Press Release

DBRS Morningstar Assigns Ratings to aZul Master Credit Cards DAC Series 2023-1 and Confirms Ratings of Series 2020-1

Consumer Loans & Credit Cards

July 24, 2023

DBRS Ratings GmbH (DBRS Morningstar) assigned ratings to the Series 2023-1 Notes issued by aZul Master Credit Cards DAC (the Issuer) as follows:

-- Series 2023-1, Class A Notes at AA (low) (sf)
-- Series 2023-1, Class C Notes at BB (sf)

DBRS Morningstar also confirmed its ratings on the following outstanding notes of the Issuer:

-- Series 2020-1, Class A Notes at A (high) (sf)
-- Series 2020-1, Class C Notes at BB (sf)

The credit ratings of the Class A Notes address the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date. The credit ratings of the Class C Notes address the ultimate payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date.

As the Series 2020-1 notes entered into the scheduled amortisation in March 2023, the subordination for the Class A Notes has increased to 52.4% by July 2023 from 22.5% at closing. DBRS Morningstar typically does not upgrade amortising notes of a credit card master trust unless there are substantial structural changes.

The securitised collateral pool is a portfolio of fixed rate, unsecured receivables generated from revolving credit agreements acquired (ex-Barclaycard, Ruby) and granted (core) to individuals and domiciled in Spain and serviced by WiZink Bank S.A.U. (the originator).

The credit ratings are based on a review of the following analytical considerations:
-- The transaction’s capital structure, including form and sufficiency of available credit enhancement.
-- The credit enhancement level is sufficient to support the projected expected net losses under various stress scenarios.
-- The originator and servicer’s capabilities with respect to originations, underwriting, and servicing.
-- The operational risk review of the originator, which DBRS Morningstar deems to be an acceptable servicer.
-- The transaction parties’ financial strength regarding their respective roles.
-- DBRS Morningstar’s sovereign rating on the Kingdom of Spain at “A” with a Stable trend.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

TRANSACTION STRUCTURE
The Series 2023-1 transaction includes a scheduled 36-month revolving period. The revolving period may end earlier than scheduled if certain events occur, such as the breach of performance triggers.

The transaction also benefits from a Class A general reserve which is available to the Issuer to cover the shortfalls in senior expenses and interests on all the Class A Notes across the entire programme.

The interest rate risk is considered limited because both series notes carry fixed-rate coupons.

COUNTERPARTIES
Société Générale, Sucursal en España (Société Générale) is the account bank for the transaction. DBRS Morningstar has a Long-Term Issuer Rating of A (high) on Société Générale, which meets the criteria to act in these capacities at closing. The downgrade provisions in the documentation are consistent with DBRS Morningstar’s criteria.

PORTFOLIO ASSUMPTIONS
The asset assumptions below consider the migration of the securitised portfolio towards the core receivables since the programme’s establishment, as the Ruby receivables continue to be in runoff without new account origination.

The monthly principal payment rate (MPPR) of the total managed portfolio was largely stable around 11% until April 2020 where it hit a record low of 6.2% before recovered to 9.4% by July 2020. The MPPRs continued to improve to be above the pre-pandemic levels before declining to 12.0% as of April 2023. DBRS Morningstar notes that the Issuer reported similar but higher MPPRs than the total managed portfolio. This better performance is attributable to the positive selection of non-delinquent receivables arising from the eligibility criteria. Based on the historical trends and the portfolio migration toward core receivables with higher MPPRs, DBRS Morningstar elects to increase the securitised portfolio MPPR from 9.75% to 10.5%.

The yield rate of the total managed portfolio has been stable around 23% until October 2019 before gradually declining to a historical low of 15.3% in March 2022. It has since marginally recovered to 16.7% by April 2023. Over the same period, the Issuer reported more volatile but higher yield rates, with 20.2% as of April 2023. After considering the historical trends and the portfolio migration toward core receivables, DBRS Morningstar reduced its expected yield assumption from 16.7% to 16.25%.

The charge-off rate of the total managed portfolio had been steadily rising until October 2020 when it reached a record high of 16.1%. After the removal of forbearance measures, the charge-off rate gradually decreased and normalised. Based on the analysis of historical data, the delinquency roll rates, the positive selection of non-delinquent receivables and the portfolio migration toward generally better performing core receivables, DBRS Morningstar reduced its expected charge-off rate to 10.5% from 12.5%.

DBRS Morningstar used a zero-recovery assumption in its cash flow analysis as the receivables are unsecured and no static vintage data was provided.

DBRS Morningstar’s credit ratings on the notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated notes are the related Monthly Interest Amounts and the Initial Principal Amounts.

DBRS Morningstar’s credit ratings on the notes also address the credit risk associated with the increased rate of interest applicable to the notes if the notes are not redeemed on the scheduled redemption date as defined in and in accordance with the applicable transaction documents.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Governance (G) Factors

DBRS Morningstar notes there is a significant effect of the Transaction Governance factor on the credit analysis due to an unusual receivables eligibility criterion that excludes the compliance with the usury law for the agreements originated prior to 12 March 2020. In DBRS Morningstar’s view, the carve-out is non-market standard and the legal risk is subjective and highly unpredictable. As there is a reliance on WiZink to repurchase non-compliant and disputed receivables, a large loss due to void receivables could incur on the Issuer in respect of all the receivables with interest rates deemed usurious if WiZink fails to fulfill its undertaking.

DBRS Morningstar considered adjustments in the cashflow analysis to account for the potential usury rate claims exposure based on the amount provisioned by WiZink and concluded that such adjustment leads to an at least one notch lower rating outcome than without such adjustment.

Additionally, there is no clarity of activities to be conducted by the back-up servicer as the entity remains unknown at closing. While the back-up servicer facilitator undertakes to find a suitable replacement within 60 calendar days of a servicer termination event, the absence of clearly defined tasks to be taken by the future back-up servicer creates uncertainty in respect of the execution timing and resources required. These risks may lead to changes in borrower behaviour that could subsequently impact future defaults and/or repayments. DBRS Morningstar considers such exposure as a relevant Transaction Governance factor within its credit analysis.

There were no Environmental or Social 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit 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 continues to consider potential portfolio migration based on 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” methodology 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 the credit ratings include performance and portfolio data relating to the receivables provided by the originator directly or through the arranger, Société Générale S.A..

DBRS Morningstar received the following information:
-- Monthly historical dynamic data from January 2015 to April 2023 for the entire managed book and by receivables types in respect of receivables balances, monthly payment rates, gross charge-offs, yield, delinquencies, recoveries, and purchase rates.
-- Stratification tables in relation to the eligible portfolio as of April 2023 and the securitised portfolio as of June 2023 were also received.

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

At the time of the initial credit ratings, DBRS Morningstar was supplied with third-party assessments for the Series 2020-1 Notes but was not supplied with third-party assessments for the Series 2023-1 Notes. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The credit ratings on the Series 2023-1 Notes concern newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

The last credit rating action on the Series 2020-1 Notes took place on 22 July 2022, when DBRS Morningstar confirmed the ratings at A (high)(sf) and BB (sf), respectively.

The lead analyst responsibilities for these transactions have been transferred to Kevin Chiang.

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 credit ratings, DBRS Morningstar considered the following stress scenarios, as compared with the parameters used to determine the credit ratings:

-- Expected Yield Rate: 16.25%
-- Expected MPPR: 10.50%
-- Expected Charge-Off Rate: 10.50%

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

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

-- Series 2023-1, Class A Notes: A (sf), A (high) (sf), A (sf), and A (low) (sf), respectively.
-- Series 2023-1, Class C Notes: BB (low) (sf), BB (low) (sf), BB (low) (sf), and B (high) (sf), respectively.
-- Series 2020-1, Class A Notes: A (high) (sf), A (high) (sf), A (high) (sf), and A (high) (sf), respectively.
-- Series 2020-1, Class C Notes: BB (sf), BB (low) (sf), BB (low) (sf), and BB (low) (sf), respectively.

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.

The credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Kevin Chiang, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Dates:
23 July 2020: Series 2020-1
24 July 2023: Series 2023-1

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The credit 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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