DBRS Morningstar Assigns Credit Rating of A (high) (sf) with Stable Trend to Wolf Receivables Financing III Plc

DBRS Ratings Limited (DBRS Morningstar) assigned a A (high) (sf) credit rating with a Stable trend to the GBP 119,187,000 Class A Notes issued by Wolf Receivables Financing III Plc (the Issuer).

The credit rating of the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal final maturity date in November 2038. DBRS Morningstar does not rate the Class B Notes also issued in this transaction. DBRS Morningstar’s rating does not address the Step-Up Margin (as defined in the transaction documents).

The transaction entails the issuance of the Class A Notes collateralised by a pool of UK reperforming unsecured receivables, with a total outstanding balance of GBP 630.0 million as of 31 August 2023. Most of the accounts are credit card loans (54% of total current balance), followed by personal unsecured loans and banking mixed (25% and 7% respectively). The receivables are well diversified, comprising 234,622 accounts with GBP 2,685 average balance. The largest borrower accounts for 0.06% of the pool by outstanding amount.

All of the borrowers are located in the United Kingdom, around 90% of the debtors by current balance are located in England, 6% in Wales, 3% in Scotland, 1% in Northern Ireland. 84% of the debtors are aged over 40 years, being the majority of the them in the 41-60 range. Approximately 54% of the current balance was generated between 2001 and 2010. Balances generated in 2004, 2005, and 2008 account for 20% of the total current balance.

The Issuer is a securitisation of a Hoist Finance UK (Hoist) receivables portfolio, which was purchased by Lowell Portfolio 1 Ltd in 2022. The servicing of the portfolio was transitioned to Lowell between December 2022 and April 2023, and it is now serviced in house by Lowell, with a small portion serviced by external debt collection agencies and debt management companies.

The receivables contain reperforming unsecured claims that were selected based on the following criteria: UK reperforming unsecured accounts denominated in GBP that, as the Cut-Off Date, over the six-month period immediately before the Cut-off date, have made at least four net positive monthly payments.

The transaction benefits from an amortising liquidity reserve of 4.0% of the Class A Notes outstanding balance. The balance of the reserve at closing will be GBP 4.76 million. The liquidity reserve is available to cover senior fees and expenses as well as interest due on the Class A Notes.

The transaction features a Step-Up Margin of 1% on the outstanding Class A Notes amount that starts accruing from 20 January 2029. It can be deferred and it becomes payable once the Class A Notes have amortised to GBP 1, i.e. just prior to their full redemption.

Collections from the cut-off date of 30 October 2023 to the closing date of 20 December 2023 (corresponding to the November collection period, December collections are not yet confirmed) are GBP 4.4 million. The interest rate cap premium and the initial top up of the interest reserve account was funded from the note proceeds. The actual collections between the cut-off date and the closing date will run through the transaction waterfall.

On the closing date, the Issuer entered into an interest rate cap agreement with Goldman Sachs International at a strike rate of 5.5% and a pre-determined schedule until 2029. The reference entity, Goldman Sachs International, is privately rated by DBRS Morningstar and meets its minimum criteria to act in such capacity.

The Issuer Account Bank is Citibank, N.A., London Branch (Citibank). DBRS Morningstar privately rates Citibank and concluded that this counterparty meets DBRS Morningstar’s minimum criteria to act in such capacity and that the credit rating assigned to the Class A Notes is commensurate with Citibank's credit rating and the replacement provisions outlined in the transaction documents.

The final maturity of the transaction is November 2038.

CREDIT RATING RATIONALE
DBRS Morningstar based its credit rating on a review of the following analytical considerations:
-- The transaction’s capital structure and form and sufficiency of the available credit enhancement.
-- The credit quality of the receivables portfolio and the ability of the servicer to perform collections and resolution activities. DBRS Morningstar estimated the expected collections from the unsecured receivables based on the
proposed business plan projections and historical performance data provided by the servicer and its agents.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A Notes according to the terms of the transaction documents.
-- 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 hedge structure with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.
-- The sovereign rating of the United Kingdom, which DBRS Morningstar rates at AA and R-1 (high) with Stable trends as of the date of this press release.

DBRS Morningstar’s credit rating on the GBP 119,187,000 Class A Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the Class A Interest Amount (excluding any Step-Up Margin) and the related Class A Notes Balance.

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, for example the Step-Up Margin on the Class A Notes with effect from the 20th January 2029, because of its contingent nature.

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 analysed the transaction structure using Intex DealMaker.

Notes:
All figures are in GBP unless otherwise noted.

The principal methodology applicable to the credit rating is: Rating European Nonperforming Loans Securitisations (5 June 2023), https://www.dbrsmorningstar.com/research/415383/rating-european-nonperforming-loans-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 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 this credit rating include portfolio data tape as of 31 August 2023, quarterly historic recovery data from Q1 2015 to Q4 2022, actual collections from May 2023 to November 2023 and Business Plan as of 31 August 2023, all provided by Lowell Financial Limited.

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

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.

This credit rating concerns a newly issued financial instrument. This is the first DBRS Morningstar credit rating on this financial instrument.

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):

-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 5%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the Recovery Rate by 10%, ceteris paribus, would lead to a downgrade of the Class A Notes to BB (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.

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

Lead Analyst: Sebastiano Romano, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 20 December 2023

DBRS Ratings Limited
1 Oliver’s Yard 55-71 City Road, 2nd Floor
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.

-- Rating European Nonperforming Loan Securitisations (5 June 2023), https://www.dbrsmorningstar.com/research/415383/rating-european-nonperforming-loans-securitisations
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions
-- 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
-- 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
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://www.dbrsmorningstar.com/research/420754/derivative-criteria-for-european-structured-finance-transactions
-- 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
-- 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].