DBRS Morningstar Confirms Credit Ratings on Securitisation of Catalogue Assets Limited Following Amendment

DBRS Ratings Limited (DBRS Morningstar) confirmed its credit ratings on the notes issued by Securitisation of Catalogue Assets Limited as follows:

-- Class A-S Variable Funding Notes (Class A-S VFN) at AAA (sf)
-- Class A-J Variable Funding Notes (Class A-J VFN) at A (sf)

The credit ratings on Class A-S VFN and Class A-J VFN (the rated Notes) address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date.

The transaction is a securitisation of home shopping receivables granted to private individuals by Shop Direct Finance Company Limited (Shop Direct) in the United Kingdom. Shop Direct offers two main credit products:
-- Direct Credit, offered under the very.co.uk brand and broadly similar to a credit card agreement where a customer is granted an initial credit limit, subject to interest charges.
-- Embedded Credit, providing weekly payment arrangements for goods predominantly purchased through the Littlewoods brand. Products sold through Littlewoods are typically advertised as interest free with weekly payment arrangements available, but the price of the product is higher than through direct channels, recognising "embedded" interest charges.

The credit rating confirmations follow amendments to the transaction effective on 7 September 2023 and 29 November 2023, which included:
-- The extension of the end dates of the Class B, Class C1, and Class C2 notes to 1 January 2027 from 1 January 2025, 1 January 2025, and 31 December 2023, respectively.
-- The extension of the Maturity Date to 13 December 2032 from 13 December 2031 for the Class B, Class C1, and Class C2 notes.
-- The increase in the margin of the Class B Notes to 4.25% from 3.75%.
-- The extension of the end dates of the Class A-S VFN and Class A-J VFN to 1 January 2027 from 1 January 2026. The maturity dates for these classes of notes remain 13 December 2032. As a result, all classes of notes share the same end date and maturity date.
-- The increase of the Class A-S VFN and Class A-J VFN to GBP 1,186,580,000 and GBP 188,420,000, respectively, from GBP 1,143,330,000 and GBP 181,670,000, respectively.

The revolving period ends on the latest of the notes’ end dates, 1 January 2027, provided that no revolving termination events have occurred. DBRS Morningstar does not rate the Class B, the Class C1, and the Class C2 notes.

The credit rating confirmations also follow an annual review of the transaction and are based on the following analytical considerations:
-- No revolving termination events have occurred.
-- Portfolio performance, in terms of charge-off rates, monthly principal payment rates (MPPR), and yield rates, as of the November 2023 payment date;
-- Available credit enhancement to the rated notes to cover the expected losses at their respective rating levels; and
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the rated notes in full.

PORTFOLIO PERFORMANCE
As of the November 2023 payment date, the three-month moving average payment rate was 10.2%, well above its trigger level of 7.5%. The delinquency ratio, the five-month delinquency ratio, the dilution ratio, and the three-month moving average portfolio default rate were 8.5%, 3.5%, 60.1%, and 0.6%, respectively, well below their trigger levels of 22.5%, 10.0%, 175%, and 2.0%, respectively (or 1.75% on any three months over a 12-month period).

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar considered the historical performance of the transaction and the product weightings applicable to the portfolio to assess its asset and portfolio assumptions. As a result, DBRS Morningstar maintained its base-case charge-off rate, MPPR, and yield rate assumptions at 14.0%, 7.5%, and 22.0%, respectively.

CREDIT ENHANCEMENT
The maximum advance rates available to Class A-S VFN and Class A-J VFN are 64.0% and 73.0%, respectively, corresponding to credit enhancement (excluding the liquidity reserve) of 36.0% and 27.0%, respectively.

The liquidity reserve target balance is calculated based on the aggregation of amounts calculated for each class of notes. These class-specific amounts consider the sum of the total margin for each class of the rated notes, Sonia along with a spread adjustment, plus 2.0% and an additional 1.0%, which are then multiplied by the applicable commitment amounts (or, if zero, the applicable balance of the rated notes). These amounts are then calculated to cover three payment dates for Class A-S VFN and one payment date for the other classes of notes.

HSBC Bank plc (HSBC) acts as the account bank for the transaction. Based on DBRS Morningstar’s private credit rating on HSBC, 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 credit rating assigned to Class A-S VFN, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

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

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. For example, the credit ratings on the Class A-S VFN and Class A-J VFN notes do not address the excess cost fee on the Class A-S VFN and Class A-J VFN notes.
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 methodologies applicable to the credit ratings are: “Master European Structured Finance Surveillance Methodology” (22 October 2023) https://www.dbrsmorningstar.com/research/422281/master-european-structured-finance-surveillance-methodology and “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 methodologies consistently and conducted a review of the transaction in accordance with the principal methodologies.

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.

DBRS Morningstar has conducted a review of the amended transaction legal documents provided in the context of the aforementioned amendments. A review of the remaining transaction legal documents was not conducted as the documents have remained unchanged since the most recent 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/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 performance data and monthly reports provided by Shop Direct through HSBC, the arranger.

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 not 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 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 last credit rating action on this transaction took place on 12 January 2023 when DBRS Morningstar confirmed its credit ratings on the Class A-S VFN and Class A-J VFN at AAA (sf) and A (sf), respectively.

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 charge-off rate: 14.0%
-- Expected MPPR: 7.5%
-- Expected yield rate: 22.0%

Scenario 1: A 25% decrease in the expected MPPR.
Scenario 2: A 25% increase in the expected charge-off rate.
Scenario 3: A 25% decrease in the expected yield rate.
Scenario 4: A 15% increase in the expected charge-off rate, 15% decrease in the expected MPPR, and 15% decrease in the expected yield rate.

DBRS Morningstar concludes that the expected credit ratings on the notes under the four stress scenarios are:
Class A-S VFN: AA (sf), AA (high) (sf), AA (high) (sf), A (high) (sf)
Class A-J VFN: A (low) (sf), A (low) (sf), BBB (high) (sf), BBB (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: Natalia Coman, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 25 November 2013

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.

-- Master European Structured Finance Surveillance Methodology (22 October 2023), https://www.dbrsmorningstar.com/research/422281/master-european-structured-finance-surveillance-methodology.
-- 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.
-- 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.
-- 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 Servicers (15 September 2023), https://www.dbrsmorningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers.
-- 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.
-- 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].