Morningstar DBRS Assigns Provisional Credit Ratings to Small Business Origination Loan Trust 2025-1 DAC Notes

DBRS Ratings Limited (Morningstar DBRS) assigned provisional credit ratings to the notes to be issued by Small Business Origination Loan Trust 2025-1 DAC (the Issuer) as follows:

-- Class B Notes at (P) BBB (sf)
-- Class C Notes at (P) BB (sf)

The provisional credit ratings on the Class B and Class C Notes (together, the Rated Notes) address ultimate payment of interest, but the timely payment of scheduled interest when they are the most senior class of notes and ultimate repayment of principal on or before the legal final maturity date (expected to be in December 2036).

The Issuer will also issue the Class A Loan Note, the Class Z Notes, and the Class R Notes, which Morningstar DBRS does not rate.

The transaction is a cash flow securitisation of a portfolio of largely unsecured loans originated through the Funding Circle Ltd. (Funding Circle) lending platform to UK-based small and medium sized enterprises (SMEs) and sole traders. All loans follow a French amortisation schedule, have a fixed interest rate, and pay monthly instalments.

CREDIT RATING RATIONALE
Morningstar DBRS determined its provisional credit ratings based on the principal methodology and the following considerations:
-- The nature of the portfolio, which will be static and consists of unsecured loans with a maximum maturity of six years. All loans are amortising on a monthly basis following a French amortisation profile, contributing to a short weighted-average life (WAL) of 2.35 years.
-- The transaction capital structure's features, that provides for a pro-rata amortisation until certain sequential switch events occur.
-- The transaction benefits from an interest rate swap which limits the interest rate risk between the floating-rate notes and the portfolio comprised solely of fixed-rate loans.
-- The transaction benefit from a back-up servicer which reduces servicer continuity risk.
-- The portfolio benefits from significant excess spread which can be used to cure any principal shortfalls via a principal deficiency ledger mechanism. The provisional portfolio's weighted average interest rate stood at 15.35%.

TRANSACTION STRUCTURE
The transaction is static and there is no requirement for the Issuer to purchase new assets or to replace any asset comprised in the securitised portfolio. The transaction will amortise pro rata until certain sequential switch events occur. Thereafter the amortisation will be sequential. Before the occurrence of an enforcement event, the transaction allocates collections in separate interest and principal priorities of payments. Upon the occurrence of an enforcement event, there will be one priority of payments for both principal and interest. The transaction incorporates two reserves funded at closing. The cash reserve provides both liquidity and credit support in accordance with the applicable priority of payments and will amortise in line with the outstanding principal balance of the Notes. The liquidity reserve will be available to cover any interest shortfalls on the most senior class of Notes outstanding from time to time.

Morningstar DBRS considers the interest rate risk for the transaction to be limited as an interest rate swap is in place to reduce the mismatch between the fixed-rate collateral and the Rated Notes.

PORTFOLIO ASSUMPTIONS
The provisional portfolio consists of 5,244 loans granted to 5,169 borrowers. The average outstanding principal balance is GBP 73,352 and the maximum individual borrower concentration is 0.16% of the portfolio. The top 5 and 10 obligors represent 0.72% and 1.37% of the portfolio balance, respectively.

The top three regions for borrower concentration are South-East, London and Midlands, representing 24.5%, 15.4% and 15.2% of the portfolio balance, respectively.

The historical data provided by Funding Circle reflects the portfolio composition which includes unsecured loans for which Funding Circle internally categorises borrowers into seven risk bands (A+, A, A2, B, B2, C and D). For the purpose of its analysis, Morningstar DBRS calculated the Probability of Defaults (PDs) for each risk band in order to capture any negative or positive pool selection. The assumed PDs for A+, A (including A2), B (including B2), C and D risk bands are 1.49%, 2.70%, 4.80%, 7.08% and 9.34%. A small subset of loans in the provisional portfolio (52 loans, representing 0.95% of the outstanding portfolio balance) were subject to forbearance measures which included payment grace periods with loan term extensions. In our analysis we considered these loans to have a 1 year PD of 22.3% (equivalent to a CCC rating) to reflect the higher risk associated with these borrowers.

Morningstar DBRS' credit rating on the Rated Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related interest payment amounts and the related class balances.

Morningstar DBRS' credit rating does not address nonpayment 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, AND 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 (13 August 2024) at https://dbrs.morningstar.com/research/437781.

Morningstar DBRS analysed the transaction structure in Proprietary Cash Flow Engine, considering the default rates at which the rated notes did not return all specified cash flows.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the credit ratings is: Rating CLOs Backed by Loans to European SMEs (19 November 2024), https://dbrs.morningstar.com/research/443198.

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.

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" (15 July, 2024) at https://dbrs.morningstar.com/research/436000.

The sources of data and information used for these credit ratings include Funding Circle and BNP Paribas.

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

Morningstar DBRS was not 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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned Rated Notes and may change or be different than the final credit rating assigned or may be discontinued. The assignment of the final credit ratings on the above-mentioned Rated Notes are subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalise the credit ratings.

These credit ratings concern expected-to-be-issued new financial instruments. These are the first Morningstar DBRS credit ratings on these financial instruments.

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 ratings, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the base case):

-- Probability of Default Rates Used: base case PD of 1.49%, 2.70%, 4.80%, 7.08%, and 9.34% for internal risk bands of A+, A (including A2), B (including B2), C and D, respectively and a PD of 22.3% for borrowers to whom a forbearance measure was granted, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: base case Recovery Rate of 32.0% at the BBB stress level, and 36.5% at the BB stress level, a 10% and 20% decrease in the base case recovery rate. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

Morningstar DBRS concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would each lead to (i) with regard to the Class B Notes, a downgrade to BB (high) (sf) and BBB (low) (sf), respectively, and (ii) with regard to the Class C Notes, a 20% increase of the base case PD would lead to a downgrade to BB (low) (sf), while a 20% decrease of the recovery rate would not lead to any downgrade.

A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a downgrade of the Class B Notes to BB (high) (sf) and of the Class C Notes to BB (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: Carlos Silva, Senior Vice President, Sector Lead, European Structured Credit Ratings
Rating Committee Chair: Christian Aufsatz, Managing Director, European Structured Finance Ratings
Initial Rating Date: 14 April 2025

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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 CLOs Backed by Loans to European SMEs and SME Diversity Model v.2.7.1.5 (19 November 2024), https://dbrs.morningstar.com/research/443198
-- Rating European Structured Finance Transactions (19 November 2024), https://dbrs.morningstar.com/research/443199
-- 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
-- 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 Risk 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.