loans at the B (low) (sf) rating level are 6.2% and 18.1%, respectively. The RV haircuts are 41.9%, 34.1%, 29.3%, 21.5%, and 16,0% at the AAA (sf), AA (low) (sf), A (sf), BBB (low) (sf), and BB (sf) rating levels, respectively.
-- The risk sensitivity overview below illustrates the ratings expected if the PD, LGD, and the RV haircut increase by a certain percentage over the base case assumption. For example, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to decrease to AA (high) (sf), ceteris paribus. If the RV haircut increases by 50%, the rating on the Class A Notes would be expected to remain at AAA (sf), ceteris paribus. Furthermore, if the PD, LGD, and RV haircut all increase by 50%, the rating on the Class A Notes would be expected to decrease to AA (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of AAA (sf)
-- 50% increase in PD and LGD, expected rating of AA (high) (sf)
-- 25% increase in RV haircut, expected rating of AAA (sf)
-- 50% increase in RV haircut, expected rating of AAA (sf)
-- 25% increase in PD and LGD and 25% increase in RV haircut, expected rating of AAA (sf)
-- 25% increase in PD and LGD and 50% increase in RV haircut, expected rating of AA (high) (sf)
-- 50% increase in PD and LGD and 25% increase in RV haircut, expected rating of AA (sf)
-- 50% increase in PD and LGD and 50% increase in RV haircut, expected rating of AA (sf)

Class B Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and LGD, expected rating of A (high) (sf)
-- 25% increase in RV haircut, expected rating of AA (low) (sf)
-- 50% increase in RV haircut, expected rating of A (high) (sf)
-- 25% increase in PD and LGD and 25% increase in RV haircut, expected rating of A (high) (sf)
-- 25% increase in PD and LGD and 50% increase in RV haircut, expected rating of A (sf)
-- 50% increase in PD and LGD and 25% increase in RV haircut, expected rating of A (sf)
-- 50% increase in PD and LGD and 50% increase in RV haircut, expected rating of A (low) (sf)

Class C Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of A (sf)
-- 50% increase in PD and LGD, expected rating of A (low) (sf)
-- 25% increase in RV haircut, expected rating of A (sf)
-- 50% increase in RV haircut, expected rating of BBB (high) (sf)
-- 25% increase in PD and LGD and 25% increase in RV haircut, expected rating of BBB (high) (sf)
-- 25% increase in PD and LGD and 50% increase in RV haircut, expected rating of BBB (sf)
-- 50% increase in PD and LGD and 25% increase in RV haircut, expected rating of BBB (sf)
-- 50% increase in PD and LGD and 50% increase in RV haircut, expected rating of BBB (sf)

Class D Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and LGD, expected rating of BBB (low) (sf)
-- 25% increase in RV haircut, expected rating of BBB (low) (sf)
-- 50% increase in RV haircut, expected rating of BB (high) (sf)
-- 25% increase in PD and LGD and 25% increase in RV haircut, expected rating of BBB (low) (sf)
-- 25% increase in PD and LGD and 50% increase in RV haircut, expected rating of BB (high) (sf)
-- 50% increase in PD and LGD and 25% increase in RV haircut, expected rating of BB (high) (sf)
-- 50% increase in PD and LGD and 50% increase in RV haircut, expected rating of BB (sf)

Class E Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of BB (sf)
-- 50% increase in PD and LGD, expected rating of BB (sf)
-- 25% increase in RV haircut, expected rating of BB (sf)
-- 50% increase in RV haircut, expected rating of BB (low) (sf)
-- 25% increase in PD and LGD and 25% increase in RV haircut, expected rating of BB (low) (sf)
-- 25% increase in PD and LGD and 50% increase in RV haircut, expected rating of BB (low) (sf)
-- 50% increase in PD and LGD and 25% increase in RV haircut, expected rating of BB (low) (sf)
-- 50% increase in PD and LGD and 50% increase in RV haircut, expected rating of B (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: Alfonso Candelas, Senior Vice President
Initial Rating Date: 7 February 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.

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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