DBRS Morningstar Confirms Credit Rating on Cavern Funding 2020 plc

DBRS Ratings Limited (DBRS Morningstar) confirmed its credit rating on the Class A Notes issued by Cavern Funding 2020 plc (the Issuer) at AAA (sf).

The credit rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in 2038.

The credit rating action follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses;
-- Probability of default (PD), loss given default (LGD), and residual value (RV) haircut assumptions on a potential portfolio migration based on replenishment criteria;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) credit rating level; and
-- Absence of revolving termination events.

The transaction represents the issuance of notes backed by assets related to hire purchase, personal contract purchase (PCP), and lease purchase vehicle loan contracts granted by MI Vehicle Finance Limited (Mann Island or the seller) to borrowers in England, Wales, Scotland, and Northern Ireland. Mann Island is a motor finance business and part of Investec Asset Finance plc having been acquired in 2014. Mann Island's ultimate parent is Investec Bank plc. The underlying motor vehicles and motorcycles related to the finance contracts consist of cars, light-commercial vehicles, motorcycles, and motorhomes. The underlying auto loan receivables include the RV component of PCP agreements, and the portfolio is serviced by Investec Asset Finance plc.

The transaction closed on 15 October 2020 with an initial prefunding period of six months, contained within a four-year revolving period scheduled to end in November 2024.

PORTFOLIO PERFORMANCE
As of September 2023, two- to three-month arrears represented 0.1% of the outstanding portfolio balance and the 90+-day delinquency ratio was 0.2%. As of September 2023, the gross cumulative default ratio was 1.4%, as a proportion of the aggregate initial and additional portfolio balances.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and maintained its base case PD and LGD assumptions at the B (low) (sf) credit rating level at 7.4% and 37.7%, respectively. DBRS Morningstar maintained its RV haircut at 45.0% at the AAA (sf) credit rating level.

CREDIT ENHANCEMENT
As of the September 2023 payment date, credit enhancement to the Class A Notes is 32.5%, unchanged since the closing date, given that the transaction remains in its revolving period. Credit enhancement is expressed as portfolio overcollateralisation and does not include the reserve fund.

The reserve fund forms part of available revenue funds and is currently funded to its target level of GBP 2.7 million (1.0% of the Class A Notes). The liquidity reserve fund is available to cover senior fees and interest on the Class A Notes and is currently funded to its target level of GBP 1.4 million (0.5% of the Class A Notes).

HSBC Bank plc acts as the account bank for the transaction. Based on DBRS Morningstar’s private credit rating on HSBC Bank plc, 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’s credit rating 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 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 DealMaker.

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

The principal methodology applicable to the credit rating is the 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 credit rating action.

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 this credit rating include investor reports provided by HSBC Bank plc and loan-level data provided by EuroABS Ltd.

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

At the time of the initial credit rating, DBRS Morningstar was supplied with 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 this credit rating 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 last credit rating action on this transaction took place on 14 October 2022, when DBRS Morningstar confirmed the rating on the Class A Notes at AAA (sf).

Information regarding DBRS Morningstar credit 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 credit rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit 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 the current pool of loans for the Issuer at the B (sf) credit rating level are 7.4% and 37.7%, respectively. The RV haircut at the AAA (sf) credit rating level is 45.0%.
-- The risk sensitivity overview below illustrates the credit ratings expected if the PD, LGD, and RV haircut increase by a certain percentage over the base case assumption. For example, if the RV haircut increases by 50%, the credit 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 credit rating on the Class A Notes would be expected to fall to AA (sf), assuming no change in the RV haircut. Furthermore, if the PD, LGD, and the RV haircut all increase by 50%, the credit rating on the Class A Notes would be expected to fall to AA (sf).

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

This credit rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Andrew Lynch, Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 15 October 2020

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

-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.
-- 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.
-- 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.
-- Rating European Structured Finance Transactions Methodology (15 July 2022), https://www.dbrsmorningstar.com/research/399899/rating-european-structured-finance-transactions-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.

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].