DBRS Morningstar Finalised Provisional Credit Ratings on NewDay Funding Master Issuer plc, Series 2023-1

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

-- Series 2023-1, Class A1 Notes at AAA (sf)
-- Series 2023-1, Class A2 Notes at AAA (sf)
-- Series 2023-1, Class B Notes at AA (sf)
-- Series 2023-1, Class C Notes at A (sf)
-- Series 2023-1, Class D Notes at BBB (sf)
-- Series 2023-1, Class E Notes at BB (sf)
-- Series 2023-1, Class F Notes at B (high) (sf)

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

The credit ratings are based on the following analytical considerations:
-- The transaction’s structure, including the form and sufficiency of available credit enhancement to withstand stressed cash flow assumptions and repay the Issuer’s financial obligations according to the terms under which the Notes are issued.
-- The credit quality of NewDay Ltd.’s portfolio, the characteristics of the collateral, its historical performance and DBRS Morningstar’s expectation of charge-offs, monthly principal payment rate (MPPR), and yield rates under various stress scenarios.
-- NewDay Ltd.’s capabilities with respect to origination, underwriting, servicing, and its position in the market and financial strength.
-- An operational risk review of NewDay Cards Ltd., which DBRS Morningstar deems to be an acceptable servicer.
-- The transaction parties’ financial strength regarding their respective roles.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.
-- The consistency of the transaction’s hedging structure with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.
-- The sovereign rating on United Kingdom of Great Britain and Northern Ireland, currently rated AA with a stable trend by DBRS Morningstar.

TRANSACTION STRUCTURE
The Notes are backed by a portfolio of own-branded, direct-to-consumer credit cards granted to individuals domiciled in the UK by NewDay and are issued out of NewDay Funding Master Issuer plc as part of the NewDay Funding-related master issuance structure under the same requirements regarding servicing, amortisation events, priority of distributions and eligible investments.

The transaction includes a scheduled revolving period. During this period, additional receivables may be purchased and transferred to the securitised pool, 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 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 respective scheduled revolving periods, the transaction enters into a rapid amortisation.

The transaction also includes a series-specific liquidity reserve funded by NewDay at closing equal to 2% of the balances of Class A1, Class A2 (collectively Class A Notes), Class B, Class C and Class D Notes (collectively with the Class A Notes, Senior Notes) and will be replenished to the target amount of 3% of the Senior Notes’ balances in the transaction’s interest waterfalls. The liquidity reserve is available to cover the shortfalls in senior expenses, senior swap payments and interest on the Senior Notes and would amortise to the target amount, subject to a floor of GBP 250,000.

As the Class A2 Notes are denominated in U.S. dollars (USD) with a Secured Overnight Financing Rate (SOFR) coupon rate, there is a balance-guaranteed, cross-currency swap to hedge the currency and interest rate mismatch between the British pound sterling (GBP) denominated receivables and the Class A2 Notes. Other classes of the Notes are denominated in GBP with floating-rate coupons based on the daily compounded Sterling Overnight Index Average (Sonia) and there is also an interest rate mismatch between the fixed-rate collateral and the Sonia coupon rates. While the potential risk is to a certain degree mitigated by excess spread and NewDay’s ability to increase the credit card annual percentage rates (APRs), the A (sf) rated Class C Notes benefit from higher subordination to compensate for higher notes margins than the other A (low) (sf) rated notes issued separately out of the NewDay Funding-related master issuance programme. This approach is consistent with DBRS Morningstar’s criteria in respect of the credit rating stability of a master issuance structure.

COUNTERPARTIES
HSBC Bank plc (HSBC Bank) is the account bank for the transactions. Based on DBRS Morningstar’s private credit rating on HSBC Bank 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.

Banco Santander S.A. is the swap counterparty for the Class A2 Notes swap. DBRS Morningstar has a Long-Term Issuer Rating of A (high) on Banco Santander, which meets its criteria to act in such capacity. The swap documentation also contains downgrade provisions consistent with DBRS Morningstar’s criteria.

PORTFOLIO ASSUMPTIONS
Recent total payment rates including the interest collections continue to be higher than historical levels. Nonetheless, it remains to be seen if these levels remain susceptible to the current macroeconomic environment of persistent inflationary pressures and interest rate increases. DBRS Morningstar therefore elected to maintain the securitised portfolio’s expected MPPR at 8% after removing the interest collections.

The portfolio yield was largely stable over the reported period until March 2020, the initial outbreak of the COVID-19 pandemic. The most recent performance in October 2023 showed a total yield of 32%, up from the record low of 25% in May 2020 due to the consistent repricing of credit card rates by NewDay following the Bank of England base rate increases since mid-2022. After consideration of the observed increasing trend and the removal of spend-related fees, DBRS Morningstar revised the expected yield upward to 27.0% from 24.5%.

The reported historical annualised charge-off rates were high but stable at around 16% until June 2020. The most recent performance in October 2023 showed a charge-off rate of 10.0% after reaching a record high of 17.1% in April 2020. Based on the analysis of historical data and consideration of the current macroeconomic environment, DBRS Morningstar continued to maintain the expected charge-off rate at 18%.

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 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 ratings do 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/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” (22 October 2023); https://www.dbrsmorningstar.com/research/422276/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” methodology at: https://www.dbrsmorningstar.com/research/421590.

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 sources of data and information used for these credit ratings include the following data provided by the arranger, NewDay Cards Ltd., and monthly servicer reports:
-- Securitised portfolio: monthly receivables balances, total payment rates, gross yield, charge-off rates, and purchase rates up to August 2023;
-- Total managed portfolio: monthly historical dynamic data from June 2007 to August 2023 and static data from Q1 2008 to Q2 2023, including the own brands portfolio in respect of receivables balances, payment rates, gross charge-offs, gross yield, delinquencies, purchase rates, and recoveries; and
-- Stratification tables in relation to the own brands portfolio as of 31 August 2023.
-- Investor report of the securitised portfolio as of 31 October 2023.

DBRS Morningstar also received additional data with regard to utilisation rate, credit limits, dilutions and APRs.

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

DBRS Morningstar was supplied with third-party assessments for the transaction. 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.

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

This is the first 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 to the parameters used to determine the credit ratings:

-- Expected yield rate of 27%
-- Expected MPPR of 8%
-- Expected charge-off rate of 18%

Scenario 1: a 25% decrease in the expected yield rate
Scenario 2: a 25% decrease in the expected MPPR
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 ratings under the four stress scenarios are:

-- Class A1: AA (high) (sf), AA (low) (sf), AA (sf), AA (low) (sf)
-- Class A2: AA (high) (sf), AA (low) (sf), AA (sf), AA (low) (sf)
-- Class B: AA (low) (sf), A (sf), A (high) (sf), A (low) (sf)
-- Class C: A (low) (sf), BBB (high) (sf), BBB (high) (sf), BBB (sf)
-- Class D: BBB (low) (sf), BB (high) (sf), BBB (low) (sf), BB (sf)
-- Class E: BB (low) (sf), BB (low) (sf), BB (low) (sf), B (high) (sf)
-- Class F: below B (low) (sf), B (sf), B (low) (sf), below B (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://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: Jeffrey Cespon, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 3 November 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 these transactions can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Rating European Consumer and Commercial Asset-Backed Securitisations (22 October 2023); https://www.dbrsmorningstar.com/research/422276/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (6 October 2023); https://www.dbrsmorningstar.com/research/421599/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 2023); https://www.dbrsmorningstar.com/research/420573/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023); https://www.dbrsmorningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023); https://www.dbrsmorningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023); https://www.dbrsmorningstar.com/research/420754/derivative-criteria-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].