DBRS Morningstar Confirms Rating on Temese Funding 2 plc

DBRS Ratings Limited (DBRS Morningstar) confirmed its AAA (sf) rating on the Class A Notes issued by Temese Funding 2 plc.

The rating addresses the timely payment of interest and the ultimate payment of principal by the legal final maturity date.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the April 2023 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the Class A Notes to cover expected losses at the AAA (sf) rating level and
-- No early revolving period termination events have occurred.

The transaction is a securitisation of UK equipment lease receivables originated by Investec Asset Finance PLC (IAF) and its affiliate, CF Corporate Finance Ltd., both fully owned by Investec Bank PLC (Investec). IAF is the servicer of the transaction. The portfolio includes fixed-term agreements, minimum-term agreements along with residual value (RV) receivables, hire-purchase loans, and commercial loans. The Class A Notes are allowed to amortise during the revolving period upon the occurrence of interim amortisation events. The transaction closed in November 2014 and was last restructured in May 2021. The legal final maturity date is on the December 2037 payment date.

PORTFOLIO PERFORMANCE
As of the April 2023 payment date, two- to three-months arrears and the 90+-day delinquency ratio were 0.0% and 0.1%, respectively, compared with 0.1% for both figures at the last annual review. Defaults in the transaction are based on a 90-day arrears definition. As of the April 2023 payment date, cumulative defaults represented 3.6% of the total purchased receivables since closing.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated its base case PD and base case LGD assumptions on a potential migration of the portfolio based on the replenishment criteria to 5.4% and 72.5%, respectively, from 5.6% and 72.5% at the last annual review, respectively. The decrease in the base case PD reflects DBRS Morningstar’s removal of the adjustments applied in the context of the Coronavirus Disease (COVID-19) pandemic.

The RV receivables represent the final balloon payments on minimum-term leases granted for the use of material handlings equipment provided and sold to IAF by a third-party supplier. These balloon payments are contractually due by the third-party suppliers; however, in the event of their default, there is no assurance that the re-leasing proceeds from the sale of the assets will cover the balloon amount. DBRS Morningstar assumed a loss of 47.8% on these balloon payments at the AAA (sf) rating level.

CREDIT ENHANCEMENT
The credit enhancement to the Class A Notes consists of the subordination of the Class B Notes and the reserve fund. Credit enhancement has remained at 23.0% since the April 2021 payment date, when the last amortisation of the Class A Notes occurred.

The cash reserve is currently funded to its target level of approximately GBP 8.3 million and covers senior fees, interest shortfall, and principal losses (via the principal deficiency ledger) on the Class A Notes. The transaction also benefits from an amortising liquidity reserve, currently funded to its target level of approximately GBP 7.0 million. The liquidity reserve is available to cover senior fees and interest shortfall on the Class A 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 the Class A Notes, 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 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.

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

The principal methodology applicable to the rating is: “Master European Structured Finance Surveillance Methodology” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

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 continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 this rating include loan-level data provided by Investec and investor reports provided by HSBC.

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

At the time of the initial rating, 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 18 May 2022, when DBRS Morningstar confirmed its AAA (sf) rating on the Class A Notes.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available at 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 and LGD 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 5.4% and 72.5%, respectively. An RV loss at the AAA (sf) rating level of 47.8%.
-- The risk sensitivity overview below illustrates the ratings expected if the PD, LGD, and the RV loss increase by a certain percentage over the base case assumption. For example, if the RV loss increases by 50%, the rating on the Class A Notes would be expected to remain at AAA (sf), assuming no change in both the PD and LGD. If both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to remain at AAA (sf), assuming no change in the RV loss. Furthermore, if the PD, LGD, and the RV loss all increase by 50%, the rating on the Class A Notes would be expected to fall to A (high) (sf).

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

This rating is 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: 14 November 2014

DBRS Ratings Limited
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (7 February 2023),
https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.
-- 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.
-- Rating European Structured Finance Transactions Methodology (15 July 2022), https://www.dbrsmorningstar.com/research/399899/rating-european-structured-finance-transactions-methodology.
-- Rating CLOs and CDOs of Large Corporate Credit (7 February 2023) and CLO Asset Model version 2.2.3.1,
https://www.dbrsmorningstar.com/research/409498/rating-clos-and-cdos-of-large-corporate-credit
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022), https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022), https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022),
https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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].