Press Release

DBRS Morningstar Assigns Provisional Ratings to PCL Funding VIII PLC and Takes Rating Actions on Related PCL Funding Issuers

Consumer Loans & Credit Cards

April 14, 2023

DBRS Ratings Limited (DBRS Morningstar) assigned provisional ratings to the notes to be issued by PCL Funding VIII PLC (the Issuer) as follows:

-- Series 2023-1 Class A Notes at AAA (sf)
-- Series 2023-1 Class B Notes at A (high) (sf)
-- Series 2023-1 Class C Notes at A (low) (sf)

DBRS Morningstar did not assign a provisional rating to the Series 2023-1, Class D Notes also expected to be issued in this transaction.

The provisional ratings are based on information provided to DBRS Morningstar by the Issuer and by 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 executed version of 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.

DBRS Morningstar also took rating actions on the following notes of related PCL Funding issuers:

PCL Funding I Limited
-- Class A Senior ETNs of Series 2012 Senior VFN confirmed at AAA (sf)

PCL Funding V PLC
-- Series 2021-1 Class A Notes confirmed at AAA (sf)
-- Series 2021-1 Class B Notes upgraded to AA (sf) from A (high) (sf)
-- Series 2021-1 Class C Notes upgraded to A (low) (sf) from BBB (high) (sf)

PCL Funding VI PLC
-- Series 2022-1 Class A Notes confirmed at AAA (sf)
-- Series 2022-1 Class B Notes confirmed at A (high) (sf)
-- Series 2022-1 Class C Notes upgraded to A (low) (sf) from BBB (high) (sf)

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

These rating actions reflect the largely stable collateral portfolio compositions over the past decade compared with the theoretically worst limits and, additionally for the Class B Notes of PCL Funding V PLC, higher subordination level compared with the Class B Notes of other PCL Funding issuers.

All the notes above are backed by a portfolio of financing advances made by Premium Credit Limited (PCL, the originator) to companies and individuals domiciled in the United Kingdom of Great Britain and Northern Ireland (UK) and the Republic of Ireland (Ireland) for nonlife insurance premia and other payment plans. PCL is also the servicer with Link Financial Outsourcing Limited in place as the backup servicer.

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 projected expected net losses 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 historical and projected performance of the originator’s portfolio.
-- DBRS Morningstar’s sovereign ratings of the UK at AA with a Stable trend and Ireland at AA (low) with a Stable trend.
-- The expected consistency of the transaction’s legal structure with the DBRS Morningstar “Legal Criteria for European Structured Finance Transactions” methodology.

TRANSACTION STRUCTURE
The Series 2023-1 notes will be issued as part of the PCL-related master issuance structure, where all outstanding series of notes are supported by the same pool of receivables and are generally issued under similar requirements regarding servicing, amortisation events, priority of distributions, and eligible investments.

The Series 2023-1 transaction includes a scheduled 36-month 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. If the notes are not fully redeemed at the end of the scheduled revolving period, the transaction will enter into an amortisation period where the notes are redeemed sequentially.

The Series 2023-1 transaction includes a series-specific liquidity reserve that the originator initially funds. The target amount is dynamic, sized to cover three months of senior expenses and stressed interest payments on the rated notes. Further increases consider the portfolio’s delinquencies, defaults, and excess spread ratio triggers where the reserve replenishment is through the transaction’s interest waterfalls or further funding from the originator (subject to certain trigger breaches), depending on whether the transaction is within or outside the specified period. The liquidity reserve forms part of available funds and is available to cover the shortfalls in senior expenses and interest payments on the Series 2023 Class A, Class B, and Class C Notes.

As the Series 2023-1 notes carry floating-rate coupons based on the daily compounded Sterling Overnight Index Average (Sonia), there is an interest rate mismatch between the fixed-rate collateral and the Sonia-based floating-rate notes. While the potential risk is to a certain degree mitigated by excess spread, the originator’s ability to increase the collateral rates, and an undertaking to increase the required reserve amount (subject to certain trigger breaches) during the revolving period, the transaction is exposed to the risk of further interest rate hikes. DBRS Morningstar considered such risk in its analysis and assigned the ratings commensurate with its view to maintain the rating stability of the 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
DBRS Morningstar analysed PCL’s product segments for respective asset assumptions that have remained generally stable over the past decade with little signs of adverse effects from the Coronavirus Disease (COVID-19) pandemic, current persistent inflationary pressures, and/or interest rate increases. In addition, the portfolio compositions have remained largely stable over the past decade in comparison with the theoretically worst limits, which contributed to rating upgrades on certain subordinated classes of PCL Funding V PCL and PCL Funding VI PLC as listed above.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant impact 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 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.

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. Due to the inclusion of a revolving period in the transaction, the analysis considers potential portfolio migration based on the replenishment criteria set forth in the transaction legal documents.

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 performance and portfolio data relating to the receivables provided by the originator through the arranger, Lloyds Bank Corporate Markets plc. DBRS Morningstar received vintage default, recovery, and net losses information split by product types and jurisdictions from 2007 to January 2023. DBRS Morningstar also received stratification tables in relation to the loan pool as of 28 February 2023.

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

DBRS Morningstar was not supplied with one or more third-party assessments for this transaction, PCL Funding I Limited, PCL Funding V PLC, or PCL Funding VI PLC. 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 ratings on PCL Funding VIII PLC concern expected-to-be-issued new financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

The last rating action on PCL Funding I Limited and PCL Funding V PLC took place on 29 July 2022 and 21 April 2022, respectively, when DBRS Morningstar confirmed its ratings on the notes. The last rating action on PCL Funding VI PLC took place on 14 July 2022, when DBRS Morningstar finalised its ratings on the notes.

The lead analyst responsibilities for all the above transactions have been transferred to Jeffrey Cespon.

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 expected probability of default (PD) used: expected PD of 7.8%, with a 25% and 50% increase on the expected PD
-- The loss given default (LGD) used: expected LGD of 25.5%, with a 25% and 50% increase on the expected LGD

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

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are:

PCL Funding VIII PLC
-- Series 2023-1 Class A Notes: AAA (sf), AA (high) (sf), AAA (sf), AA (high) (sf), A (high) (sf), AA (high) (sf), A (high) (sf), A (high) (sf)
-- Series 2023-1 Class B Notes: A (high) (sf), A (low) (sf), A (high) (sf), A (low) (sf), BBB (high) (sf), A (low) (sf), BBB (high) (sf), BBB (low) (sf)
-- Series 2023-1 Class C Notes: BBB (high) (sf), BBB (sf), BBB (high) (sf), BBB (sf), BB (high) (sf), BBB (high) (sf), BB (high) (sf), BB (sf)

PCL Funding VI PLC
-- Series 2022-1 Class A Notes: AAA (sf), AA (high) (sf), AAA (sf), AA (high) (sf), A (high) (sf), AA (high) (sf), A (high) (sf), A (high) (sf)
-- Series 2022-1 Class B Notes: A (high) (sf), A (low) (sf), A (high) (sf), BBB (high) (sf), BBB (high) (sf), A (low) (sf), BBB (high) (sf), BBB (low) (sf)
-- Series 2022-1 Class C Notes: A (low) (sf), BBB (high) (sf), A (low) (sf), BBB (high) (sf), BBB (low) (sf), BBB (high) (sf), BBB (low) (sf), BB (high) (sf)

PCL Funding V PLC
-- 2021-1 Class A Notes: AAA (sf), AA (high) (sf), AAA (sf), AA (high) (sf), AA (high) (sf), AAA (sf), AA (sf), A (high) (sf)
-- 2021-1 Class B Notes: A (high) (sf), A (high) (sf), A (high) (sf), A (high) (sf), BBB (high) (sf), A (high) (sf), BBB (high) (sf), BBB (high) (sf)
-- 2021-1 Class C Notes: BBB (high) (sf), BBB (high) (sf), A (low) (sf), BBB (high) (sf), BBB (low) (sf), BBB (high) (sf), BBB (low) (sf), BB (high) (sf)

PCL Funding I Limited
-- Class A Senior ETNs of Series 2012 Senior VFN: AA (high) (sf), AA (high) (sf), AAA (sf), AA (sf), A (high) (sf), AA (high) (sf), A (high) (sf), A (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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Jeffrey Cespon, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 14 April 2023

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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