Morningstar DBRS Finalises Provisional Credit Ratings on PCL Funding IX PLC

DBRS Ratings Limited (Morningstar DBRS) finalised the provisional credit ratings on the following notes (the Rated Notes) issued by PCL Funding IX PLC (the Issuer):

-- Series 2024-1 Class A Notes at AAA (sf)
-- Series 2024-1 Class B Notes at A (high) (sf)
-- Series 2024-1 Class C Notes at A (low) (sf)

Morningstar DBRS did not assign a credit rating to the Series 2024-1 Class D Notes also issued in this transaction.

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

CREDIT RATING RATIONALE
The Series 2024-1 transaction is backed by a portfolio of financing advances made by Premium Credit Limited (PCL or the originator) to companies and individuals domiciled in the United Kingdom of Great Britain and Northern Ireland (UK) and the Republic of Ireland (Ireland) for nonlife insurance premia and other payment plans. PCL is also the servicer with Link Financial Outsourcing Limited in place as the backup servicer.

The credit ratings are based on the following analytical considerations:
-- The transaction's capital structure, including the form and sufficiency of available credit enhancement to support Morningstar DBRS's projected expected net losses under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the notes.
-- The originator's capabilities with respect to origination, underwriting, and servicing.
-- An operational risk review of the originator, 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 historical and projected performance of the originator's portfolio.
-- Morningstar DBRS's sovereign credit ratings on the UK at AA with a Stable trend and on Ireland at AA (low) with a Positive trend.
-- The consistency of the transaction's legal structure with the Morningstar DBRS "Legal Criteria for European Structured Finance Transactions" methodology.

TRANSACTION STRUCTURE
The Series 2024-1 transaction was issued as part of the PCL-related master issuance structure, where all outstanding series of notes are supported by the same pool of receivables and are generally issued under similar requirements regarding servicing, amortisation events, priority of distributions, and eligible investments.

The Series 2024-1 transaction includes a scheduled 37-month 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. If the notes are not fully redeemed at the end of the scheduled revolving period, the transaction will enter into an amortisation period where the notes are redeemed sequentially.

The Series 2024-1 transaction includes a series-specific liquidity reserve that the originator initially funded at transaction closing. The target amount is dynamic, sized to cover three months of senior expenses and stressed interest payments on the Rated Notes. Further increases consider the portfolio's delinquencies, defaults, and excess spread ratio triggers where the reserve replenishment is through the transaction's interest waterfalls or additional funding from the originator (subject to certain trigger breaches), depending on whether the transaction is in the specified period. The liquidity reserve forms part of the available funds and is available to cover the shortfalls in senior expenses and interest payments on the Rated Notes.

As the Series 2024-1 notes carry 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-based floating-rate notes. While the potential risk is mitigated to a certain degree by excess spread, the originator's ability to increase the collateral rates and an undertaking to increase the required reserve amount (subject to certain trigger breaches) during the revolving period, the transaction is exposed to the risk of further interest rate hikes. Morningstar DBRS considered such risk in its analysis and assigned the credit ratings commensurate with its view to maintain the credit rating stability of a master issuance structure.

COUNTERPARTIES
HSBC Bank plc is the account bank for the transaction. Based on Morningstar DBRS private credit rating on HSBC Bank 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
Morningstar DBRS analysed PCL's product segments for respective asset assumptions that have remained generally stable over the past decade with little signs of adverse effects from the coronavirus pandemic, current persistent inflationary pressures, and/or interest rate increases. In addition, the portfolio compositions have remained largely stable over the past decade in comparison with the theoretical worst limits.

Morningstar DBRS credit rating on the Rated Notes addresses 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 rating on the Rated Notes also addresses the credit risk associated with the increased rate of interest applicable to the Rated Notes if the Rated Notes are not redeemed on the scheduled amortisation date as defined and in accordance with the applicable transaction document(s).

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), 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 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. Due to the inclusion of a revolving period in the transaction, the analysis considered potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 these credit ratings include performance and portfolio data relating to the receivables provided by the originator through the arranger, Lloyds Bank Corporate Markets plc. Morningstar DBRS received vintage default, recovery, and net losses information split by product types and jurisdictions from 2007 to February 2024. Morningstar DBRS also received stratification tables in relation to the loan pool as of 31 March 2024.

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

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 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 concern newly issued 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 with the parameters used to determine the credit ratings:

-- Expected probability of default (PD) of 7.4%, with a 25% and 50% increase
-- Expected loss given default (LGD) of 26.1%, with a 25% and 50% increase

-- Scenario 1: A 25% increase in expected PD
-- Scenario 2: A 50% increase in expected PD
-- Scenario 3: A 25% increase in expected LGD
-- Scenario 4: A 25% increase in expected PD and 25% increase in expected LGD
-- Scenario 5: A 50% increase in expected PD and 25% increase in expected LGD
-- Scenario 6: A 50% increase in expected LGD
-- Scenario 7: A 25% increase in expected PD and 50% increase in expected LGD
-- Scenario 8: A 50% increase in expected PD and 50% increase in expected LGD

DBRS Morningstar concludes that the expected credit ratings under the eight stress scenarios are:
-- Class A Notes: AAA (sf), AA (high) (sf), AAA (sf), AA (high) (sf), AA (low) (sf), AA (high) (sf), AA (low) (sf), A (high) (sf)
-- Class B Notes: A (high) (sf), BBB (high) (sf), A (high) (sf), BBB (high) (sf), BBB (high) (sf), A (low) (sf), BBB (high) (sf), BBB (low) (sf)
-- Class C Notes: BBB (high) (sf), BBB (high) (sf), A (low) (sf), BBB (high) (sf), BBB (low) (sf), BBB (high) (sf), BBB (low) (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 Credit Rating Date: 8 May 2024

DBRS Ratings Limited
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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://dbrs.morningstar.com/about/methodologies.

-- 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.
-- Currency Stresses for Global Structured Finance Transactions (30 January 2024), https://dbrs.morningstar.com/research/427281
-- Rating CLOs Backed by Loans to European SMEs (23 February 2024) and SME Diversity Model (version 2.6.1.4), https://dbrs.morningstar.com/research/428543
-- Global Methodology for Rating CLOs and Corporate CDOs (23 February 2024) and CLO Insight Model (version 1.0.1.0), https://dbrs.morningstar.com/research/428544.

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].