Press Release

DBRS Morningstar Finalises Provisional Credit Ratings on Hermitage 2023 plc

Consumer/Commercial Leases

July 28, 2023

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional credit ratings on the following notes and loan notes (the Rated Debt) issued by Hermitage 2023 plc (the Issuer):

-- Class A Loan Notes at AAA (sf)
-- Class A Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (sf)
-- Class D Notes at BBB (sf)

DBRS Morningstar did not assign a credit rating to the Class E Notes (together with the Rated Debt, the Debt) also issued in this transaction.

The finalised rating on the Class C Notes is one notch higher than the provisional rating DBRS Morningstar assigned due to the overall lower margins of the Rated Debt, which improved the cash flow analysis on the Class C Notes in its rating stress scenario.

The credit ratings on the Class A Loan Notes, Class A Notes, and Class B Notes address the timely payment of scheduled interest and the ultimate repayment of principal by the legal maturity date. The credit ratings on the Class C Notes and Class D Notes address the ultimate repayment of interest (timely when most senior) and the ultimate repayment of principal by the legal maturity date.

The transaction represents the issuance of Debt backed by approximately GBP 349 million receivables related to equipment hire purchase and finance lease receivables granted by Haydock Finance Limited (Haydock or the Seller) to borrowers in England, Wales, and Scotland. Haydock also services the receivables.

DBRS Morningstar based its credit ratings on a review of the following analytical considerations:
-- The transaction capital structure, including form and sufficiency of available credit enhancement;
-- Relevant credit enhancement in the form of subordination, the liquidity reserve fund, and excess spread;
-- Credit enhancement levels that are sufficient to support DBRS Morningstar's projected cumulative net loss assumptions under various stressed cash flow assumptions for the Rated Debt;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested;
-- Haydock’s capabilities with regard to originations, underwriting, servicing, and financial strength;
-- The transaction parties’ financial strength with regard to their respective roles;
-- The credit quality of the collateral and historical and projected performance of the Seller’s portfolio;
-- DBRS Morningstar's sovereign rating on the United Kingdom of Great Britain and Northern Ireland currently at AA with a Stable trend; and
-- The consistency of the transaction's legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that address the true sale of the assets to the Issuer.

TRANSACTION STRUCTURE
The transaction’s cash flows follow separate interest and principal waterfalls. Both waterfalls allow for the fully sequential payment of both interest and principal on the Debt. Available revenue receipts are available to cover principal deficiencies and, in certain scenarios, principal may be diverted to pay interest on the Rated Debt. The principal-to-interest mechanism is designed to cover senior interest shortfalls related to insufficient available revenue receipts available to cover senior expenses and fees as well as interest on the most senior class of Rated Debt outstanding. Such principal-to-interest reclassifications, along with any defaults, are recorded on the applicable principal deficiency ledgers in a reverse-sequential order.

The transaction benefits from a liquidity reserve split into Class A/B, Class C, and Class D liquidity reserve ledgers, which are fully funded on the closing date. Amounts standing to the credit of the liquidity reserves are available to cover senior expenses and fees and to pay interest on their related and more senior-ranking class of Notes. The amortising liquidity reserve is set at 1.75% of the aggregate principal amount outstanding on the Class A Loan Notes and Class A Notes to Class D Notes.

COUNTERPARTIES
Elavon Financial Services DAC, UK branch (Elavon UK) has been appointed as the Issuer’s account bank for the transaction. DBRS Morningstar privately rates Elavon UK. The transaction documents contain downgrade provisions relating to the account bank that are consistent with DBRS Morningstar’s criteria.

Citigroup Global Markets Limited (Citi) has been appointed as the hedge counterparty for the transaction. DBRS Morningstar privately rates Citi. The hedging documents contain downgrade provisions that are consistent with DBRS Morningstar’s criteria.

DBRS Morningstar’s credit ratings on the Class A Loan Notes, Class A Notes, Class B Notes, Class C Notes, and Class D Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for the Rated Debt are the related interest amounts, deferred interest amounts, and principal amounts.

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
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 Dealmaker.

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.

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:
-- Quarterly static cumulative gross loss data from Q1 2017 to Q2 2023 split into all loans, all loans excluding the coronavirus business interruption loans, and all loans excluding the coronavirus business interruption loans and one-off items;
-- Quarterly static cumulative recovery data from Q1 2017 to Q2 2023 split into all loans, all loans excluding the coronavirus business interruption loans, and all loans excluding the coronavirus business interruption loans and one-off items;
-- Monthly dynamic delinquency data from January 2017 to May 2023;
-- Monthly dynamic prepayment data from January 2017 to May 2023;
-- Loan-level portfolio breakdown as at 30 June 2023 and its related amortisation schedule; and
-- The interest rate swap upper and lower bounds.

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

DBRS Morningstar was supplied with one or more third-party assessments. 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 rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- Expected default: 7.7%.
-- Expected recovery rate: 60.0%.
-- Loss given default (LGD): 67.0% for the AAA (sf) scenario, 63.4% for the AA (sf) scenario, 58.0% for the A (sf) scenario, and 52.6% for the BBB (sf) scenario.

DBRS Morningstar concludes that the expected credit ratings under the eight stress scenarios will be:
-- Scenario 1: A 25% increase in the expected default.
-- Scenario 2: A 50% increase in the expected default.
-- Scenario 3: A 25% increase in LGD.
-- Scenario 4: A 50% increase in LGD.
-- Scenario 5: A 25% increase in both the expected default and LGD.
-- Scenario 6: A 25% increase in the expected default and 50% increase in LGD.
-- Scenario 7: A 50% increase in the expected default and 25% increase in LGD.
-- Scenario 8: A 50% increase in both the expected default and LGD.

DBRS Morningstar concludes that the expected credit ratings under the eight stress scenarios are:
-- Class A Notes: AA (high) (sf), AA (low) (sf), AA (high) (sf), AA (low) (sf), AA (low) (sf), A (sf), A (sf), A (low) (sf)
-- Class B Notes: A (high) (sf), A (sf), A (high) (sf), A (sf), A (low) (sf), BBB (high) (sf), BBB (high) (sf), BBB (sf)
-- Class C Notes: BBB (high) (sf), BBB (sf), BBB (high) (sf), BBB (sf), BBB (sf), BBB (low) (sf), BBB (low) (sf), BB (high) (sf)
-- Class D Notes: BBB (low) (sf), BB (high) (sf), BBB (low) (sf), BB (high) (sf), BB (high) (sf), BB (sf), BB (low) (sf), B (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://registers.esma.europa.eu/cerep-publication/. 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: Miklos Halasz, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 13 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.

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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