Morningstar DBRS Confirms Credit Rating on Temese Funding 2 plc

DBRS Ratings Limited (Morningstar DBRS) confirmed its AAA (sf) credit rating on the Class A Notes issued by Temese Funding 2 plc.

The credit rating addresses the timely payment of interest and the ultimate payment of principal by the legal final maturity date in June 2031.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the April 2024 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement (CE) to the Class A Notes to cover expected losses at the AAA (sf) credit rating level; and
-- No early revolving period termination events have occurred.

The transaction is a securitisation of UK equipment lease receivables originated by Investec Asset Finance PLC (IAF) and its affiliate, CF Corporate Finance Ltd., both fully owned by Investec Bank PLC (Investec). IAF is the servicer of the transaction. The portfolio includes fixed-term agreements, minimum-term agreements along with residual value (RV) receivables, hire-purchase loans, and commercial loans. The transaction is currently in its revolving period, which is scheduled to end in March 2025. The Class A Notes are allowed to amortise during the revolving period upon the occurrence of interim amortisation events. The transaction closed in November 2014 and was last restructured in May 2021. The legal final maturity date is on the December 2037 payment date.

PORTFOLIO PERFORMANCE
As of the April 2024 payment date, loans two to three months in arrears represented 0.07% of the outstanding portfolio balance, and loans more than three months in arrears represented 0.13%. Cumulative defaults amounted to 3.7% of the total purchased receivables since closing.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS maintained its base case PD and base case LGD assumptions on a potential migration of the portfolio based on the replenishment criteria at 5.4% and 72.5%, respectively.

The RV receivables represent the final balloon payments on minimum-term leases granted for the use of material handlings equipment provided and sold to IAF by a third-party supplier. These balloon payments are contractually due by the third-party suppliers; however, in the event of their default, there is no assurance that the re-leasing proceeds from the sale of the assets will cover the balloon amount. Morningstar DBRS assumed a loss of 48.9% on these balloon payments at the AAA (sf) credit rating level.

CREDIT ENHANCEMENT
The CE to the Class A Notes consists of the subordination of the Class B Notes and the reserve fund. CE has remained at 23.0% since the April 2021 payment date, when the last amortisation of the Class A Notes occurred.

The cash reserve is currently funded to its target level of approximately GBP 8.3 million and covers senior fees, interest shortfall, and principal losses (via the principal deficiency ledger) on the Class A Notes. The transaction also benefits from an amortising liquidity reserve, currently funded to its target level of approximately GBP 7.0 million. The liquidity reserve is available to cover senior fees and interest shortfall on the Class A Notes.

HSBC Bank plc (HSBC) acts as the account bank for the transaction. Based on Morningstar DBRS' private credit rating on HSBC, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the credit rating assigned to the Class A Notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS' credit rating on the notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

Morningstar DBRS' credit rating does not address non-payment 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, AND 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 (23 January 2024) at https://dbrs.morningstar.com/research/427030.

Morningstar DBRS analysed the transaction structure in Intex Dealmaker.

Notes:
All figures are in British pounds 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.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 loan-level data provided by Investec and investor reports provided by HSBC.

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

At the time of the initial credit rating, Morningstar DBRS was not supplied with third-party assessments. However, this did not affect the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing this credit rating 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 issuer took place on 18 May 2023, when Morningstar DBRS confirmed its AAA (sf) credit rating on the Class A Notes.

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

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):

-- Morningstar DBRS 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 5.4% and 72.5%, respectively. An RV loss at the AAA (sf) credit rating level of 48.9%.
-- The Risk Sensitivity overview below illustrates the credit ratings expected if the PD, LGD, and RV loss increase by a certain percentage over the base-case assumption.

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

This credit rating is 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: 14 November 2014

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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.

-- 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
-- Rating European Structured Finance Transactions Methodology (11 December 2023), https://dbrs.morningstar.com/research/425149
-- Global Methodology for Rating CLOs and Corporate CDOs (23 February 2024) and CLO Insight Model v1.0.1.0, https://dbrs.morningstar.com/research/428544
-- Legal Criteria for European Structured Finance Transactions (30 June 2022), https://dbrs.morningstar.com/research/416730
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024), https://dbrs.morningstar.com/research/429054
-- 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].