DBRS Morningstar Finalises Provisional Ratings on NewDay Partnership Master Issuer plc, Series 2023-1

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the notes (collectively, the Notes) issued by NewDay Partnership Master Issuer plc (the Issuer) as follows:

-- Series 2023-1, Class A Notes rated AAA (sf)
-- Series 2023-1, Class B Notes rated AA (low) (sf)
-- Series 2023-1, Class C Notes rated A (low) (sf)
-- Series 2023-1, Class D Notes rated BBB (low) (sf)

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

The Notes are backed by a portfolio of co-branded credit cards (with limited legacy store cards and instalment credit) affiliated with high-street and online retailers granted to individuals domiciled in the UK by NewDay Ltd. (NewDay or the originator).

CREDIT RATING RATIONALE
-- The transaction’s capital structure, including the form and sufficiency of available credit enhancement to support DBRS Morningstar’s revised expectation of charge-off, monthly principal payment, and yield rates 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 and underwriting.
-- An operational risk review of the NewDay Cards Ltd (servicer), 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 securitised portfolio’s historical and projected performance.
-- DBRS Morningstar’s sovereign rating on the United Kingdom of Great Britain and Northern Ireland at AA 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
These notes are part of the NewDay Partnership master trust structure, where all series of notes are supported by the same collateral pool of receivables and generally issued under the same requirements regarding servicing, amortisation events, priority of distributions, and eligible investments.

The transaction includes a 36-month scheduled revolving period. During this period, additional receivables are purchased 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 a servicer termination. The servicer may extend the scheduled revolving period by up to 12 months. If the Notes are not fully redeemed at the end of the scheduled revolving period, the series enters into a rapid amortisation.

While there is no interest rate swap in place for this transaction, the interest rate mismatch risk between the fixed-rate collateral and floating-rate coupons of the Notes based on Compounded Daily SONIA is to a degree mitigated by the excess spread in the transaction and considered in DBRS Morningstar’s cash flow analysis.

The transaction includes a series-specific liquidity reserve to cover the shortfalls in senior expenses, senior swap payments (if applicable), and interest on the Notes and would amortise down to a floor of GBP 250,000.

COUNTERPARTIES
Citibank, N.A. has been appointed to act as the account bank for the transaction. Based on DBRS Morningstar’s credit rating of AA (low) on Citibank, N.A. 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 credit ratings assigned.

PORTFOLIO ASSUMPTIONS
As the composition of card types in the securitised portfolio may be different from the total eligible portfolio, DBRS Morningstar starts its analysis from the performance of major card types in the total eligible portfolio before considering other factors that could affect the performance of the aggregate securitised portfolio.

In its cash flow analysis, DBRS Morningstar removed the finance collections from the total payment rates to estimate the monthly principal payment rate (MPPR). The MPPRs of the securitised portfolio were largely stable at above 20% until March 2020 before declining to 14.6% by June 2020. The payment rates had since recovered and stabilised until the termination of the commercial relationship between NewDay and Amazon in January 2023. Following the migration of certain Amazon accounts onto the Pulse card starting in October 2022, payment rates started to deteriorate again, with the estimated MPPR of the securitised portfolio reaching a low of 14.7% in March 2023. Based on the trend of performance data and the forecasted compositions of major card types, DBRS Morningstar elected to reduce the expected MPPR of the securitised portfolio to 14.7% from 19.7%.

On the other hand, the securitised portfolio yield had been largely stable at around 22% until April 2022 when it first reduced then started to increase to a new high of 26.4% as of March 2023. This increase is the result of NewDay’s active repricing activities following the increases in the Bank of England base rate since mid-2022. Based on this trend, DBRS Morningstar increased its expected securitised portfolio yield to 21.9% from 17.2% after excluding spend-related fees.

The reported historical charge-off rates were less than 5% between 2015 and March 2020 when the Coronavirus Disease (COVID-19) pandemic began. The charge-off rates have since been stable between 5% and 7% until April 2023 with an annualised charge-off rate of 7.7%. Based on the trend of performance data and the forecasted compositions of major card types, DBRS Morningstar increased its expected charge-off rate of the securitised portfolio to 8.0% from 7.6%.

DBRS Morningstar placed all outstanding NewDay Partnership transactions Under Review with Negative Implications on 8 June 2023 (see https://www.dbrsmorningstar.com/research/415562/dbrs-morningstar-places-newday-partnership-related-transactions-under-review-with-negative-implications), where NewDay transferred approximately GBP 110 million of John Lewis and Partnerships (JLP) co-branded card receivables to mitigate the deteriorating trends. While the limited performance history of JLP receivables thus far has indicated lower charge-offs and noticeably higher payment rates than the current portfolio, the above asset assumptions for the securitised portfolio do not consider the impact of JLP receivables that are not yet sufficiently seasoned to warrant any potential benefit at this stage. DBRS Morningstar is actively monitoring the portfolio performance.

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 Notes are the related Interest Payment Amounts and the related Class Balances.
DBRS Morningstar’s credit rating on the Notes also addresses the credit risk associated with the increased rate of interest applicable to the Notes if the Notes are not redeemed on the initial scheduled redemption date as defined in and in accordance with the applicable transaction documents.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents 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
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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure in Intex Deal Maker.

Notes:
All figures are in British pound sterling 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.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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 credit ratings include the following data provided by the arranger, NewDay, or monthly servicer reports:
-- Total eligible portfolio: monthly historical dynamic data from January 2007 to April 2023 in respect of the receivables balances, monthly payment rates, gross charge-offs, yield, delinquencies, and purchase rates which were further split by account types.
-- The securitised portfolio: monthly receivables balance and accounts of the composition of Foundation retail partners, Amazon (Platinum and Classic) and its migration to Pulse from November 2020 to May 2023 and the stratification tables as of 30 April 2023.

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 a third-party assessment. However, this did not impact the credit 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.

These credit ratings concern newly issued financial instruments. These are the first DBRS Morningstar credit ratings on these financial instruments.

This is the first credit rating action since the Initial Rating Date.

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

-- Expected yield rate of 21.9%
-- Expected MPPR of 14.7%
-- Expected charge-off rate of 8.0%

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, a 15% decrease in the expected MPPR, and a 15% increase in the expected charge-off rate.

DBRS Morningstar concludes that the expected credit ratings under the four stress scenarios are:
-- Class A Notes: AA (high) (sf), AA (high) (sf), AA (high) (sf), AA (sf)
-- Class B Notes: A (sf), A (high) (sf), A (high) (sf), A (low) (sf)
-- Class C Notes: BBB (sf), BBB (sf), BBB (high) (sf), BBB (low) (sf)
-- Class D Notes: BB (high) (sf), BB (sf), BB (high) (sf), BB (low) (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 credit 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: 7 July 2023

DBRS Ratings Limited
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London EC1Y 1HQ United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- 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.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- 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.
-- 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.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023), https://www.dbrsmorningstar.com/research/416784/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].