Morningstar DBRS Confirms Credit Rating on Cavern Funding 2020 plc

DBRS Ratings Limited (Morningstar DBRS) confirmed its AAA (sf) credit rating on the Class A Notes issued by Cavern Funding 2020 plc (the Issuer).

The credit rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in 2038.

The credit rating 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 August 2024 payment date;
-- Probability of default (PD), loss given default (LGD), and residual value (RV) haircut assumptions on a potential portfolio migration based on replenishment criteria;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) credit rating level; and
-- Absence of revolving termination events.

The transaction represents the issuance of notes backed by assets related to hire purchase, personal contract purchase (PCP), and lease purchase vehicle loan contracts granted by MI Vehicle Finance Limited (Mann Island or the seller) to borrowers in England, Wales, Scotland, and Northern Ireland. Mann Island is a motor finance business and part of Investec Asset Finance plc (having been acquired in 2014). Mann Island's ultimate parent is Investec Bank plc. The underlying motor vehicles and motorcycles related to the finance contracts consist of cars, light-commercial vehicles, motorcycles, and motorhomes. The underlying auto loan receivables include the RV component of PCP agreements, and the portfolio is serviced by Investec Asset Finance plc.

The transaction closed on 15 October 2020 with an initial prefunding period of six months, contained within a four-year revolving period scheduled to end in November 2024. During the revolving period, and subject to the eligibility criteria, additional receivables can be purchased. To date, no revolving period suspension event has occurred.

PORTFOLIO PERFORMANCE
As of August 2024 payment date, two- to three-month arrears represented 0.3% of the outstanding portfolio balance and the 90+-day delinquency ratio was 0.4%. As of August 2024, the gross cumulative default ratio was 1.9%, as a proportion of the aggregate initial and additional portfolio balances.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and maintained its base case PD and LGD assumptions at the B (low) (sf) credit rating level at 7.4% and 37.7%, respectively. Morningstar DBRS updated its RV haircut at the AAA (sf) credit rating level to 34.20% from 45.0%, following an update to its "Rating European Consumer and Commercial Asset-Backed Securitisations" methodology on 8 January 2024.

CREDIT ENHANCEMENT
As of the August 2024 payment date, credit enhancement to the Class A Notes is 32.5%, unchanged since the previous review, given that the transaction remains in its revolving period. Credit enhancement is expressed as portfolio overcollateralisation and does not include the reserve fund.

The reserve fund forms part of available revenue funds and is currently funded to its target level of GBP 2.7 million (1.0% of the Class A Notes).

The liquidity reserve fund is available to cover senior fees and interest on the Class A Notes and is currently funded to its target level of GBP 1.4 million (0.5% of the Class A Notes).

HSBC Bank plc acts as the account bank for the transaction. Based on the Morningstar DBRS private credit rating of HSBC Bank plc, 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 ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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 Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781.

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" (6 August 2024): https://dbrs.morningstar.com/research/437540.

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 continues to consider potential portfolio migration based on the 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 Credit Ratings on Other Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/436000.

The sources of data and information used for this credit rating include investor reports provided by HSBC Bank plc, and loan-level data provided by EuroABS Ltd.

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 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 transaction took place on 19 September 2023, when Morningstar DBRS confirmed its AAA (sf) credit rating of 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 at 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, LGD, and RV haircut 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 7.4% and 37.7%, respectively. The RV haircut at the AAA (sf) credit rating level is 34.2%.
-- The risk sensitivity overview below illustrates the credit ratings expected if PD, LGD, and RV haircut increase by a certain percentage over the base case assumption.

Class A Notes Risk Sensitivity:
-- 25% increase in RV haircut, expected credit rating of AAA (sf)
-- 50% increase in RV haircut, expected credit rating of AAA (sf)
-- 25% increase in both PD and LGD, expected credit rating of AA (high) (sf)
-- 50% increase in both PD and LGD, expected credit rating of AA (sf)
-- 25% increase in both PD and LGD and 25% increase in RV haircut, expected credit rating of AA (high) (sf)
-- 25% increase in both PD and LGD and 50% increase in RV haircut, expected credit rating of AA (high) (sf)
-- 50% increase in both PD and LGD and 25% increase in RV haircut, expected credit rating of AA (sf)
-- 50% increase in both PD and LGD and 50% increase in RV haircut, expected credit rating of 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: Petter Wettestad, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Associate Managing Director
Initial Rating Date: 15 October 2020

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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.

-- Legal Criteria for European Structured Finance Transactions (28 June 2024),
https://dbrs.morningstar.com/research/435165
-- Master European Structured Finance Surveillance Methodology (6 August 2024),
https://dbrs.morningstar.com/research/437540
-- Rating European Consumer and Commercial Asset-Backed Securitisations (22 August 2024),
https://dbrs.morningstar.com/research/438224
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024)
https://dbrs.morningstar.com/research/437781
-- Rating European Structured Finance Transactions Methodology (25 June 2024),
https://dbrs.morningstar.com/research/434970
-- Operational Risk Assessment for European Structured Finance Servicers (6 August 2024),
https://dbrs.morningstar.com/research/437543
-- Operational Risk Assessment for European Structured Finance Originators (6 August 2024),
https://dbrs.morningstar.com/research/437541

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 info-DBRS@morningstar.com.