Morningstar DBRS Assigns Provisional Credit Ratings to Hermitage 2024 plc

DBRS Ratings Limited (Morningstar DBRS) assigned provisional credit ratings to the following classes of notes (the Rated Notes) to be issued by Hermitage 2024 plc (the Issuer):

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (sf)
-- Class D Notes at BBB (sf)
-- Class E Notes at BB (high) (sf)

Morningstar DBRS did not assign a credit rating to the Class F Notes (together with the Rated Notes, the Notes) also expected to be issued in this transaction.

The credit rating on the Class A Notes and Class B Notes address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date. The credit ratings on the Class B, Class C, Class D and Class E Notes address the ultimate repayment of interest (timely when most senior) and the ultimate repayment of principal by the legal maturity date.

CREDIT RATING RATIONALE
The Issuer is a public limited company incorporated under the laws of England and Wales, acting as a special-purpose entity specifically for the purpose of this transaction. The transaction represents the issuance of Notes backed by receivables selected from a provisional portfolio of approximately GBP 347 million related to equipment hire purchase and finance lease receivables granted by Haydock Finance Limited (Haydock or the seller) to borrowers in England, Wales, and Scotland. Haydock also services the receivables (the servicer).

Morningstar DBRS based its provisional credit ratings on a review of the following analytical considerations:
-- The transaction's capital structure, including 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 Rated Notes are expected to be issued;
-- The credit quality of Haydock's portfolio, the characteristics of the collateral, its historical performance, and Morningstar DBRS-projected behaviour under various stress scenarios;
-- Haydock's capabilities with respect to originations, underwriting, servicing, and its position in the market and financial strength;
-- The operational risk review of Haydock, which Morningstar DBRS deems to be an acceptable servicer;
-- The transaction parties' financial strength with regard to their respective roles;
-- The expected consistency of the transaction's legal structure with Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology;
-- The expected consistency of the transaction's hedging structure with Morningstar DBRS' "Derivative Criteria for European Structured Finance Transactions" methodology; and,
-- Morningstar DBRS' sovereign credit rating on the United Kingdom of Great Britain and Northern Ireland, currently at AA with a Stable trend.

TRANSACTION STRUCTURE
The transaction's cash flows follow separate interest and principal waterfalls. The Notes amortise from the first interest payment date on a pro-rata basis until a sequential amortisation event has occurred. Sequential amortisation events include, among others, the breach of performance related triggers on Class F principal deficiency ledger (PDL) and cumulative default ratio, the Seller not exercising the call option, or a shortage of the liquidity reserve required amount.

Available revenue receipts are available to cover principal deficiencies and, in certain scenarios, principal may be diverted to pay interest on the Rated Notes. The principal-to-interest mechanism is designed to cover senior interest shortfalls related to insufficient revenue receipts available to cover senior expenses and fees as well as interest on the most-senior class of Rated Notes outstanding. Such principal-to-interest reclassifications, along with any defaults, are recorded on the applicable principal deficiency ledgers in a reverse-sequential order.

The transaction benefits from a liquidity reserve fund (LRF) split into Class A/B, Class C, Class D, and Class E LRF ledgers. The Class A/B LRF ledger is fully funded at closing through a subordinated loan to 1.7% of the Class A and B Notes' balance and includes a minimum level of 0.3% of the initial outstanding balance of the Class A and B Notes. Following the redemption of the Class A and Class B Notes, the other reserve ledgers will be funded through excess spread up to 1.7% of their respective outstanding principal balance.

COUNTERPARTIES
Elavon Financial Services DAC, UK Branch (Elavon UK) has been appointed as the Issuer's account bank for the transaction. Morningstar DBRS privately rates Elavon UK and considers it to meet the relevant criteria to act in this capacity. The Transaction documents are expected to contain downgrade provisions relating to the account bank that are consistent with Morningstar DBRS' criteria

Citigroup Global Markets Limited (Citi) has been appointed as the hedge counterparty for the transaction. Morningstar DBRS privately rates Citi and considers it to meet the relevant criteria to act in this capacity. The hedging documents are expected to contain downgrade provisions consistent with the Morningstar DBRS' criteria.

Morningstar DBRS' credit ratings on the Rated Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for the Rated Notes are the related interest amounts, deferred interest amounts, and principal amounts.

Morningstar DBRS' credit ratings do 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, 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.

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 the Seller and its agents. Morningstar DBRS received:
-- Quarterly static cumulative gross loss and cumulative recovery data from January 2017 to April 2024 split into all loans, all loans excluding the coronavirus business interruption loans, and excluding one-off items;
-- Monthly dynamic delinquency data from January 2017 to April 2024;
-- Monthly dynamic prepayment data from January 2017 to April 2024;
-- Loan-level portfolio breakdown as at 30 April 2024 and its related amortisation schedule.

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

Morningstar DBRS was 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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned notes and may change or be different than the final credit rating assigned or may be discontinued. The assignment of the final credit ratings on the above-mentioned Rated Notes are subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalise the credit ratings.

These credit ratings concern expected-to-be-issued new financial instruments. These are the first Morningstar DBRS credit ratings on these financial instruments.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://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 (the base case):

-- Expected default: 7.3%.
-- Expected recovery rate: 60.0%.
-- Loss given default (LGD): 67.0% for the AAA (sf) scenario, 63.4% for the AA (sf) scenario, 58.0% for the A scenario, 52.6% for the BBB (sf) scenario, and 47.2% for the BB (sf) scenario.

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

Morningstar DBRS concludes that the expected credit ratings under the eight stress scenarios are:
-- Class A Notes: AA (sf), AA (sf), AA (sf), AA (low) (sf), AA (low) (sf), A (high) (sf), A (high) (sf), A (low) (sf)
-- Class B Notes: AA (low) (sf), A (high) (sf), AA (low) (sf), A (low) (sf), A (sf), A (low) (sf), A (low) (sf), BBB (high) (sf)
-- Class C Notes: A (low) (sf), BBB (high) (sf), BBB (high) (sf), BBB (low) (sf), BBB (sf), BB (high) (sf), BB (high) (sf), BB (sf)
-- Class D Notes: BBB (low) (sf), BB (high) (sf), BB (high) (sf), BB (sf), BB (sf), B (high) (sf), BB (low) (sf), B (low) (sf)
-- Class E Notes: BB (sf), B (high) (sf), BB (sf), B (high) (sf), B (high) (sf), B (low) (sf), B (low) (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: Petter Wettestad, Assistant Vice President,
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 24 June 2024

DBRS Ratings Limited
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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 Consumer and Commercial Asset-Backed Securitisations (8 January 2024),
https://dbrs.morningstar.com/research/426219
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://www.dbrsmorningstar.com/research/416730
-- Rating European Structured Finance Transactions Methodology (11 December 2023),
https://dbrs.morningstar.com/research/425149
-- 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://www.dbrsmorningstar.com/research/429054
-- 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 dbrs.morningstar.com or contact us at [email protected].