DBRS Morningstar Confirms Ratings on PCL Funding II PLC and PCL Funding III PLC

DBRS Ratings Limited (DBRS Morningstar) confirmed the following ratings on the notes issued by PCL Funding II PLC (PCL II) and PCL Funding III PLC (PCL III):

PCL FUNDING II PLC
-- Series 2017-1 Class A Notes confirmed at AAA (sf)
-- Series 2017-1 Class B Notes confirmed at A (high) (sf)
-- Series 2017-1 Class C Notes confirmed at BBB (high) (sf)

PCL FUNDING III PLC
-- Series 2017-2 Class A Notes confirmed at AAA (sf)
-- Series 2017-2 Class B Notes confirmed at A (high) (sf)
-- Series 2017-2 Class C Notes confirmed at BBB (high) (sf)

The ratings on the notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date.

The confirmations follow annual reviews of the transactions and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, losses, payment rate and excess spread.
-- Updated probability of default (PD), loss given default (LGD) and expected loss assumptions for the receivables.
-- Current available credit enhancement to the notes to cover the expected losses at their respective rating levels.

The two transactions form part of Premium Credit Limited (PCL)’s securitisation programme, which is structured as a master trust. The assets securing the notes are a revolving portfolio of commercial and consumer financing agreements originated by PCL primarily in the United Kingdom, and for the purpose of financing non-life insurance premiums, sport and leisure membership fees, professional membership fees and private school tuition. The revolving periods for PCL II and PCL III are scheduled to end in June 2020 and June 2021, respectively, with their corresponding legal final maturity dates following two years later in each case.

On 18 September 2019, DBRS Morningstar transferred the ongoing coverage of the ratings assigned to the Issuer to DBRS Ratings Limited from DBRS, Inc. The lead analyst responsibilities for this transaction have been transferred to Andrew Lynch.

DBRS Ratings Limited is registered with the European Securities and Markets Authority (ESMA) under Regulation (EC) No. 1060/2009 on Credit Rating Agencies, as amended, and is a registered Nationally Recognized Statistical Rating Organization (NRSRO) affiliate in the United States and Designated Rating Organization (DRO) affiliate in Canada. DBRS, Inc. is a registered NRSRO in the United States and DRO affiliate in Canada.

PORTFOLIO PERFORMANCE
As of the reporting date on 11 October 2019, the 13-week average delinquency, default and payment rate ratios were 1.2%, 1.0% and 4.7%, respectively. The delinquency and default ratios are below their respective performance trigger levels of 3.75% and 2.25%, respectively, while the payment rate ratio is above its performance trigger level of 3.5%.

PORTFOLIO ASSUMPTIONS
DBRS Morningstar conducted an analysis of the revolving pool of receivables and has updated its base case PD and LGD assumptions for PCL II to 14.4% and 20.3%, respectively. The base case PD and LGD assumptions for PCL III have been updated to 14.4% and 18.6%, respectively. DBRS Morningstar’s analysis reflects assessments of the worst-case collateral pools in accordance with the concentration limits and incorporates default risks related to the obligor, insurance carrier and/or intermediary.

CREDIT ENHANCEMENT
Credit enhancement to the Series 2017-1 Class A, B and C Notes issued by PCL II are 15.3%, 9.8% and 6.0%, respectively. Credit enhancement to the Series 2017-2 Class A, B and C Notes issued by PCL III are 15.0%, 9.3% and 5.5%, respectively. In each case, credit enhancement is provided by subordination of junior classes.

The rated notes in each transaction additionally benefit from reserve funds, sized to cover three months of senior fees and stressed interest payments.

HSBC Bank plc acts as the asset trust and issuer account bank for each transaction. Based on the DBRS Morningstar private rating of HSBC Bank plc, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Class A Notes in each transaction, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

The transaction structures were analysed in Da Vinci, DBRS Morningstar’s proprietary cash flow engine.

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

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology”. DBRS Morningstar 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 transactions, the analysis continues to be based on the worst-case 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 rating action.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings includes portfolio and performance data provided by Lloyds Bank plc in its capacity as asset trust facilitator, as well as monthly investor reports provided by HSBC Bank plc. In particular, DBRS Morningstar received historical termination and recovery data relating to PCL originations by semi-annual vintage and split by business line, dating back to 2007.

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

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

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating actions on PCL II and PCL III took place on 15 November 2018, when DBRS Morningstar confirmed its ratings on the Class A, B and C Notes in each transaction.

The lead analyst responsibilities for this transaction have been transferred to Andrew Lynch.

Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies is available at www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

-- DBRS Morningstar 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.

-- For PCL II, the base case PD and LGD of the current pool of loans are 14.4% and 20.3%, respectively
-- For PCL III, the base case PD and LGD of the current pool of loans are 14.4% and 18.6%, respectively.

-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Series 2017-1 Class A Notes would be expected to fall to AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Series 2017-1 Class A Notes would be expected to fall to AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Series 2017-1 Class A Notes would be expected to fall to A (low) (sf).

PCL II:
Series 2017-1 Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

Series 2017-1 Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

Series 2017-1 Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BBB (low) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (low) (sf)

PCL III:
Series 2017-2 Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

Series 2017-2 Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

Series 2017-2 Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BBB (low) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (low) (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Andrew Lynch, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Dates:
PCL II: 12 May 2017
PCL III: 30 October 2017

DBRS Ratings Limited
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Registered and incorporated under the laws of England and Wales: Company No. 7139960.

Ratings issued and monitored by DBRS Ratings Limited are noted as such on the DBRS Morningstar website; however, the language and related statements in previously published press releases in respect of the relevant ratings will not be changed retroactively and will remain as part of DBRS Morningstar’s historical record. The ratings issued and monitored in the European Union are marked as such in their respective rating tables. As part of this transfer, these markings will remain unchanged on all active ratings related to the Issuer.

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Rating CLOs Backed by Loans to European SMEs
-- Rating CLOs and CDOs of Large Corporate Credit
-- Interest Rate Stresses for European Structured Finance Transactions

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.

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