Morningstar DBRS Upgrades Credit Rating on Wolf Receivables Financing III Plc, Maintains Stable Trend

DBRS Ratings Limited (Morningstar DBRS) upgraded its credit rating on the Class A Notes issued by Wolf Receivables Financing III Plc (the Issuer) to AA (low) (sf) from A (high) (sf) and maintained the Stable trend on the credit rating.

The transaction represents the issuance of Class A Notes and Class B Notes (collectively, the Notes). The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal. Morningstar DBRS does not rate the Class B Notes nor the Class A step-up margin.

As of 31 August 2023 (the cut-off date), the Notes were collateralised by a pool of UK reperforming unsecured receivables, with a total outstanding balance of GBP 630.0 million.

At the cut-off date, the pool was fully unsecured and was mainly composed of credit card loans (54% balance), followed by personal unsecured loans and banking mixed (25% and 7%, respectively). The receivables were well diversified, comprising around 234,622 accounts with circa GBP 2,685 in average balance. The largest borrower accounted for 0.06% of the pool by outstanding amount.

All borrowers were in the United Kingdom: around 90% of the debtors by current balance were in England, 6% were in Wales, 3% were in Scotland, and 1% were in Northern Ireland. Approximately 54% of the current balance was originated between 2001 and 2010.

The receivables contained reperforming unsecured claims that were selected based on the following criteria: UK reperforming unsecured accounts denominated in British pound sterling under which over the six-month period immediately before the cut-off date borrowers have made at least four net positive monthly payments.

The receivables are mainly serviced by Lowell Financial Ltd (the servicer), which is part of the Lowell Group, with a small portion serviced by external debt collection agencies and debt management companies. No backup servicer has been appointed. CSC Capital Markets UK Limited was appointed as Replacement Servicer Facilitator and has undertaken to identify and appoint a suitable backup servicer within 60 calendar days, should a servicer termination event occur.

CREDIT RATING RATIONALE
The credit rating upgrade follows a review of the transaction and is based on the following analytical considerations:

-- Transaction performance: An assessment of portfolio recoveries as of October 2024, focusing on (1) a comparison between actual collections and the servicer's initial business plan forecast, (2) the collection performance observed over recent months, and (3) a comparison between the current performance and Morningstar DBRS' expectations.
-- Portfolio characteristics: The loan pool composition as of October 2024 and the evolution of its core features since issuance.
-- Transaction liquidating structure: The order of priority entails a fully sequential amortisation of the Notes (i.e., the Class B Notes will begin to amortise following the full repayment of the Class A Notes). Additionally, interest payments on the Class B notes become subordinated to principal payments on the Class A Notes if the cumulative collection ratio is lower than 90%. This trigger was not breached on the November 2024 interest payment date, with actual figures at 97.8%, according to the servicer.
-- Liquidity support: The transaction benefits from an amortising liquidity reserve providing liquidity to the structure and covering a potential interest shortfall on the Class A Notes and senior fees. The liquidity reserve target amount is equal to 4.0% and is currently fully funded.

TRANSACTION AND PERFORMANCE
According to the latest investor report from November 2024, the Class A Notes' and the Class B Notes' outstanding principal amounts were GBP 85.3 million and GBP 126.6 million, respectively. As of the November 2024 payment date, the balance of the Class A Notes had amortised by 28.5% and the current aggregated transaction balance was GBP 211.8 million.

As of October 2024, the transaction was performing slightly below the servicer's business plan expectations. The actual cumulative gross collections equalled GBP 46.7 million whereas the servicer's initial business plan estimated cumulative gross collections of GBP 47.7 million for the same period. Therefore, as of October 2024, the transaction was underperforming by GBP 1.1 million (-2.2%) compared with the initial business plan expectations.

At issuance, Morningstar DBRS estimated cumulative gross collections for the same period of GBP 36.3 million at the A (high) (sf) stressed scenario. Therefore, as of October 2024, the transaction was performing above Morningstar DBRS' initial stressed expectations.

The legal terms applicable to this transaction do not envisage the servicer's obligation to submit an updated version of the business plan, and given that the current performance is aligned to the initial business plan expectations, the original assumptions are maintained. The AA (low) (sf) credit rating stress assumes a haircut of 34.6% to the servicer's initial business plan, considering future expected collections.

The Class A Notes may pass higher credit rating stress scenarios; however, Morningstar DBRS believes that higher credit ratings would not be commensurate with the transaction's risk at this time considering (1) the potential higher variability of nonperforming loans' cash flows, and (2) the continued leakage of available funds to the payment of Class B interests.

The transaction's final maturity is in November 2038.

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" (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 methodology consistently and conducted a review of the transaction in accordance with the surveillance section of the principal methodology.

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 the Issuer, Lowell Financial Ltd, and Citibank, N.A. These comprise, in addition to the information received at issuance, the investor report as of November 2024, the monthly servicer report as of October 2024, and the monthly loan-by-loan report as of October 2024.

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 20 December 2023, when Morningstar DBRS assigned an A (high) (sf) credit rating with a Stable trend to the Class A Notes.

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 (the base case):
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a confirmation on the Class A Notes at AA (low) (sf).
-- Morningstar DBRS concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a downgrade on the Class A Notes to A (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.

This credit rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Sebastiano Romano, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 20 December 2023

DBRS Ratings Limited
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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 Nonperforming and Reperforming Loans Securitisations (19 November 2024), https://dbrs.morningstar.com/research/443201
-- Master European Structured Finance Surveillance Methodology (19 November 2024), https://dbrs.morningstar.com/research/443204
-- Legal and Derivative Criteria for European Structured Finance Transactions (19 November 2024), https://dbrs.morningstar.com/research/443196
-- Rating European Consumer and Commercial Asset-Backed Securitisations (18 September 2024), https://dbrs.morningstar.com/research/439583
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024), https://dbrs.morningstar.com/research/439571
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2024), https://dbrs.morningstar.com/research/439913
-- 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.