Morningstar DBRS Upgrades Credit Rating on Wolf Receivables Financing Plc, Maintains Stable Trend

DBRS Ratings Limited (Morningstar DBRS) upgraded its credit rating on the Senior Notes issued by Wolf Receivables Financing Plc (the Issuer) to AA (sf) from A (high) (sf) and maintained the Stable trend.

The transaction represents the issuance of Senior Notes and Junior Notes (collectively, the Notes). The credit rating on the Senior Notes addresses the timely payment of interest and the ultimate repayment of principal. Morningstar DBRS does not rate the Junior Notes.

As of December 2021 (the cut-off date), the Notes were backed by a portfolio of UK reperforming unsecured loans with GBP 315 million of gross book value (GBV). The receivables are well diversified, comprising around 357,000 accounts with circa GBP 884 average balance across 2,421 portfolios that were acquired by Lowell Portfolio 1 Limited (Lowell or the Sponsor) over a nine-year period with most of the receivables being acquired between 2017 and 2021. The receivables, mostly associated with a payment plan, are linked with a wide range of underlying product types, with catalogue credit, credit card, personal unsecured loan, and telecommunications service agreements accounting for 33.2%, 31.4%, 14.2%, and 13.6% of the total receivables balance at cut-off, respectively. The remaining 7.3% comprise utility bills, store cards, overdrafts, and mail orders, with about 0.4% categorised as other. About 84% of the total receivables by balance at cut-off were regulated under the Consumer Credit Act and about 10% were court assigned.

The receivables contain reperforming unsecured claims that were selected based on the following criteria: (1) accounts on payment plans that, over a six-month period before the cut-off date, have been paying at least 80% of the payment plan due amount (in aggregate) and made at least five monthly net positive payments; or (2) other accounts that have made six monthly net positive payments in six months prior to the cut-off date.

As of April 2022 (the Issuance Date), approximately 81.5% of the pool by GBV was associated with an active payment plan with GBP 13.2 average monthly payments. According to the latest information provided by the servicer, in February 2024, 69.4% of the pool by GBV was associated to an active payment plan with GBP 12.1 average monthly payments.

The receivables are mainly serviced by Lowell Financial Ltd (the Servicer), which is part of the Lowell Group, with a small portion serviced by external debt collection agencies and debt management companies.

CREDIT RATING RATIONALE
The credit rating upgrade follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of February 2024, focusing on: (1) a comparison between actual collections and the servicer’s initial business plan forecast; (2) the collection performance observed over recent months; and (3) a comparison between the current performance and Morningstar DBRS’ expectations.
-- Updated business plan: The servicer’s updated business plan as of December 2023, received in March 2024, and a comparison with the initial collection expectations.
-- Portfolio characteristics: The loan pool composition as of February 2024 and the evolution of its core features since issuance.
-- Transaction liquidating structure: The order of priority entails a fully sequential amortisation of the Notes (i.e., the Junior Notes will begin to amortise following the full repayment of the Senior Notes). Additionally, interest payments on the Junior notes become subordinated to principal payments on the Senior Notes if the cumulative collection ratio is lower than 90%. This trigger has not been breached on the March 2024 interest payment date, with actual figures at 107.2% according to the servicer.
-- Liquidity support: The transaction benefits from an amortising liquidity reserve providing liquidity to the structure and covering a potential interest shortfall on the Senior Notes and senior fees. The liquidity reserve target amount is equal to 4.5% of the Senior Notes’ principal outstanding balance with a minimum of GBP 500,000 fully funded.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

TRANSACTION AND PERFORMANCE
According to the latest investor report from March 2024, the outstanding principal amounts of the Senior Notes and the Junior Notes were GBP 8.7 million and GBP 80.0 million, respectively. As of the March 2024 payment date, the balance of the Senior Notes had amortised by 91.3% since issuance and the current aggregated transaction balance was GBP 88.7 million.

As of February 2024, the transaction was performing above the servicer’s business plan expectations. The actual cumulative gross collections equalled GBP 100.8 million whereas the servicer’s initial business plan estimated cumulative gross collections of GBP 94.1 million for the same period. Therefore, as of February 2024, the transaction was overperforming by GBP 6.7 million (+7.2%) compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of GBP 55.6 million at the A (sf) stressed scenario. Therefore, as of February 2024, the transaction was performing above Morningstar DBRS’ initial stressed expectations.

Pursuant to the requirements set out in the servicing agreement, in March 2024, the servicer delivered an updated portfolio business plan. The updated portfolio business plan, combined with the actual cumulative gross collections of GBP 95.8 million as of December 2023, results in a total of GBP 186.4 million, which is 4.2% lower than the total gross disposition proceeds of GBP 194.6 million estimated in the initial business plan. The servicer during the reforecast exercise has increased periodic collections in the following years driven by the consistent overperformance of the payment arrangements; however, the servicer has limited the curve tail to January 2030 (eight years life since issuance), which is six years less than the original business plan, which goes to January 2036. The updated Morningstar DBRS AA (sf) credit rating stress assume a haircut of 60.1% to the servicer’s updated business plan, considering future expected collections.

The Senior Notes may pass higher credit rating stress scenarios; however, Morningstar DBRS believes that higher credit ratings would not be commensurate with the risk of the transaction considering the potential higher variability of NPLs’ cash flows.

The final maturity of the transaction is in December 2034.

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 credit rating is: “Master European Structured Finance Surveillance Methodology” (7 March 2024), https://dbrs.morningstar.com/research/429051.

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 surveillance section of 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://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include the Issuer, Lowell Financial and HSBC Bank Plc which comprise, in addition to the information received at issuance, the investor report as of March 2024; the updated business plan as of December 2023; the monthly servicer report as of February 2024; and the monthly loan-by-loan report as of February 2024.

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

At the time of the initial credit ratings, Morningstar DBRS was supplied with third-party assessments. 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.

The last credit rating action on this transaction took place on 21 April 2023, when Morningstar DBRS upgraded the credit rating on the Senior notes to A (high) (sf) from A (sf) and changed the Trend to Stable from Negative.

The lead analyst responsibilities for this transaction have been transferred to Sebastiano Romano.

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 rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- Recovery rates used: Cumulative base case remaining 10-year recovery amount of approximately GBP 34.0 million at the AA (sf) stress level, a 5% and 10% decrease in the base-case recovery rate.
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a confirmation on the Senior Notes at AA (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a confirmation on the Senior Notes at AA (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.

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

Lead Analyst: Sebastiano Romano, Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 22 April 2022

DBRS Ratings Limited
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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 Nonperforming Loans Securitisations (5 June 2023),
https://dbrs.morningstar.com/research/415383.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730.
-- Master European Structured Finance Surveillance Methodology (7 March 2024), https://dbrs.morningstar.com/research/429051.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754.
-- 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 https://dbrs.morningstar.com/ or contact us at [email protected].