DBRS Morningstar Takes Rating Actions on Two Cardiff Auto Receivables Securitisation Transactions

DBRS Ratings Limited (DBRS Morningstar) took the following rating actions on the notes issued by Cardiff Auto Receivables Securitisation 2018-1 plc (CARS 2018-1) and Cardiff Auto Receivables Securitisation 2019-1 plc (CARS 2019-1):

CARS 2018-1:
-- Class A Notes confirmed at AAA (sf)

CARS 2019-1:
-- Class A Notes confirmed at AAA (sf)
-- Class B Notes upgraded to AA (low) (sf) from A (high) (sf)

The ratings address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity dates in December 2026 (CARS 2018-1) and September 2025 (CARS 2019-1).

The rating actions follow an annual review of the transactions and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the November 2020 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the rated notes to cover the expected losses at their respective rating levels;
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

CARS 2018-1 and CARS 2019-1 are securitisations of auto loan receivables related to hire purchase and personal contract purchase (PCP) agreements for new and used vehicles granted by Black Horse Limited (Black Horse) to private borrowers in the United Kingdom. PCP agreements afford the borrower the option to turn in the purchased vehicle at contract maturity as an alternative to making a final balloon payment, exposing the issuers to residual value (RV) risk.

CARS 2018-1 closed in December 2018 with an initial portfolio of GBP 2.85 billion and included a 12-month revolving period, which ended on the December 2019 payment date. CARS 2019-1 closed in December 2019 with an initial portfolio of GBP 610.1 million and no revolving period.

PORTFOLIO PERFORMANCE
CARS 2018-1: As of the November 2020 payment date, loans 30 to 60 days and 60 to 90 days in arrears represented 0.3% and 0.1% of the outstanding portfolio balance, while loans greater than 90 days in arrears represented 0.2%. Gross cumulative credit defaults, cumulative voluntary terminations (VTs), and vehicles returned by the borrower at the maturity of PCP agreements amounted to 1.0%, 0.8%, and 2.4% of the total balance of receivables purchased since closing, respectively, with cumulative recoveries of 38.8%, 73.3%, and 78.5% to date, respectively.

CARS 2019-1: As of the November 2020 payment date, loans 30 to 60 days in arrears represented 0.1% of the outstanding portfolio balance, while loans greater than 60 days in arrears were minimal. Gross cumulative credit defaults amounted to 0.4% of the initial portfolio balance, with cumulative recoveries of 61.5% to date. VTs and PCP handbacks have not been significant to date, given the relatively low seasoning of the portfolio.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pools of receivables and updated its base case PD and LGD assumptions as follows:
-- For CARS 2018-1, the base case PD and LGD assumptions were updated to 6.5% and 33.9%, respectively.
-- For CARS 2019-1, the base case PD and LGD assumptions were updated to 6.5% and 24.2%, respectively.

The transaction is subject to VT risk, as under the UK Consumer Credit Act, the borrower has the right to terminate a consumer loan agreement after having paid at least half of the total amount payable, provided that the vehicle returns to the finance provider in good condition. As of 30 September 2020, 73.9% of PCP receivables in CARS 2018-1 and 73.2% in CARS 2019-1 had an original term of four years, which poses an increased VT risk, as shown in DBRS Morningstar’s following commentary: https://www.dbrsmorningstar.com/research/326850/uk-autos-elongated-pcp-terms-increase-the-risk-of-voluntary-termination. DBRS Morningstar factored this risk into its base case PD and LGD assumptions.

CREDIT ENHANCEMENT
The subordination of the respective junior obligations provides credit enhancement to the rated notes. The transactions continue to deleverage steadily, resulting in increased credit enhancement available to the rated notes.

As of the November 2020 payment date, credit enhancement to the Class A Notes in CARS 2018-1 increased to 46.0% from 25.6% at the initial rating date and at the time of the last annual review, following the end of the revolving period in December 2019 and the amortisation of the Class A Notes since then.

As of the November 2020 payment date, the credit enhancement to the Class A and Class B Notes in CARS 2019-1 increased to 41.9% and 24.8%, respectively, from 30.5% and 18.0%, respectively, at the initial rating date.

The transactions benefit from liquidity support provided by cash reserves funded at closing through subordinated loans granted by Black Horse. The reserves are nonamortising and were funded to an amount equal to 1.5% of the respective initial portfolio balance – GBP 42.75 million for CARS 2018-1 and GBP 9.15 million for CARS 2019-1. The reserves are available to cover senior fees and expenses, senior swap payments (for CARS 2019-1), and interest payments on the rated notes. As of the November 2020 payment dates, the reserves were at their respective target levels.

CARS 2019-1 additionally benefits from an RV Top-Up reserve fund, funded at closing to GBP 79.6 million through a subordinated loan granted by Black Horse. This reserve is only made available to the issuer to the extent that sales proceeds from VTs and PCP vehicle returns are below 21% of the contractual guaranteed future value (GFV) on an individual vehicle basis. The reserve has a target balance equal to 21% of the aggregate final balloon amounts in the portfolio, and as of the November 2020 payment date was equal to GBP 65.2 million.

Lloyds Bank plc acts as the account bank for the transactions. Based on the account bank reference rating of Lloyds Bank plc at AA, one notch below the DBRS Morningstar Long Term Critical Obligations Rating of AA (high), the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structures, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

The transaction structures were analysed in Intex DealMaker.

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 delinquencies may increase in the coming months for many ABS transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For these transactions, DBRS Morningstar applied an additional haircut to its base case recovery rates. The transactions do not contain any receivables benefitting from COVID-19 related payment holidays, as any such loans are considered non-permitted variations and are repurchased from the transactions by the seller.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The 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 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 Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 British pound sterling unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (22 April 2020). DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

A review of the transactions’ legal documents was not conducted as the legal documents have remained unchanged since the most recent rating actions.

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: https://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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include investor reports and loan-level data provided by Lloyds Bank plc on behalf of Black Horse Limited.

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 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 action on CARS 2018-1 took place on 4 December 2019, when DBRS Morningstar confirmed its rating on the Class A Notes at AAA (sf).

The last rating action on CARS 2019-1 took place on 4 December 2019, when DBRS Morningstar finalised its provisional ratings on the Class A and Class B Notes at AAA (sf) and A (high) (sf), respectively.

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

-- DBRS Morningstar expected a lifetime base case PD, LGD, and RV haircut for the pools 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.
-- CARS 2018-1: the base case PD and LGD of the current pool of loans are 6.5% and 33.9%, respectively. The RV haircut is 41.2% at the AAA (sf) rating level.
-- CARS 2019-1: the base case PD and LGD of the current pool of loans are 6.5% and 24.2%, respectively. The RV haircuts are 45.2% and 34.5% at the AAA (sf) and AA (low) (sf) rating levels, respectively.
-- The risk sensitivity overview below illustrates the ratings expected if the PD, LGD, and the RV haircut increase by a certain percentage over the base case assumption. For example, if both the PD and LGD increase by 50%, the rating on the CARS 2018-1 Class A Notes would be expected to decrease to AA (sf), ceteris paribus. If the RV haircut increases by 50%, the rating on the CARS 2018-1 Class A Notes would be expected to remain at AAA (sf), ceteris paribus. Furthermore, if the PD, LGD, and RV haircut all increase by 50%, the rating on the CARS 2018-1 Class A Notes would be expected to decrease to AA (sf).

CARS 2018-1 Class A Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of AAA (sf)
-- 50% increase in PD and LGD, expected rating of AA (sf)
-- 25% increase in RV haircut, expected rating of AAA (sf)
-- 50% increase in RV haircut, expected rating of AAA (sf)
-- 25% increase in PD and LGD and 25% increase in RV haircut, expected rating of AAA (sf)
-- 25% increase in PD and LGD and 50% increase in RV haircut, expected rating of AA (high) (sf)
-- 50% increase in PD and LGD and 25% increase in RV haircut, expected rating of AA (sf)
-- 50% increase in PD and LGD and 50% increase in RV haircut, expected rating of AA (sf)

CARS 2019-1 Class A Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and LGD, expected rating of AA (sf)
-- 25% increase in RV haircut, expected rating of AAA (sf)
-- 50% increase in RV haircut, expected rating of AA (high) (sf)
-- 25% increase in PD and LGD and 25% increase in RV haircut, expected rating of AA (sf)
-- 25% increase in PD and LGD and 50% increase in RV haircut, expected rating of AA (sf)
-- 50% increase in PD and LGD and 25% increase in RV haircut, expected rating of AA (low) (sf)
-- 50% increase in PD and LGD and 50% increase in RV haircut, expected rating of A (high) (sf)

CARS 2019-1 Class B Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of A (sf)
-- 50% increase in PD and LGD, expected rating of A (low) (sf)
-- 25% increase in RV haircut, expected rating of A (high) (sf)
-- 50% increase in RV haircut, expected rating of A (low) (sf)
-- 25% increase in PD and LGD and 25% increase in RV haircut, expected rating of A (low) (sf)
-- 25% increase in PD and LGD and 50% increase in RV haircut, expected rating of BBB (high) (sf)
-- 50% increase in PD and LGD and 25% increase in RV haircut, expected rating of BBB (high) (sf)
-- 50% increase in PD and LGD and 50% increase in RV haircut, 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:
https://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: Natalia Coman, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 4 December 2018 (CARS 2018-1); 5 November 2019 (CARS 2019-1)

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

The rating methodologies used in the analysis of these transactions can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (22 April 2020),
https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology.
-- Rating European Structured Finance Transactions Methodology (21 July 2020),
https://www.dbrsmorningstar.com/research/364305/rating-european-structured-finance-transactions-methodology.
-- Rating European Consumer and Commercial Asset-Backed Securities (3 September 2020), https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- 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 (30 September 2020), https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020), https://www.dbrsmorningstar.com/research/367092/derivative-criteria-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 https://www.dbrsmorningstar.com/research/278375.

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