Press Release

DBRS Morningstar Upgrades and Confirms Ratings on Cardiff Auto Receivables Securitisation 2019-1 plc

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November 26, 2021

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

-- Class A Notes confirmed at AAA (sf)
-- Class B Notes upgraded to AAA (sf) from AA (low) (sf)

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

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 2021 payment date;
-- Probability of default (PD), loss given default (LGD), and residual value (RV) haircut 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.

The transaction is a securitisation of auto loan receivables related to personal contract purchase (PCP) agreements for new and used vehicles granted by Black Horse Limited (Black Horse, also the servicer) 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 RV risk.

The transaction closed in December 2019 with an initial portfolio of GBP 610.1 million. The transaction is static and its legal final maturity date is at the September 2025 payment date.

PORTFOLIO PERFORMANCE
Delinquencies have been low since closing except for a notable spike between the April 2020 and the July 2020 payment dates in the context of the coronavirus pandemic. As of the November 2021 payment date, loans two to three months in arrears and loans above three months in arrears were nonexistent and marginal 0.0% (0.01%) of the outstanding portfolio balance, respectively, which is comparable to the levels at last annual review. Gross cumulative credit defaults amounted to 1.1% of the initial portfolio balance, with cumulative recoveries of 60.4% to date. Losses on Voluntary Terminations (VTs) and PCP handbacks were limited at 0.1% and 0.3% of the initial portfolio balance, respectively.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pools of receivables and maintained its base case PD and LGD assumptions at 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 the November 2021 payment date, 80.9% of PCP receivables had an original term of four years, which poses an increased VT risk, as shown in DBRS Morningstar’s following commentary titled “U.K. Autos: Elongated PCP Terms Increase the Risk of Voluntary Termination”: 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 transaction continues to deleverage steadily, resulting in increased credit enhancement available to the rated notes.

As of the November 2021 payment date, the credit enhancement to the Class A and Class B notes increased to 69.3% and 40.9%, respectively, from 41.9% and 24.8%, respectively, at last annual review. The increase in credit enhancement prompted the upgrade of the Class B Notes.

The transaction benefits from liquidity support provided by cash reserves funded at closing through a subordinated loan granted by Black Horse. The reserve is nonamortising and was funded to an amount equal to 1.5% of the respective initial portfolio balance, or GBP 9.15 million. The reserve is available to cover senior fees and expenses, senior swap payments, and interest payments on the rated notes. As of the November 2021 payment dates, the reserve was at its target level.

The transaction also 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 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 2021 payment date was equal to GBP 45.2 million.

Lloyds Bank plc (Lloyds Bank) acts as the account bank for the transaction. Based on the account bank reference rating of Lloyds Bank at AA, one notch below the DBRS Morningstar Long Term Critical Obligations Rating (COR) of AA (high), 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 notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Black Horse acts as the swap counterparty with Lloyds Bank acting as the swap guarantor for the transaction. DBRS Morningstar's Long Term COR of AA (high) on Lloyds Bank is above the First Rating Threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

The transaction structure was analysed in Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to 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. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries:
https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 2 November 2021, DBRS Morningstar updated its 8 May 2020 commentary outlining the impact of the coronavirus crisis on the performance of DBRS Morningstar-rated auto ABS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/387320/european-auto-abs-recovery-performance-update and https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

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.

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

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (8 February 2021).

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.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include loan-level data and investor reports 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 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 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 this transaction took place on 27 November 2020, when DBRS Morningstar confirmed its AAA (sf) rating on the Class A Notes and upgraded the rating on the Class B Notes to AA (low) (sf) from A (high) (sf).

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):

-- DBRS Morningstar expected a lifetime base case PD, LGD, and RV haircut 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 are 6.5% and 24.2%, respectively. The RV haircut is 45.2% at the AAA (sf) rating level.
-- 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 Class A Notes would be expected to remain at AAA (sf), ceteris paribus. If the RV haircut increases by 50%, the rating on the 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 Class A Notes would be expected to remain at AAA (sf).

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 AAA (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 AAA (sf)
-- 50% increase in PD and LGD and 25% increase in RV haircut, expected rating of AAA (sf)
-- 50% increase in PD and LGD and 50% increase in RV haircut, expected rating of AAA (sf)

Class B 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 (high) (sf)
-- 25% increase in RV haircut, expected rating of AA (high) (sf)
-- 50% increase in RV haircut, expected rating of AA (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 (low) (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 (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. 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: Natalia Coman, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 5 November 2019

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 this transaction can be found at: http://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: 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.

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.

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