DBRS Morningstar Upgrades and Confirms Credit Ratings on Cardiff Auto Receivables Securitisation 2022-1 plc

DBRS Ratings Limited (DBRS Morningstar) took the following credit rating actions on the notes issued by Cardiff Auto Receivables Securitisation 2022-1 plc (the Issuer):

-- Class A Notes confirmed at AAA (sf)
-- Class B Notes upgraded to AAA (sf) from AA (low) (sf)
-- Class C Notes upgraded to AAA (sf) from A (sf)
-- Class D Notes upgraded to AA (sf) from BBB (low) (sf)
-- Class E Notes upgraded to A (low) (sf) from BB (sf)

The credit ratings on the Class A Notes, Class B Notes, Class C Notes, Class D Notes, and Class E Notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in October 2028.

The credit rating actions follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the November 2023 payment date;
-- Probability of default (PD), loss given default (LGD), and residual value (RV) haircut assumptions on the remaining receivables; and
-- Current available credit enhancement to the rated notes to cover the expected losses at their respective credit rating levels.

The transaction is a securitisation of auto loan receivables related to personal contract purchase (PCP) agreements for new and used vehicles granted by Black Horse Limited (Black Horse) to private borrowers in England and Wales. PCP agreements afford the borrower the option to turn in the purchased vehicle at contract maturity as an alternative to making a final balloon payment, exposing the issuers to RV risk. Ancillary products (insurance, maintenance) are not included in the portfolio.

PORTFOLIO PERFORMANCE
Delinquencies have been minimal since closing. As of the November 2023 payment date, loans two to three months in arrears and loans more than three months in arrears were marginal at 0.08% and 0.05% of the outstanding portfolio balance, respectively. Gross cumulative credit defaults amounted to 0.3% of the initial portfolio balance, with cumulative recoveries of 51.7% to date. Losses arising from both voluntary terminations (VTs) and PCP handbacks have been minimal to date.

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 6.2% and 18.1%, respectively.

The transaction is subject to VT risk, as under the UK Consumer Credit Act, the borrower has the right to terminate a consumer loan agreement after paying at least half of the total amount payable, provided that the vehicle returns to the finance provider in good condition. As of the November 2023 payment date, 91.04% of the PCP receivables had an original term of four years or longer, which poses an increased VT risk as shown in DBRS Morningstar’s subsequent commentary titled “U.K. Autos: Elongated PCP Terms Increase the Risk of Voluntary Termination”, available at https://www.dbrsmorningstar.com/research/326850/uk-autos-elongated-pcp-terms-increase-the-risk-of-voluntary-termination. DBRS Morningstar factored this risk into its base case PD and LGD assumptions.

The RV haircuts are 28.6%, 25.1%, and 18.9% at the AAA (sf), AA (sf), and A (low) (sf) credit rating levels, respectively.

CREDIT ENHANCEMENT
The subordination of the respective junior obligations provides credit enhancement to the rated notes. The transaction continues to deleverage steadily, resulting in increased credit enhancement (CE) available to the rated notes.

As of the November 2023 payment date, the CE on the rated notes had increased as follows since the previous annual review:
-- CE on the Class A Notes to 90.3% from 46.8%,
-- CE on the Class B Notes to 59.7% from 31.1%,
-- CE on the Class C Notes to 44.8% from 23.4%,
-- CE on the Class D Notes to 30.6% from 16.1%, and
-- CE on the Class E Notes to 20.7% from 11.0%.

The transaction benefits from liquidity support provided by a cash reserve funded at closing through a subordinated loan granted by Black Horse. The reserve is nonamortising and was funded to an amount equal to 0.75% of the respective initial notes’ balance (while the relevant class of notes is outstanding), or GBP 4.2 million. The reserve is available to cover senior fees and expenses, senior swap payments, and interest payments on the rated notes. As of the November 2023 payment date, the reserve was at its target level.

Lloyds Bank plc acts as the account bank for the transaction. Based on the account bank reference credit rating of AA on Lloyds Bank plc (one notch below the DBRS Morningstar public Long Term Critical Obligations Rating of AA (high)),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 ratings assigned to the Class A Notes, Class B Notes, and Class C Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Lloyds Bank plc acts as the swap counterparty for the transaction. DBRS Morningstar's public Long Term Critical Obligations Rating of AA (high) on Lloyds Bank plc is above the first rating threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

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 ratings do 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 ratings is the “Master European Structured Finance Surveillance Methodology” (11 December 2023), https://www.dbrsmorningstar.com/research/425148/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.

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/421590/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 loan-level data and investor reports provided by Black Horse.

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 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 23 January 2023, when DBRS Morningstar confirmed the credit ratings on the Class A Notes, Class D Notes, and Class E Notes at AAA (sf), BBB (low) (sf), BB (sf), respectively, and upgraded the credit ratings on the Class B Notes and Class C Notes to AA (low) (sf) and A (sf) from A (high) (sf) and A (low) (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Petter Wettestad.

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 ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit ratings (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 at the B (low) (sf) credit rating level are 6.2% and 18.1%, respectively. The RV haircuts are 28.6%, 25.1%, and 18.9 % at the AAA (sf), AA (sf), and A (low) (sf) credit rating levels, respectively.
-- The risk sensitivity overview below illustrates the credit ratings expected if the PD, LGD, and the RV haircut increase by a certain percentage over the base case assumption.

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

Class B Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and LGD, expected credit rating of AAA (sf)
-- 25% increase in RV haircut, expected credit rating of AAA (sf)
-- 50% increase in RV haircut, expected credit rating of AAA (sf)
-- 25% increase in PD and LGD and 25% increase in RV haircut, expected credit rating of AAA (sf)
-- 25% increase in PD and LGD and 50% increase in RV haircut, expected credit rating of AAA (sf)
-- 50% increase in PD and LGD and 25% increase in RV haircut, expected credit rating of AAA (sf)
-- 50% increase in PD and LGD and 50% increase in RV haircut, expected credit rating of AAA (sf)

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

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

Class E Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected credit rating of A (low) (sf)
-- 50% increase in PD and LGD, expected credit rating of BBB (high) (sf)
-- 25% increase in RV haircut, expected credit rating of A (low) (sf)
-- 50% increase in RV haircut, expected credit rating of BBB (high) (sf)
-- 25% increase in PD and LGD and 25% increase in RV haircut, expected credit rating of BBB (high) (sf)
-- 25% increase in PD and LGD and 50% increase in RV haircut, expected credit rating of BBB (sf)
-- 50% increase in PD and LGD and 25% increase in RV haircut, expected credit rating of BBB (sf)
-- 50% increase in PD and LGD and 50% increase in RV haircut, expected credit rating of BBB (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: Petter Wettestad, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 7 February 2022

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 (11 December 2023),
https://www.dbrsmorningstar.com/research/425148/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 (11 December 2023),
https://www.dbrsmorningstar.com/research/425149/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.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023),
https://www.dbrsmorningstar.com/research/420754/derivative-criteria-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.
-- 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].