Morningstar DBRS Takes Credit Rating Actions on NewDay Partnership Master Issuer plc and NewDay Partnership Loan Note Issuer, Removes Under Review with Negative Implications Status

DBRS Ratings Limited (Morningstar DBRS) confirmed and upgraded the credit ratings of NewDay Partnership Master Issuer plc as follows:
-- Series 2023-1, Class A Notes confirmed at AAA (sf)
-- Series 2023-1, Class B Notes upgraded to AA (high) (sf) from AA (low) (sf)
-- Series 2023-1, Class C Notes upgraded to A (high) (sf) from A (low) (sf)
-- Series 2023-1, Class D Notes upgraded to BBB (high) (sf) from BBB (low) (sf)

Morningstar DBRS also took credit rating actions and removed the Under Review with Negative Implications (UR-Neg.) status of the following notes issued by NewDay Partnership Loan Note Issuer:

VFN-P1 V1
-- V1 Class A Loan Note confirmed at BBB (high) (sf)

VFN-P1 V2
-- V2 Class A Loan Note confirmed at AAA (sf)
-- V2 Class B Loan Note confirmed at AA (sf)
-- V2 Class C Loan Note confirmed at A (sf)
-- V2 Class D Loan Note discontinued and withdrawn
-- V2 Class E Loan Note downgraded to BB (high) (sf) from BBB (high) (sf)

VFN-P1 V3
-- V3 Class A Loan Note confirmed at AAA (sf)
-- V3 Class B Loan Note confirmed at AA (sf)
-- V3 Class C Loan Note confirmed at A (sf)
-- V3 Class D Loan Note confirmed at A (low) (sf)
-- V3 Class E Loan Note downgraded to BB (high) (sf) from BBB (high) (sf)

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

The rating actions above reflect Morningstar DBRS’ revised expected performance of the securitised portfolio discussed below, specifically the monthly principal payment rate (MPPR) and charge-off rate. The downgrade of the Class E Notes of the VFN-P1 V2 and VFN-P1 V3 reflects growing concerns over the absence of external liquidity typically required for investment grade timely interest payments, particularly in an elevated interest rate environment. The discontinuation and withdrawal of the VFN-P1 V2 Class D Loan Note credit rating follows the reduction of the commitment amount to zero.

These above transactions are part of the NewDay Partnership master trust issuance structure, where all series of notes are supported by the same pool of receivables and generally issued under the same requirements regarding servicing, amortisation events, priority of distributions, and eligible investments.

CREDIT RATING RATIONALE
-- The transaction’s capital structure, including the form and sufficiency of available credit enhancement to support Morningstar DBRS’ revised expectation of charge-off rate, MPPR, and yield rate under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the notes.
-- NewDay Cards Ltd (NewDay)’s capabilities with respect to origination and underwriting.
-- An operational risk review of NewDay, which Morningstar DBRS deems to be an acceptable servicer.
-- The transaction parties’ financial strength regarding their respective roles.
-- The credit quality, the diversification of the collateral, and the securitised portfolio’s historical and projected performance.
-- Morningstar DBRS’ sovereign rating on the United Kingdom of Great Britain and Northern Ireland at AA with a Stable trend.
-- The consistency of the transaction’s legal structure with Morningstar DBRS’ “Legal Criteria for European Structured Finance Transactions” methodology.

On 8 June 2023, Morningstar DBRS placed the credit ratings of NewDay Partnership Loan Note Issuer-related transactions Under Review with Negative Implications amid deteriorating collateral performance, specifically the MPPRs, after the termination of the commercial relationship between NewDay and Amazon in January 2023 and the migration of certain Amazon accounts onto the Pulse-branded card since October 2022. For information on these rating actions, please refer to the following press release: https://dbrs.morningstar.com/research/415562/dbrs-morningstar-places-newday-partnership-related-transactions-under-review-with-negative-implications. In July 2023, Morningstar DBRS reduced the expected MPPR to 14.7% from 19.7% upon the issuance of NewDay Partnership Master Issuer plc, Series 2023-1 (https://dbrs.morningstar.com/research/416912/dbrs-morningstar-assigns-provisional-ratings-to-newday-partnership-master-issuer-plc-series-2023-1). Morningstar DBRS maintained the Under Review with Negative Implications status of NewDay Partnership Loan Note Issuer on 6 September 2023. For information on these rating actions, please refer to the following press release: https://dbrs.morningstar.com/research/420252/dbrs-morningstar-maintains-under-review-with-negative-implications-status-on-ratings-of-newday-partnership-related-transactions.

The most recent investor report indicates a total payment rate of 32.0% for the month of December 2023, notably improved from 19.3% in June 2023 before the inclusion of the John Lewis Partnership (JLP) receivables to the securitised portfolio in July 2023. While the historical data of JLP receivables is still relatively short, the available performance history so far has shown unusually low charge-off rates and high MPPRs. Morningstar DBRS considered the impact of the JLP receivables addition to the securitised portfolio by analysing its performance history and the projections provided by NewDay and using comparable portfolios as benchmarks. Based on the trend of latest performance data, the benchmarking, and the current compositions of different receivables types, Morningstar DBRS elected to increase the expected MPPR to 20% from 14.7%.

A period of sustained gradual increases in reported yields since mid-2022 was the result of NewDay’s active repricing activities following the increases in the Bank of England base rate. The total yields remained relatively stable throughout 2023, with 23.6% reported for December 2023. Based on the trend of recent performance data, the benchmarking and the current compositions, Morningstar DBRS marginally increased the expected yield to 22.0% from 21.9%.

The reported charge-off rates of the securitised portfolio have been between 5% and 7% since March 2020 until April 2023, when it reached a record high of 7.9% before receding to 4.1% by the end of December 2023 after the inclusion of JLP receivables. Considering the trend of recent performance data and benchmarking, Morningstar DBRS elected to reduce the expected charge-off rate to 7.5% from 8.0%.

Morningstar DBRS notes the addition of the JLP receivables into the securitised portfolio contributes favourably to the improvement of the collateral performance. As noted above, the performance data of the JLP receivables is still not considered normalised, and Morningstar DBRS will continue to monitor the performance.

Morningstar DBRS’ 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 rated notes are the related interest payment amounts and the related class balances.

Morningstar DBRS’ credit ratings on the notes also address 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.

Morningstar DBRS’ credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023) at https://dbrs.morningstar.com/research/416784.

Morningstar DBRS analysed the transaction structure in Intex Deal Maker.

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 (8 January 2024); https://dbrs.morningstar.com/research/426219/.

Other methodologies referenced in these transactions are listed at the end of this press release.

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

An asset and a cash flow analysis were both conducted.

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 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://dbrs.morningstar.com/research/421590/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these credit ratings include the following data provided by NewDay and monthly servicer reports:
-- Total managed portfolio: monthly historical dynamic data from January 2007 to November 2023 in respect of the receivables balances, monthly payment rates, gross charge-offs, and yield.
-- Total managed portfolio: monthly historical dynamic data from January 2007 to October 2023 in respect of the delinquencies and purchase rates.
-- The monthly receivables balance and accounts of JLP, Foundation partners, and Amazon (Platinum and Classic) migration to Pulse from November 2020 to October 2023.
-- Stratification tables and performance related to the securitised portfolio as of 31 December 2023.
-- Total managed portfolio and securitised portfolio: NewDay’s expectations of receivables balances, payment rates, yield rates and charge-off rates from December 2023 to December 2028.

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

At the time of the initial credit ratings for NewDay Partnership Master Issuer plc, Series 2023-1, Morningstar DBRS was supplied with a third-party assessment. At the time of the initial credit ratings, Morningstar DBRS was not supplied with third-party assessments for the NewDay Partnership Loan Notes VFN-P1-related subseries. However, this did not impact the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

Morningstar DBRS does not audit or independently verify the data or information it receives in connection with the credit rating process.

These credit ratings were disclosed to NewDay and amended following that disclosure before being assigned.

The last credit rating action on NewDay Partnership Master Issuer plc took place on 25 July 2023 when the provisional credit ratings were finalised. The last credit rating action on NewDay Partnership Loan Note Issuer took place on 6 September 2023 when the credit ratings were maintained Under Review with Negative Implications.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit ratings, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit ratings:

-- Expected yield rate of 22%
-- Expected MPPR of 20%
-- Expected charge-off rate of 7.5%

Scenario 1: a 25% decrease in the expected MPPR.
Scenario 2: a 25% decrease in the expected yield rate.
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.

Morningstar DBRS concludes that the expected credit ratings under the four stress scenarios are:

NewDay Partnership Master Issuer plc
-- Series 2023-1, Class A Notes: AAA (sf), AAA (sf), AAA (sf), AAA (sf).
-- Series 2023-1, Class B Notes: AA (sf), AA (sf), AA (sf), AA (low) (sf).
-- Series 2023-1, Class C Notes: A (sf), A (sf), A (high) (sf), A (low) (sf).
-- Series 2023-1, Class D Notes: BBB (sf), BBB (low) (sf), BBB (sf), BB (high) (sf).

NewDay Partnership Funding Loan Note Issuer VFN-P1 V1:
-- V1 Class A Loan Note: BBB (low) (sf), BB (high) (sf), BBB (low) (sf), BB (high) (sf).

NewDay Partnership Funding Loan Note Issuer VFN-P1 V2:
-- V2 Class A Loan Note: AA (high) (sf), AAA (sf), AAA (sf), AA (high) (sf).
-- V2 Class B Loan Note: A (high) (sf), AA (sf), AA (sf), A (high) (sf).
-- V2 Class C Loan Note: BBB (high) (sf), BBB (high) (sf), A (low) (sf), BBB (sf).
-- V2 Class E Loan Note: BB (high) (sf), BB (sf), BB (high) (sf), BB (high) (sf).

NewDay Partnership Funding Loan Note Issuer VFN-P1 V3:
-- V3 Class A Loan Note: AA (high) (sf), AAA (sf), AAA (sf), AA (high) (sf).
-- V3 Class B Loan Note: A (high) (sf), AA (sf), AA (sf), A (high) (sf).
-- V3 Class C Loan Note: BBB (high) (sf), BBB (high) (sf), A (low) (sf), BBB (sf).
-- V3 Class D Loan Note: BBB (high) (sf), BBB (sf), BBB (high) (sf), BBB (low) (sf).
-- V3 Class E Loan Note: BB (high) (sf), BB (high) (sf), BB (high) (sf), BB (high) (sf).

For further information on Morningstar DBRS 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 Morningstar DBRS 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 Dates:
7 July 2023: NewDay Partnership Master Issuer plc
15 December 2017: NewDay Partnership Loan Note Issuer VFN-P1 V1 and VFN-P1 V2
16 August 2021: NewDay Partnership Loan Note Issuer VFN-P1 V3

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

-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219/
-- Rating European Structured Finance Transactions Methodology (11 December 2023), https://dbrs.morningstar.com/research/425149/
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730/
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023), https://dbrs.morningstar.com/research/420573/
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572/
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602/
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023), https://dbrs.morningstar.com/research/416784/
-- Master European Structured Finance Surveillance Methodology (11 December 2023), https://dbrs.morningstar.com/research/425148/

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].