DBRS Morningstar Assigns Ratings to aZul Master Credit Cards DAC Series 2020-1

DBRS Ratings Limited (DBRS Morningstar) assigned ratings to the notes issued by aZul Master Credit Cards DAC (the Issuer) as follows:

-- Series 2020-01, Class A Notes at A (high) (sf)
-- Series 2020-01, Class C Notes at BB (sf)

The rating of the Class A Notes addresses timely payment of scheduled interest and ultimate repayment of principal by the legal final maturity date. The rating of the Class C Notes addresses ultimate payment of interest and ultimate repayment of principal by the legal final maturity date.

DBRS Morningstar does not rate the seller interest credit facility (SICF).

DBRS Morningstar based its ratings on information provided by the Issuer and its agents as of the date of this press release.

The rated notes are backed by an initial portfolio of approximately EUR 295 million of credit card receivables acquired (Ruby portfolio) or granted (core portfolio) by WiZink Bank S.A. (WiZink or the seller) to individuals in Spain. WiZink is also the initial servicer. As the Ruby portfolio is in run-off, the securitised pool is expected to migrate over time toward the core portfolio, a large portion of which is currently funded in WiZink Master Credit Cards, Fondo de Titulización.

The ratings are based on the following analytical considerations:

--The transaction’s capital structure including the form and sufficiency of available credit enhancement to support DBRS Morningstar’s expectation of charge-off, principal payment, and yield rates under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the rated notes.
-- The seller’s capabilities with respect to originations, underwriting, and servicing.
-- An operational risk review of the seller, which DBRS Morningstar deems to be an acceptable servicer.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The credit quality and diversification of the collateral and historical and projected performance of the securitised portfolio.
--The sovereign rating of the Kingdom of Spain, currently rated A (high) with a Stable trend by DBRS Morningstar.
-- The general consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology (except for the transaction governance issue discussed in ESG Considerations section below).

TRANSACTION STRUCTURE
Credit enhancement available to the rated notes during the amortisation period consists of subordination of the junior notes and SICF note, potential overcollateralisation, and excess spread.

An amortising Class A general reserve for liquidity purposes can be used to cover senior fees and any interest shortfall on the Class A Notes of the entire programme but is not meant for providing credit enhancement. The general reserve was funded to its target level of EUR 2,696,400 at closing, equal to 1.2% of the initial Class A Notes balance.

As both the underlying receivables and the notes carry fixed rates, there is limited risk of interest rating mismatch.

COUNTERPARTIES
Société Générale S.A. (Spanish branch) is the account bank for the transaction. The account bank replacement trigger of BBB (high) and the downgrade provisions outlined in the transactions’ documents are consistent with DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology for the rating on the Class A Notes.

PORTFOLIO ASSUMPTIONS

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and adverse financial impact on many borrowers. DBRS Morningstar anticipates that delinquencies would continue to arise, and payment and yield rates would remain subdued in the coming months for many credit card portfolios.

The total payment rates of the core portfolio have been largely stable around 14%-16% over the reported period until March 2020 while the Ruby portfolio experienced noticeably lower levels around 7%-9%. The most recent performance in May 2020 shows a principal payment rate of 7.1%, after a record low level of 6.5% due to the coronavirus impact. Based on the analysis of historical data, macroeconomic factors, and the portfolio-specific coronavirus adjustments, DBRS Morningstar set the expected monthly principal payment rate at 9.75%.

The portfolio yield is largely stable over the reported period. There are no major differences between the cash interest yields between Ruby and the core portfolios. However, the recent Spanish supreme court ruling on the usury rates exposes the transaction to yield uncertainty and potential set-off risk. DBRS Morningstar elected to set the expected cash interest yield at 18.5%, reflecting the observed recent trend, potential yield compression due to the usury rate constraint.

As the Ruby portfolio is in run-off, the charge-off rates are expected to increase continuously due to the declining portfolio balances. the reported historical charge-off rates of the core portfolio tend to be volatile and increasing without clear, stabilising trends, DBRS Morningstar used the arrears roll rates to assess the migration of delinquent balances and eventual charge-offs. Based on the analysis of delinquency trends, the expected future inflows of receivables in arrears, macroeconomic factors, the portfolio-specific adjustment due to the coronavirus impact and the positive selection of eligible assets, the expected charge-off rate is set at 12.5%.

The portfolio asset assumptions above also take into consideration of the migration of the securitised pool to the core portfolio over the next two years.

DBRS Morningstar analysed the transaction structure in its proprietary cash flow tool.

COVID-19 CONSIDERATIONS

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that payment holidays and delinquencies may arise in the coming months for many ABS, some meaningfully. The rating/ratings is/are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

The DBRS Morningstar Sovereign group released on 16 April 2020 a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 22 July 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 8 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the DBRS Morningstar-rated ABS transactions in Europe. For more details, please see:https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and COVID-19, please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
DBRS Morningstar considers some unusual aspects of general eligibility criteria and related representations and warranties given by the seller to the Issuer regarding the compliance with law (specifically, an usury law carve-out) to have a negative rating impact.

In DBRS Morningstar’s view, the legal and regulatory risks arising from the non-standard eligibility criterion fall under the ‘transaction governance’ in the environmental, social, and governance (ESG) analytical framework for structured finance transactions.

The A (high) (sf) rating assigned to the Class A notes is, consequently, one notch lower than the level implied by the cash flow results. The rating of Class C Notes, on the other hand, is not impacted by the ESG considerations.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Rating European Consumer and Commercial Asset-Backed Securitisations” (13 January 2020).

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.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.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.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings received from the arranger, Société Générale S.A., include monthly historical dynamic data from June 2007 to May 2020 for the seller’s entire managed book in respect of receivables balances, monthly payment rates, charge-offs, yields, delinquencies, and purchase rates.

DBRS Morningstar also received stratification tables in relation to the collateral pool as of 21 July 2020.

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

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 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.

These ratings concern newly issued financial instruments. This is the first DBRS Morningstar rating on these financial instruments.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies is available at www.dbrsmorningstar.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 ratings:
-- Expected Charge-Off Rate: 12.5%
-- Expected Principal Payment Rate: 9.75%
-- Expected Yield Rate: 18.5%

-- Scenario 1: a 25% increase in the expected Charge-Off Rate
-- Scenario 2: a 25% decrease in the expected Principal Payment Rate
-- Scenario 3: a 25% decrease in the expected Yield Rate
-- Scenario 4: a 15% increase in the expected Charge-Off Rate, 15% decrease in the expected Principal Payment Rate and 15% decrease in the expected Yield Rate

DBRS Morningstar concludes that the expected ratings under the four stress scenarios will be:
-- Class A Notes: A (sf), A (sf), A (high) (sf), A (low) (sf)
-- Class C Notes: B (high) (sf), BB (low) (sf), B (high) (sf), B (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 U.S. regulations only.

Lead Analyst: Kevin Chiang, Senior Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 23 July 2020

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

-- Rating European Consumer and Commercial Asset-Backed Securitisations (13 January 2020),
https://www.dbrsmorningstar.com/research/355533/rating-european-consumer-and-commercial-asset-backed-securitisations
-- Rating European Structured Finance Transactions Methodology (21 July 2020),
https://www.dbrsmorningstar.com/research/364305/rating-european-structured-finance-transactions-methodology
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020), https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.

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

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