Press Release

DBRS Morningstar Finalises Provisional Ratings on PCL Funding V PLC, Series 2021-1 Notes

Consumer Loans & Credit Cards

April 22, 2021

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the Series 2021-1 Notes (the Notes) issued by PCL Funding V PLC (the Issuer or PCL V):

-- GBP 256,500,000 Series 2021-1, Class A Notes rated AAA (sf)
-- GBP 18,000,000 Series 2021-1, Class B Notes rated A (high) (sf)
-- GBP 9,000,000 Series 2021-1, Class C Notes rated BBB (high) (sf)

DBRS Morningstar does not rate the Series 2021-1, Class D Notes also issued in this transaction.

The Series 2021-1 Notes comprises three rated classes of notes (Class A, Class B, and Class C; collectively, the Rated Notes) and the unrated noninterest bearing Class D Notes. The ratings address the timely payment of interest and the ultimate repayment of principal (in accordance with the terms of the notes) of the Rated Notes on or prior to the legal final maturity date.

Premium Credit Limited (PCL or the Originator) is an independent finance company providing nonlife insurance premium financing in the United Kingdom and Republic of Ireland. PCL also finances payments of annual fees, such as professional associations and memberships, as well as school fees. The main underlying source of funds to make payments on the Series 2021-1 Notes will be the collections received on a portfolio of advances made by PCL to fund insurance premia and other payment plan receivables, which will be purchased by the Asset Trustee on an ongoing basis.

PCL’s securitisation programme is structured as a master trust. The Series 2012 Variable Funding Note (VFN) is issued out of the PCL Funding I Limited special-purpose vehicle (SPV) (PCL I) and acts as PCL’s warehouse facility. Series 2017-2 and Series 2020-1 are issued out of the PCL Funding III PLC (PCL III) and PCL Funding IV PLC (PCL IV) SPVs, respectively, and are term ABS. The Issuer represents the fifth transaction to be included in the PCL master trust. Following the issuance of the 2021-1 Notes, the trust has four transactions outstanding: PCL I, PCL III, PCL IV, and PCL V. The ratings assigned to PCL Funding II PLC (the Series 2017-1 Issuer) were discontinued in June 2020 following the full repayment of the notes. PCL acts as the servicer for the asset pool with Link Financial Outsourcing Limited in place as Backup Servicer.

DBRS Morningstar based its ratings on a review of the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement.
-- Credit enhancement levels are sufficient to support DBRS Morningstar’s projected expected net losses under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay noteholders according to the terms of their investment. The breakeven rates for the interest rate stresses, currency stresses, and default timings were determined using DBRS Morningstar’s proprietary cash flow engine.
-- The presence of a backup servicer for the asset trust and its capabilities with respect to servicing.
-- The credit quality, diversification of the collateral, and historical and projected performance of the seller’s portfolio.
-- DBRS Morningstar’s sovereign rating on the United Kingdom of Great Britain and Northern Ireland at AA (high) with a Stable trend.
-- The transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting, and servicing practices.
-- The legal structure and presence of legal opinions are deemed consistent with the DBRS Morningstar “Legal Criteria for European Structured Finance Transactions” methodology.

The Rated Notes pay interest indexed to the daily-compounded Sterling Overnight Index Average (Sonia) plus a margin. This margin is expected to step up after the end of the reinvestment period (October 2023).

As of the last review, the three prior transactions are performing within DBRS Morningstar’s expectations. The Senior ETNs of Series 2012 Senior VFN is currently rated AAA (sf). The current ratings on the Series 2017-2 Notes and Series 2020-1 Notes are AAA (sf) for the Class A Notes, A (high) (sf) for the Class B Notes, and BBB (high) (sf) for the Class C Notes.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

The transaction structure was analysed in DBRS Morningstar’s proprietary cash flow engine, considering the default rates at which the Rated Notes did not return all specified cash flows.

The ratings are based on information provided to DBRS Morningstar by the Issuer and by its agents as of the date of this press release. The ratings have been finalised based upon review of final information, data, legal opinions, and the executed version of the governing transaction documents.

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 continue to increase in the coming months for many ABS transactions, some meaningfully. The ratings are based on additional analysis as a result of the global efforts to contain the spread of the coronavirus.

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 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-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.

For more information on DBRS Morningstar considerations for European ABS transactions and Coronavirus Disease (COVID-19), please see the following commentary: https://www.dbrsmorningstar.com/research/360734.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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

The principal methodology applicable to the ratings is: “Rating European Consumer and Commercial Asset-Backed Securities” (3 September 2020).

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

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 considers potential portfolio migration based on the replenishment criteria set forth in the transaction legal documents.

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 the ratings include performance and portfolio data relating to the receivables provided by the Originator, PCL, directly or through Lloyds Bank Corporate Markets plc as the arranger. DBRS Morningstar received vintage default, recovery, and net losses information split by product types and jurisdictions from 2007 to 2020. DBRS Morningstar also received stratification tables in relation to the loan pool as of 31 January 2021.

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

DBRS Morningstar was not supplied with one or more 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 a newly issued financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

This is the first rating action since the Initial Rating Date.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on 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):

-- The base case probability of default (PD) of 14.14% and loss given default (LGD) of 17.95% were increased by 25% and 50%.

-- The risk sensitivity below illustrates the ratings expected for each series of Notes if the PD and LGD increase by a certain percentage over the base case assumptions. For example, if the LGD increases by 50%, the rating of the Series 2021-1 Class A Notes would be expected to decrease to AA (high) (sf), ceteris paribus. If the PD increases by 50%, the rating of the Series 2021-1 Class A Notes would be expected to decrease to AA (high) (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating of the Series 2021-1 Class A Notes would be expected to decrease to A (high) (sf), ceteris paribus.

Series 2021-1 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)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of AA (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 2021-1 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 (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 (low) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (sf)

Series 2021-1 Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BBB (low) (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, expected rating of BB (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 below 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Andrew Lynch, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 6 April 2021

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
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 this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

Download This Press Release