DBRS Morningstar Finalizes Provisional Ratings of AAA (sf), A (high) (sf), and BBB (sf) on CARDS II Trust, Series 2023-2

DBRS Limited (DBRS Morningstar) finalized its provisional ratings on the Credit Card Receivables-Backed Notes, Series 2023-2 (the Notes) issued by CARDS II Trust (the Trust) as follows:

-- AAA (sf) on the Credit Card Receivables-Backed Class A Floating Rate Notes, Series 2023-2 (the Class A Notes)
-- A (high) (sf) on the Credit Card Receivables-Backed Class B Notes, Series 2023-2 (the Class B Notes)
-- BBB (sf) on the Credit Card Receivables-Backed Class C Notes, Series 2023-2 (the Class C Notes)

The Notes are denominated in U.S. dollars. There is a cross-currency, interest rate swap in place for the Class A Notes. Cross-currency swaps are in place for the Class B and Class C Notes.

The Targeted Principal Distribution Date of the Notes is July 15, 2025.

DBRS Morningstar considered the following factors in its analysis:

(1) For the Class A Notes, credit enhancement (CE) is available through subordination of 7.25% (4.25% Class B Notes and 3.00% Class C Notes), excess spread, and the series-specific cash reserve account, which could build up to 5% of the initial invested amount.

(2) For the Class B Notes, CE is provided by subordination of 3.00% (the Class C Notes), excess spread, and the series-specific cash reserve account.

(3) For the Class C Notes, CE is available through excess spread and the series-specific cash reserve account.

(4) Three-month average payment rates and gross yield remain strong, averaging over 50% and 23%, respectively, over the past three years. Prior to the pandemic, three-month average losses averaged 3.2% over the previous three years. Three-month average losses remain lower compared with pre-pandemic loss rates and stand at 1.8% as of June 30, 2023. The overall performance of the portfolio has been strong and remains better than historical levels prior to the Coronavirus Disease pandemic.

(5) The receivables pool is a well-diversified, seasoned portfolio and is one of the largest in Canada.

DBRS Morningstar stress testing indicates that simultaneous declines in yield and payment rates and increases in losses would not result in a failure of the Trust in repaying the Notes on a timely basis. The severity of the tests applied is commensurate with the respective ratings of the Notes.

DBRS Morningstar’s analysis also indicates that the Class B Notes are expected to withstand more punitive stress multiples for requested rating categories, warranting a (high) designation and resulting in an A (high) (sf) rating.

DBRS Morningstar notes that the program fees and expenses (which could include indemnity payments) that are payable to the financial services agent are not subordinated to payments to Noteholders, as expected in DBRS Morningstar’s “Legal Criteria for Canadian Structured Finance.” DBRS Morningstar will monitor the monthly servicer reports, and to the extent that these fees and expenses may affect payments to Noteholders, DBRS Morningstar will review and take appropriate rating actions, if necessary.

DBRS Morningstar also notes that a true sale opinion in respect of the co-ownership interests in any accounts that may be added may not be delivered at the time of each account addition, as expected in DBRS Morningstar’s “Legal Criteria for Canadian Structured Finance.” DBRS Morningstar considers the risk minimal as additional accounts are transferred to the Custodian infrequently, an officer’s certificate is provided by the Seller in connection with each additional account transfer, and a true sale opinion in respect of the co-ownership interests in any accounts that may be added will be delivered every six months for any additions made within the previous six months.

DBRS Morningstar’s credit ratings on the Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit rating does not address non-payment 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
There were no Environmental, 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/416784 (July 4, 2023).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology applicable to the credit rating is Rating Canadian Credit Card and Personal Line of Credit Securitizations https://www.dbrsmorningstar.com/research/404530 (November 1, 2022).

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The credit rating was initiated at the request of the rated entity. The Trust or Canadian Imperial Bank of Commerce, in its capacity as Financial Services Agent of the Trust, did participate in the credit rating process for this credit rating action. DBRS Morningstar had access to the accounts, management and other relevant internal documents of the Trust or the Financial Services Agent in connection with this credit rating action. This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Research below or by contacting us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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

Operational Risk Assessments for Canadian Structured Finance
https://www.dbrsmorningstar.com/research/412270 (April 4, 2023)

Derivatives Criteria for Canadian Structured Finance
https://www.dbrsmorningstar.com/research/415974 (June 16, 2023)

Legal Criteria for Canadian Structured Finance
https://www.dbrsmorningstar.com/research/416101 (June 20, 2023)

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/410863.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].