Morningstar DBRS Upgrades and Confirms Credit Ratings on Hermitage 2023 plc

DBRS Ratings Limited (Morningstar DBRS) took the following credit rating actions on the notes issued by Hermitage 2023 plc (the Issuer):

-- Class A Notes confirmed at AAA (sf)
-- Class A Loan Notes confirmed at AAA (sf)
-- Class B Notes upgraded to AAA (sf) from AA (sf)
-- Class C Notes upgraded to AA (high) (sf) from A (sf)
-- Class D Notes upgraded to A (high) (sf) from BBB (sf)

The credit ratings on the Class A Notes and Class A Loan Notes (together, the Class A Notes) and Class B Notes address the timely payment of interest and ultimate payment of principal on or before the final maturity date in September 2033. The credit ratings on the Class C Notes and Class D Notes address ultimate payment of interest and ultimate payment of principal on or before the final maturity date, as well as timely payment of interest while the senior-most class outstanding.

The credit rating actions follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults and losses, as of the May 2024 payment date;
-- Updated probability of default (PD), loss given default (LGD), and expected loss assumptions for the remaining collateral pool, considering the updated quarterly vintage performance data received; and
-- Current available credit enhancement (CE) to the notes to cover the expected losses at their respective credit rating levels.

Hermitage 2023 plc represents the issuance of notes backed by a portfolio of equipment hire purchase (HP) and finance lease receivables granted by Haydock Finance Limited (Haydock, the originator or the seller) to borrowers in England, Wales, and Scotland. Haydock also services the portfolio.

PORTFOLIO PERFORMANCE
As of the May 2024 payment date, loans that were one to two and two to three months delinquent both represented 0.0% of the outstanding portfolio balance. Gross cumulative defaults represented 2.63% of the original portfolio balance.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS received updated historical performance data from the originator and conducted a loan-by-loan analysis of the remaining pool of receivables. Morningstar DBRS updated its base case PD at the B (low) (sf) rating level to 7.3% down from 7.7% and maintained its base case LGD assumption at 40.0%.

CREDIT ENHANCEMENT
CE is provided by the subordination of the junior notes. As of the May 2024 payment date, CE to the Class A, Class B, Class C, and Class D Notes was 43.5%, 31.7%, 20.0% and 11.8%, respectively, up from 28.5%, 20.5%, 12.5% and 7.0% as of the closing date, respectively.

The transaction benefits from a liquidity reserve split into Class A/B, Class C and Class D subledgers. All the subledgers were fully funded at closing. Amounts standing to the credit of the liquidity reserve ledgers are available to cover senior expenses and fees and to pay interest on their related and more senior-ranking classes of notes. The amortising liquidity reserve is set at 1.75% of the aggregate principal amount outstanding on the Class A Loan Notes and Class A Notes to Class D Notes. As of May 2024, all liquidity reserve ledgers were funded to their targets.

Elavon Financial Services DAC, U.K. Branch acts as the account bank for the transaction. Based on the Morningstar DBRS private rating of Elavon Financial Services DAC, U.K. Branch, 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 ratings assigned to the notes, as described in Morningstar DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.

Citigroup Global Markets Limited (Citi) is the swap counterparty for the transaction. Morningstar DBRS' private credit rating on Citi is consistent with the First Rating Threshold as described in Morningstar DBRS' "Derivative Criteria for European Structured Finance Transactions" methodology.

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

Morningstar DBRS's credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

Morningstar DBRS's 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-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 the "Master European Structured Finance Surveillance Methodology" (7 March 2024): https://dbrs.morningstar.com/research/429051/master-european-structured-finance-surveillance-methodology.

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.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent 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/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these credit ratings include the following provided by Haydock:
-- 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; and
-- Investor Report relating to the May 2024 payment date.

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 supplied with third-party assessments. 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 last credit rating action on this transaction took place on 28 July 2023, when Morningstar DBRS finalised its provisional credit rating on the Class A Notes, Class A Loan Notes, Class B Notes, Class C Notes and Class D Notes at AAA (sf), AAA (sf), AA (sf), A (sf) and BBB (sf).

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 the current pool of loans for the Issuer at the B (low) (sf) credit rating level are 7.3% and 40.0%, respectively.
-- The risk sensitivity overview below illustrates the credit ratings expected if the PD and LGD increase by a certain percentage over the base case assumption.

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

Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

Class D Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (sf)
-- 50% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD, expected rating of A (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (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: Alfonso Candelas, Senior Vice President
Initial Rating Date: 13 July 2023

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.

-- 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
-- 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
-- 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].