DBRS Morningstar Confirms Rating on PCL Funding I Limited Following Restructure

DBRS Ratings Limited (DBRS Morningstar) confirmed the AAA (sf) rating on the Class A Eligible Trust Notes (ETN) of the Series 2012 Variable Funding Notes (VFN) issued by PCL Funding I Limited (the Issuer). The rating on the Class A ETN addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:

-- A structural amendment to the transaction, in the form of amendments to the VFN transaction documents and Asset Trust transaction documents, executed on 25 October 2019.
-- 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 Class A ETN to cover the expected losses at the AAA (sf) rating level.

The assets securing the Class A ETN are a revolving portfolio of commercial and consumer financing agreements originated by Premium Credit Limited (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 Class A ETN is held by several committed lenders, and together with the unrated Class B ETN, forms the Senior ETN issued by PCL Funding I Limited, which acts as a warehouse facility for the benefit of PCL.

DBRS Morningstar notes that the asset trust amendments, although signed on 25 October 2019, will only be effective upon either the refinancing of the debts issued by PCL Funding II PLC and PCL Funding III PLC (both of which are currently rated by DBRS Morningstar), or the date on which the parties to the relevant transaction documents consent to such amendments – subject in both cases to satisfaction of the Rating Agency Condition. DBRS Morningstar has accounted for this in its analysis of the amendments.

VFN AMENDMENTS
-- The committed revolving period for the ETN has been extended to October 2022. The legal final maturity of the ETN is defined as the date falling two years after termination of the revolving period, and as such has been implicitly extended to October 2024.
-- The Class A ETN facility limit increased to GBP 804.0 million and the Class B ETN facility limit increased to GBP 22.0 million
-- The Class A ETN applicable margin increased by 0.05% both prior to and during the amortisation period.
-- The concentration limit in place for long-term assets has been redefined to reference a remaining term of greater than 12 months.
-- The concentration limit in place for non-refundable receivables has been amended to 32.75%.

ASSET TRUST AMENDMENTS
-- The definition of eligible receivables has been extended to cover receivables which were delinquent at the time of transfer to the asset trust but have since paid at least two instalments.
-- Minor amendments have been made to the grace periods for daily and weekly reporting.
-- The definition of excess spread has been amended to reference gross excess spread prior to any adjustment for defaulted amounts. The performance trigger level related to average excess spread has been increased to 6.25%.

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 to 14.4% and 18.6%, respectively. DBRS Morningstar’s analysis reflects an assessment of the worst-case collateral pool in accordance with the concentration limits and incorporates default risks related to the obligor, insurance carrier and/or intermediary.

CREDIT ENHANCEMENT
The Class A ETN continues to be subject to an advance rate of 88% and additionally benefits from a reserve fund, sized to cover nine weeks of senior fees and stressed interest payments on the Senior ETN.

HSBC Bank plc acts as the asset trust and VFN issuer account bank for the 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 rating assigned to the Class A ETN, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

The transaction structure was 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 rating 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 transaction, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

DBRS Morningstar has conducted a review of the transaction legal documents provided in the context of the aforementioned amendment. The other transaction legal documents have remained unchanged since the most recent rating action and as such, a review has not been conducted.

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 this rating include portfolio and performance data provided by Lloyds Bank plc in its capacity as VFN Administrative Agent. In particular, DBRS Morningstar received historical termination and recovery data relating to PCL originations by semiannual 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 rating, DBRS Morningstar was 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 this rating 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 action on this transaction took place on 10 October 2018, when DBRS Morningstar confirmed its rating on the Class A ETN at AAA (sf).

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.
-- The base case PD and LGD of the current pool of loans for the Issuer 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 Class A ETN would be expected to fall to A (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A ETN would be expected to fall to A (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A ETN would be expected to fall to BBB (sf).

Class A ETN Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (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 A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (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 Date: 31 October 2012

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom

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 Securities
-- 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.