Press Release

DBRS Morningstar Assigns Provisional Ratings to Azure Finance No. 3 plc

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March 29, 2023

DBRS Ratings Limited (DBRS Morningstar) assigned provisional ratings to the following classes of Notes (the Notes) to be issued by Azure Finance No. 3 plc (the Issuer):

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (sf)
-- Class D Notes at BBB (sf)
-- Class E Notes at BB (sf)
-- Class F Notes at CCC (sf)
-- Class X Notes at B (low) (sf)

DBRS Morningstar did not assign a provisional rating to the residual certificates also expected to be issued in this transaction.

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. These ratings will be finalised upon review of the final version of the transaction documents and of the relevant opinions. If the information therein were substantially different, DBRS Morningstar may assign different final ratings to the Notes.

The ratings on the Class A Notes and Class B Notes address the timely payment of scheduled interest and the ultimate repayment of principal by the legal maturity date. The ratings on the Class C Notes, Class D Notes, Class E Notes, and Class F Notes address the ultimate repayment of interest (timely when most senior) and the ultimate repayment of principal by the legal maturity date. The rating on the Class X Notes addresses the ultimate payment of interest and principal by the legal maturity date.

The transaction represents the issuance of Notes backed by assets selected from a static provisional portfolio of approximately GBP 242 million in receivables related to hire-purchase (HP) auto loans granted by Blue Motor Finance Limited (Blue; the Originator or the Seller) to borrowers in England, Wales, and Scotland. The underlying motor vehicles related to the finance contracts consist of new and used passenger and light-commercial vehicles and motorcycles. Blue also services the receivables.

DBRS Morningstar based its ratings on a review of the following analytical considerations:
-- The transaction capital structure, including form and sufficiency of available credit enhancement;
-- Relevant credit enhancement in the form of subordination, the senior or junior reserve fund (as applicable), and excess spread;
-- Credit enhancement levels that are sufficient to support DBRS Morningstar’s projected cumulative net loss assumptions under various stressed cash flow assumptions for the Class A Notes to Class X Notes;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested;
-- Blue’s capabilities with regard to originations, underwriting, servicing, and financial strength;
-- The transaction parties’ financial strength with regard to their respective roles;
-- The credit quality of the collateral and historical and projected performance of the Seller’s portfolio;
-- DBRS Morningstar’s sovereign rating on the United Kingdom of Great Britain and Northern Ireland, currently at AA with a Stable trend; and
-- The expected consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that are expected to address the true sale of the assets to the Issuer.

TRANSACTION STRUCTURE
The transaction incorporates separate interest and principal waterfalls that allow for the fully sequential payment of both interest and principal on the Notes. Available interest collections are available to cover principal deficiencies in relation to each of the Notes after interest has been paid in relation to the same class of Notes.

The structure benefits from a fully funded senior reserve fund. The target size of the senior reserve fund is 2.2% of the Class A Notes’ and Class B Notes’ principal amount outstanding. The senior reserve fund required amount is subject to a floor of 0.5% of the aggregate outstanding principal balance of the purchased receivables as at the closing date. The senior reserve fund forms part of the available revenue receipts, but its use is restricted to the payment of senior fee shortfalls and to the payment of interest on the Class A Notes and the Class B Notes only. On the redemption of the Class B Notes, part of the released funds are applied to create the junior reserve fund. The junior reserve fund also forms part of the available revenue receipts, but its use is also restricted to the payment of senior fee shortfalls and to the payment of interest on the Class C Notes, Class D Notes, Class E Notes, and Class F Notes only.

All underlying contracts are fixed rate while the Notes are floating rate. Interest rate risk is mitigated through an interest rate swap provided by BNP Paribas SA (BNPP).

COUNTERPARTIES
Citibank N.A./London Branch (Citibank London) has been appointed as the Issuer’s account bank for the transaction. DBRS Morningstar privately rates Citibank London and publicly rates its parent, Citibank, N.A., at AA (low) with a Stable trend. The transaction documents are expected to contain downgrade provisions relating to the account bank that are consistent with DBRS Morningstar’s criteria.

BNPP has been appointed as the swap counterparty. DBRS Morningstar publicly rates BNPP at AA (low) with a Stable trend. The hedging documents are expected to contain downgrade provisions that are consistent with DBRS Morningstar’s criteria.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
The initial portfolio has a relatively high exposure to older diesel engine vehicles that are unlikely to be classified as Euro 6 (DBRS Morningstar estimates that up to 26.7% of receivables relate to diesel vehicles first registered prior to 2016). DBRS Morningstar considers that risks related to greenhouse gas emissions may be associated with future restrictions on these vehicle types, including bans and additional taxes. These risks may lead to changes in expected vehicle valuations and borrower behaviours that could subsequently influence future default, recovery, and prepayment activity. DBRS Morningstar considers that this exposure, combined with the longer-than-typical contract tenors, is a relevant environmental factor within its credit analysis.

There were no Social or 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.

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), 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 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/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:
-- Quarterly static cumulative gross loss data from Q1 2015 to Q3 2022 split by credit defaults and voluntary terminations (VTs) for each risk tier (1 to 8) and on a total portfolio basis;
-- Quarterly static cumulative recovery data split by credit default recoveries from Q2 2015 to Q4 2022 and VT recoveries from Q3 2015 to Q4 2022;
-- Monthly dynamic delinquency data from November 2014 to February 2023;
-- Monthly dynamic default rate from November 2014 to February 2023;
-- Monthly dynamic prepayment data from November 2014 to February 2023;
-- Quarterly static cumulative prepayment rate from Q1 2015 to Q3 2022 for each risk tier (1 to 8) and on a total portfolio basis;
-- Loan-level characteristics and stratification data as at 31 January 2023;
-- Monthly origination volumes broken down by credit risk tier from November 2014 to February 2023; and
-- Monthly average receivables balance broken down by credit risk tier from November 2014 to February 2023.

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 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 were disclosed to Blue Motor Finance Limited and the arranger, Morgan Stanley & Co. International plc, and amended following that disclosure before being assigned.

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 with the parameters used to determine the ratings (the base case):

-- Expected default rate (PD) (credit defaults and VTs combined): 10.8%
-- Expected recovery rate (credit defaults and VTs combined): 55.4%
-- Loss given default (LGD): 69.5% in the AAA (sf) scenario, 66.2% in the AA (sf) scenario, 61.2% in the A (sf) scenario, 56.2% in the BBB (sf) scenario, 51.3% for the BB (sf) scenario, 44.6% for the B (low) (sf) scenario.

Scenario 1: 25% increase in LGD
Scenario 2: 50% increase in LGD
Scenario 3: 25% increase in PD
Scenario 4: 50% increase in PD
Scenario 5: 25% increase in PD and 25% increase in LGD
Scenario 6: 25% increase in PD and 50% increase in LGD
Scenario 7: 50% increase in PD and 25% increase in LGD
Scenario 8: 50% increase in PD and 50% increase in LGD

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios will be:
-- Class A Notes: AA (high) (sf), AA (sf), AA (high) (sf), AA (sf), AA (low) (sf), A (high) (sf), A (high) (sf), A (sf)
-- Class B Notes: A (high) (sf), A (sf), A (high) (sf), A (sf), A (sf), A (low) (sf), A (low) (sf), BBB (sf)
-- Class C Notes: BBB (high) (sf), BBB (sf), BBB (high) (sf), BBB (sf), BBB (low) (sf), BB (high) (sf), BB (high) (sf), BB (sf)
-- Class D Notes: BB (high) (sf), BB (sf), BB (high) (sf), BB (high) (sf), BB (sf), B (high) (sf), B (high) (sf), B (low) (sf)
-- Class E Notes: B (high) (sf), B (low) (sf), B (high) (sf), B (sf), B (low) (sf), below B (low), below B (low), below B (low)

The provisional rating assigned to the Class F Notes would not be affected by a hypothetical change in either the PD or LGD. A hypothetical change in either the PD or LGD in relation to the Class X Notes would lead to a rating below B (low).

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: Miklos Halasz, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 29 March 2023

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
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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