Morningstar DBRS Finalises Provisional Credit Ratings on NewDay Funding Master Issuer plc, Series 2024-1

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

-- Series 2024-1, Class A Notes at AAA (sf)
-- Series 2024-1, Class B Notes at AA (sf)
-- Series 2024-1, Class C Notes at A (sf)
-- Series 2024-1, Class D Notes at BBB (sf)
-- Series 2024-1, Class E Notes at BB (sf)
-- Series 2024-1, 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 Morningstar DBRS’ 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 is deemed an acceptable servicer.
-- The transaction parties’ financial strength regarding their respective roles.
-- The consistency of the transaction’s legal structure with Morningstar DBRS’ methodology “Legal Criteria for European Structured Finance Transactions”.
-- The sovereign rating on United Kingdom of Great Britain and Northern Ireland, currently rated AA with a Stable trend by Morningstar DBRS.

TRANSACTION STRUCTURE
The Notes are backed by a portfolio of near-prime 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 to cover shortfalls in senior expenses, senior swap payments (if applicable) and interest on the Class A, Class B, Class C and Class D Notes and would amortise to the target amount, subject to a floor of GBP 250,000.

As the Notes are denominated in GBP with floating-rate coupons based on the daily compounded Sterling Overnight Index Average (Sonia), there is an interest rate mismatch between the fixed-rate collateral and the Sonia coupon rates. The potential risk is to a certain degree mitigated by excess spread and NewDay’s ability to increase the credit card annual percentage rates. The A (sf) rated Class C Notes benefit from higher subordination than the other A (low) (sf) rated notes issued separately out of the NewDay Funding related master issuance programme. This approach is consistent with the issuance of the Series 2023-1 and with Morningstar DBRS’ criteria in respect of the rating stability of a master issuance structure.

COUNTERPARTIES
HSBC Bank plc is the account bank for the transaction. Based on Morningstar DBRS’ private rating on HSBC Bank plc and the downgrade provisions outlined in the transaction documents, Morningstar DBRS considers the risk arising from the exposure to the account bank to be commensurate with the credit ratings assigned.

PORTFOLIO ASSUMPTIONS
Recent total payment rates including the interest collections declined slightly with a total payment rate of 14.9% in January 2024 following a record high of 15.7% in May 2023 but continued to remain above historical levels. While the recent levels do not appear to be susceptible to the current inflationary pressures and interest rates, Morningstar DBRS elected to maintain the 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 January 2024 showed a total yield of 33%, up from the record low of 26% in May 2020 as a result of 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 trends and the removal of spend-related fees, Morningstar DBRS maintained the expected yield at 27%.

The reported historical annualised charge-off rates were high but stable at around 16% until June 2020. The most recent performance in January 2024 showed a charge-off rate of 11.5% after reaching a record high of 17.6% in April 2020. Based on the analysis of historical charge-off rates, delinquencies and consideration of the current macroeconomic environment, Morningstar DBRS maintained the expected charge-off rate at 18%.

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 Notes are the related Interest Payment Amounts and the Class Balances.

Morningstar DBRS’ 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.

Morningstar DBRS’ credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) 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 Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030.

Morningstar DBRS analysed the transaction structure in Intex Dealmaker.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the ratings is Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024); https://dbrs.morningstar.com/research/426219.

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

Morningstar DBRS 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 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://dbrs.morningstar.com/research/421590.

The sources of data and information used for these credit ratings include the following data provided by the arranger, NewDay Cards, and monthly servicer reports:
-- Securitised portfolio: monthly receivables balances, total payment rates, gross yield, charge-off rates, and purchase rates from September 2023 to December 2023 and static annual vintage data from 2008 to 2022, in respect of receivables balances, payment rates, gross charge-offs, gross yield;
-- Total near-prime portfolio: monthly historical dynamic data from June 2007 to August 2023, including monthly receivables balances, total payment rates, gross yield, charge-off rates, and purchase rates and recoveries; and
-- Stratification tables in relation to the total eligible pool as of 31 January 2024.

Morningstar DBRS also received additional data with regard to dilutions from January 2010 to August 2023 and from September 2023 to December 2023 for the entire near-prime portfolio and the securitised portfolio, respectively.

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

Morningstar DBRS was supplied with third-party assessments for the transaction. However, this did not impact the 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.

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

This is the first credit rating action since the Initial Credit Rating Date.

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 to the parameters used to determine the credit ratings:

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

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 MPPR, a 15% decrease in the expected yield rate, and a 15% increase in the expected charge-off rate.

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

-- Class A: AA (low) (sf), AA (high) (sf), AA (sf), AA (low) (sf)
-- Class B: A (sf), AA (low) (sf), A (high) (sf), A (low) (sf)
-- Class C: BBB (high) (sf), BBB (high) (sf), BBB (high) (sf), BBB (sf)
-- Class D: BB (high) (sf), BB (high) (sf), BBB (low) (sf), BB (sf)
-- Class E: B (high) (sf), below B (low) (sf), BB (low) (sf), B (sf)
-- Class F: B (sf), below B (low) (sf), B (sf), below B (low) (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 Credit Rating Date: 13 March 2024

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 these transactions 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 (7 March 2024),
https://dbrs.morningstar.com/research/429054.
-- 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.
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030.

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].