Morningstar DBRS Upgrades and Confirms Credit Ratings on Azure Finance No. 3 plc

DBRS Ratings Limited (Morningstar DBRS) took the following credit rating actions on the notes (collectively, the Rated Notes) issued by Azure Finance No.3 plc (the Issuer):
-- Class A Notes confirmed at AAA (sf)
-- Class B Notes upgraded to AAA (sf) from AA (high) (sf)
-- Class C Notes upgraded to AA (low) (sf) from A (high) (sf)
-- Class D Notes confirmed at A (low) (sf)
-- Class E Notes confirmed at BBB (sf)
-- Class F Notes confirmed at BB (high) (sf)
-- Class X Notes confirmed at B (low) (sf)

The credit ratings on the Class A Notes and Class B Notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in June 2034. The ratings on the Class C, Class D, Class E, and Class F Notes address the ultimate repayment of interest and principal by the legal maturity date, and the timely payment of interest while the senior-most class outstanding. The rating on the Class X Notes addresses the ultimate payment of interest and principal by the legal maturity date.

CREDIT RATING RATIONALE
The credit rating actions follow a review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the February 2025 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the receivables; and
-- Current available credit enhancement to the Rated Notes to cover the expected losses at their respective credit rating levels.

The transaction is a securitisation backed by receivables related to hire-purchase (HP) auto loans granted by Blue Motor Finance Limited to borrowers in England, Wales, and Scotland. The underlying motor vehicles related to the finance contracts consist of new and used passenger and light-commercial vehicles and motorcycles. Blue Motor Finance Limited also services the receivables.

PORTFOLIO PERFORMANCE
As of the February 2025 payment date, loans two to three months in arrears and loans more than three months in arrears represented 1.4% and 0.0% of the outstanding portfolio balance, respectively. The cumulative credit default ratio was 6.1% of the original balance. Cumulative voluntary terminations amounted to 2.3% of the original balance.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted an analysis of the remaining receivables and updated its expected PD and LGD assumptions to 10.9% and 46.8%, respectively.

CREDIT ENHANCEMENT
The subordination of the respective junior obligations provides credit enhancement (CE) to the rated notes. The transaction has deleveraged steadily, resulting in increased CE available to the notes.

As of the February 2025 payment date, the CE on the rated notes had increased as follows over the last year:
-- CE on the Class A Notes to 75.5% from 40.1%,
-- CE on the Class B Notes to 43.8% from 23.3%,
-- CE on the Class C Notes to 22.3% from 11.8%,
-- CE on the Class D Notes to 11.5% from 6.1%%,
-- CE on the Class E Notes to 4.4% from 2.3%, and
-- CE on the Class F Notes to 0.06% from 0.03%.

The structure benefits from senior reserve fund, which was fully funded at closing. The target size of the senior reserve fund is 2.2% of the Class A and Class B Notes' principal amount outstanding. The senior reserve fund required amount is subject to a floor of 0.5% of the aggregate outstanding principal balance of the purchased receivables as at the closing date and its currently at its target of GBP 1.2 million. The senior reserve fund forms part of the available revenue receipts and is available to cover senior fees and interest on the Class A and Class B Notes.

Upon the redemption of the Class B Notes, part of the released funds will be applied to create the junior reserve fund, with a required balance of 0.2% of the original collateral balance. The junior reserve fund will also form part of the available revenue receipts and will be available to cover senior fees and interest on the Class C, Class D, Class E, and Class F Notes.

Citibank N.A., London Branch (Citibank) acts as the account bank for the transaction. Based on Morningstar DBRS' private credit rating on Citibank, 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 and Derivative Criteria for European Structured Finance Transactions" methodology.

BNP Paribas SA (BNPP) acts as the swap counterparty for the transaction. Morningstar DBRS' public Long Term Critical Obligations Rating of AA (high) on BNPP is above the first rating threshold as described in Morningstar DBRS' "Legal and Derivative 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

Environmental (E) Factors
The portfolio has a relatively high exposure to older diesel engine vehicles that are unlikely to be classified as Euro 6. At closing, Morningstar DBRS estimated that up to 26.5% of receivables relate to diesel vehicles first registered prior to 2016. Morningstar DBRS considers that risks related to greenhouse gas emissions may be associated with future restrictions on these vehicle types, including bans and additional taxes. These risks may lead to changes in expected vehicle valuations and borrower behaviors that could subsequently influence future default, recovery, and prepayment activity. Morningstar DBRS considers this exposure to be a relevant environmental factor within its credit analysis.

There were no 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 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 ratings is: "Master European Structured Finance Surveillance Methodology" (4 February 2025) https://dbrs.morningstar.com/research/447080.

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 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 Citibank N.A. 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 ratings, 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.

The last credit rating action on this issuer took place on 20 March 2024, when Morningstar DBRS confirmed its credit ratings on the Class A and Class X Notes at AAA (sf) and B (low) (sf), respectively, and upgraded its credit ratings on the Class B, Class C, Class D, Class E and Class F Notes to AA (high) (sf), A (high) (sf), A (low) (sf), BBB (sf) and BB (high) (sf) from AA (sf), A (sf), BBB (sf), BB (sf) and B (low) (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 (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 pool of loans for the Issuer are 10.9% and 46.8%, 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 credit rating of AAA (sf)
-- 50% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD, expected credit rating of AAA (sf)
-- 50% increase in PD, expected credit rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)

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

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

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

Class E Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of BB (high) (sf)
-- 50% increase in LGD, expected credit rating of BB (high) (sf)
-- 25% increase in PD, expected credit rating of BB (high) (sf)
-- 50% increase in PD, expected credit rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of BB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of BB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of B (sf)

Class F Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of BB (low) (sf)
-- 50% increase in LGD, expected credit rating of B (low) (sf)
-- 25% increase in PD, expected credit rating of BB (low) (sf)
-- 50% increase in PD, expected credit rating of B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating below B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating below B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating below B (low) (sf)

Class X Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating below B (low) (sf)
-- 50% increase in LGD, expected credit rating below B (low) (sf)
-- 25% increase in PD, expected credit rating below B (low) (sf)
-- 50% increase in PD, expected credit rating below B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating below B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating below B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating below B (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating 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, Vice President
Rating Committee Chair: Alfonso Candelas, Associate Managing Director
Initial Rating Date: 22 February 2021

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.

-- Master European Structured Finance Surveillance Methodology (4 February 2025), 
https://dbrs.morningstar.com/research/447080
-- 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
-- Rating European Consumer and Commercial Asset-Backed Securitisations (18 September 2024), 
https://dbrs.morningstar.com/research/439583
-- Rating European Structured Finance Transactions Methodology (19 November 2024), 
https://dbrs.morningstar.com/research/443199
-- 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.