Morningstar DBRS Takes Credit Rating Actions on Securitisation of Catalogue Assets Limited

DBRS Ratings Limited (Morningstar DBRS) took the credit rating actions on the following notes issued by Securitisation of Catalogue Assets Limited following its annual review:

-- Class A-S Variable Funding Notes confirmed at AAA (sf)
-- Class A-J Variable Funding Notes upgraded to A (high) (sf) from A (sf)

The credit ratings of Class A-S Variable Funding Notes (VFNs) and Class A-J VFNs (collectively, the Rated Notes) address the timely payment of scheduled interest and the ultimate payment of principal on or before the legal final maturity date.

Morningstar DBRS does not rate the Class B, Class C1 or Class C2 Notes (together with the Rated Notes, the Notes) also issued in the transaction.

The upgrade of Class A-J VFNs' credit rating is the result of revised asset assumptions based on a maximum funding percentage of 73% when the payment rate is above 8.5% prescribed in the transaction documents, corresponding to a minimum credit enhancement of 27%.

The transaction is a securitisation of home shopping receivables granted to private individuals by Shop Direct Finance Company Limited (Shop Direct) in the United Kingdom under two main lines of credit products:
-- Direct Credit offered under the very.co.uk brand and broadly similar to a credit card agreement where a customer is granted a credit limit subject to interest charges
-- Embedded Credit for goods predominantly purchased through the Littlewoods brand. Products sold through Littlewoods are typically interest free with weekly payment arrangements at a higher price than through direct channels, recognising the "embedded" interest charges
Shop Direct is the initial servicer with Link Financial Outsourcing Limited (Link) in place as the standby servicer for the transaction.
The credit ratings are based on the following analytical considerations:
-- The transaction's structure, including the 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 issued
-- The credit quality of Shop Direct's portfolio, the characteristics of the collateral, its historical performance and Morningstar DBRS' expectation of charge-offs, monthly principal payment rate (MPPR) and yield under various stress scenarios
-- Shop Direct's capabilities with respect to origination, underwriting and its position in the market and financial strength.
-- An operational risk review of Shop Direct and Link with respect to servicing
-- The transaction parties' financial strength regarding their respective roles
-- The consistency of the transaction's structure with Morningstar DBRS' "Legal and Derivative Criteria for European Structured Finance Transactions" methodology
-- The long term sovereign credit rating on United Kingdom of Great Britain and Northern Ireland, currently rated AA with a Stable trend.

TRANSACTION STRUCTURE

The transaction includes a scheduled revolving period till 1 January 2027. During this period, additional receivables may be added to the eligible receivables balance, 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.

As the 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 floating-rate Notes. The potential interest rate mismatch risk is to a certain degree mitigated by excess spread and Shop Direct's ability to increase the credit product contractual rate and is considered in Morningstar DBRS' cashflow analysis.

The transaction also includes a liquidity reserve with a target amount based on the sum of amounts calculated for each class of Notes. These class-specific amounts consider the sum of (i) the margins for each class of the Rated Notes, (ii) Sonia plus a spread adjustment and 2.0% and (iii) an additional 1.0%, then multiplied by the applicable commitment amounts (or, if zero, the applicable balance of the Rated Notes). These amounts are then calculated to cover three interest payments for Class A-S VFNs and one interest payment for the other classes of Notes. The liquidity reserve would amortise to the target amount, subject to a floor of GBP 1,000,000 in respect of the Class A-S VFNs.

COUNTERPARTIES
HSBC Bank plc (HSBC) is the current account bank for the transaction. Based on Morningstar DBRS' private credit ratings on HSBC, the downgrade provisions outlined in the transaction documents and other mitigating factors 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.

PORTFOLIO ASSUMPTIONS
As of the November 2024 payment date, the three-month moving average payment rate was 10.5%, above the revolving period termination trigger level of 7.5%. The delinquency ratio, the five-month delinquency ratio, the dilution ratio and the three-month moving average portfolio default rate were 7.9%, 4.0%, 63.2% and 0.5%, below the respective revolving period termination trigger levels of 22.5%, 10.0%, 175% and 2.0% (or 1.75% on any three months over a 12-month period).

Morningstar DBRS considered the historical performance, the portfolio product line compositions and the upcoming operation changes and elected to revise the expected MPPR, yield and charge-off rate to 7.25%, 23.0% and 10.5% from 7.5%, 22.0% and 14.0%, respectively.

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. Where applicable, a description of these financial obligations can be found in the transaction's respective press releases at issuance.

Morningstar DBRS' credit ratings on the Rated Notes also addresses the credit risk associated with the increased rate of interest applicable to the Rated Notes in accordance with the applicable transaction documents.

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, GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factor(s) 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 (13 August 2024), 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 methodologies applicable to the credit ratings are "Rating European Consumer and Commercial Asset-Backed Securitisations" (18 September 2024), https://dbrs.morningstar.com/research/439583 and "Master European Structured Finance Surveillance Methodology" (19 November 2024), https://dbrs.morningstar.com/research/443204.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS has applied the principal methodologies 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 replenishment criteria set forth in the transaction legal documents.

A review of the transaction legal documents was not conducted as the 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 these credit ratings include performance data and monthly reports provided by Shop Direct.

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

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

The last credit rating action on this transaction took place on 30 November 2023 when Morningstar DBRS confirmed its credit ratings on the Class A-S VFNs and Class A-J VFNs at AAA (sf) and A (sf), respectively.

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 rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating:

-- Expected MPPR: 7.25%
-- Expected yield: 23.0%
-- Expected charge-off rate: 10.5%

Scenario 1: A 25% decrease in the expected MPPR
Scenario 2: A 25% decrease in the expected yield
Scenario 3: A 25% increase in the expected charge-off rate
Scenario 4: A 15% decrease in the expected MPPR, and 15% decrease in the expected yield and 15% increase in the expected charge-off rate

Morningstar DBRS concludes that the expected credit ratings under the four stress scenarios are:
Class A-S VFNs: AA (high) (sf) for all four scenarios
Class A-J VFNs: A (high) (sf) and A (sf) for remaining scenarios

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, Vice President
Rating Committee Chair: Paolo Conti, Associate Managing Director
Initial Rating Date: 25 November 2013

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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.

-- Rating European Consumer and Commercial Asset-Backed Securitisations (18 September 2024), https://dbrs.morningstar.com/research/439583
-- Master European Structured Finance Surveillance Methodology (19 November 2024), https://dbrs.morningstar.com/research/443204
-- Rating European Structured Finance Transactions Methodology (18 September 2024), https://dbrs.morningstar.com/research/439581
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024), https://dbrs.morningstar.com/research/439913
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024), https://dbrs.morningstar.com/research/443196
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024), https://dbrs.morningstar.com/research/439571
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781

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/439604.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.