Press Release

DBRS Morningstar Finalises Provisional Ratings on NewDay Funding Master Issuer plc, Series 2022-1

Consumer Loans & Credit Cards

April 20, 2022

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the notes (the Notes) issued by NewDay Funding Master Issuer plc (the Issuer):

-- Series 2022-1, Class A1 Notes at AAA (sf)
-- Series 2022-1, Class A2 Notes at AAA (sf)
-- Series 2022-1, Class B Notes at AA (sf)
-- Series 2022-1, Class C Notes at A (low) (sf)
-- Series 2022-1, Class D Notes at BBB (low) (sf)
-- Series 2022-1, Class E Notes at BB (low) (sf)
-- Series 2022-1, Class F Notes at B (high) (sf)

The ratings address the timely payment of scheduled interest and the ultimate repayment of principal by the relevant legal final maturity dates.

The Notes are backed by a portfolio of own-branded credit cards granted by NewDay Cards, the originator, to individuals domiciled in the UK.

The ratings are based on the following analytical considerations:
-- The transaction’s capital structure, including form and sufficiency of available credit enhancement to support DBRS Morningstar’s revised 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 Notes.
-- The originator’s capabilities with respect to origination, underwriting, and servicing.
-- An operational risk review of the originator, which DBRS Morningstar deems to be an acceptable servicer.
-- The transaction parties’ financial strength regarding their respective roles.
-- The credit quality, diversification of the collateral, and historical and projected performance of the securitised portfolio.
-- DBRS Morningstar’s sovereign rating on the United Kingdom of Great Britain and Northern Ireland at AA (high) with a Stable trend.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

TRANSACTION STRUCTURE
The Notes are issued out of NewDay Funding Master Issuer plc as part of the NewDay Funding-related master issuance structure, where all series of notes are supported by the same pool of receivables and generally issued under the same requirements regarding servicing, amortisation events, priority of distributions, and eligible investments.

The transaction includes a scheduled revolving period. During this period, additional receivables may be purchased and transferred to the securitised pool, provided that the eligibility criteria set out in the transaction documents are satisfied. The revolving period may end earlier than scheduled if certain events occur, such as the breach of performance triggers or servicer termination. The scheduled revolving period may be extended by the servicer by up to 12 months. If the Notes are not fully redeemed at the end of the respective scheduled revolving periods, the transaction enters into a rapid amortisation.

As the Class A2 notes are denominated in U.S. dollars (USD), there is a balance-guaranteed, cross-currency swap to hedge the currency risk between the British pound sterling (GBP)-denominated receivables and the USD-denominated Class A2 notes. For the GBP-denominated classes of the Notes, which carry floating-rate coupons based on the rate of daily compounded Sterling Overnight Index Average (Sonia), the interest rate mismatch risk arising from the fixed-rate collateral is mitigated by the excess spread in the transaction and is considered in DBRS Morningstar’s cash flow analysis.

The transaction includes a series-specific liquidity reserve that is available to cover the shortfalls in senior expenses, swap costs if applicable, and interest due on the Class A1, Class A2, Class B, Class C, and Class D notes and would amortise down to a floor of GBP 250,000.

COUNTERPARTIES
HSBC Bank plc is the account bank and swap collateral account bank for the transactions. Based on DBRS Morningstar’s private rating on HSBC Bank and the downgrade provisions outlined in the transaction documents, DBRS Morningstar considers the risk arising from the exposure to the account bank and swap collateral account bank to be commensurate with the ratings assigned.

ING Bank N.V. is the swap counterparty for the Class A2 swap. DBRS Morningstar has a Long-Term Issuer Rating of AA (low) with a Stable trend on ING Bank N.V., which meets DBRS Morningstar’s criteria to act in such capacity. The swap documentation also contains downgrade provisions consistent with DBRS Morningstar’s criteria.

PORTFOLIO ASSUMPTIONS
The most recent March 2022 servicer report of the securitised portfolio shows a total payment rate of 13.9%, including the interest collections. The most recent payment rates are above historical levels but it remains to be seen if they are sustainable in the current challenging environment of further Coronavirus Disease (COVID-19) variants, uneven economic recovery, persistent inflationary pressures, and interest rate increases. After removing the interest collections, the estimated monthly principal payment rates (MPPRs) of the securitised portfolio have been stable above 8%. Based on the analysis of historical data, DBRS Morningstar maintained the expected MPPR at 8%.

The portfolio yield was largely stable over the reported period until March 2020. The most recent performance in February 2022 showed a total yield of 30.2%, which increased from the record low of 25.0% in May 2020 because of higher delinquencies and the forbearance measures (i.e., payment holidays and payment freeze) offered. Based on the observed trend, DBRS Morningstar maintained the expected yield at 24.5%.

The reported historical charge-off rates was high but stable at approximately 16% until June 2020. The most recent performance in February 2022 showed a charge-off rate of 9.3% after reaching a record high of 17.1% in April 2020. Based on the analysis of historical data, DBRS Morningstar maintained the expected charge-off rate at 18%.

DBRS Morningstar also elected to stress the asset performance deterioration over a longer period for the Notes rated below investment grade in accordance with its “Rating European Consumer and Commercial Asset-Backed Securitisations” methodology.

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

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: “Rating European Consumer and Commercial Asset-Backed Securitisations” (29 October 2021).

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.

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” methodology 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 the following data provided by the arrangers, NewDay Cards, or monthly servicer reports:
-- Securitised portfolio: Receivables balances, payment rates, yield, charge-off rates, and purchase rates for the month of February 2022;
-- Total managed portfolio: Monthly historical dynamic data from June 2007 to December 2021 and static data from Q1 2008 to Q3 2021for the entire own brands portfolio in respect of receivables balances, payment rates, gross charge-offs, gross yield, delinquencies, purchase rates, and recoveries; and
-- Stratification tables in relation to the total pool as of 31 December 2021.

Additional data was also provided with regard to utilisation rate, credit limits, dilutions, and interest rates.

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. These are the first DBRS Morningstar ratings on these financial instruments.

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 to the parameters used to determine the ratings:

-- Expected Yield Rate of 24.5%
-- Expected MPPR of 8%
-- Expected Charge-Off Rate of 18%

Scenario 1: a 25% decrease in the Expected Yield Rate
Scenario 2: a 25% decrease in the Expected MPPR
Scenario 3: a 25% increase in the Expected Charge-Off Rate
Scenario 4: a 15% decrease in the Expected Yield Rate, a 15% decrease in the Expected MPPR, and a 15% increase in the Expected Charge-Off Rate.

DBRS Morningstar concludes that the expected ratings under the four stress scenarios are:
-- Class A notes: AA (high) (sf), AA (low) (sf), AA (sf), AA (low) (sf)
-- Class B notes: A (high) (sf), A (high) (sf), A (high) (sf), A (sf)
-- Class C notes: BBB (high) (sf), BBB (sf), BBB (high) (sf), BBB (low) (sf)
-- Class D notes: BB (sf), BB (high) (sf), BB (sf), BB (low) (sf)
-- Class E notes: below B (low) (sf), B (high) (sf), B (low) (sf), below B (low) (sf)
-- Class F notes: below B (low) (sf), B (low) (sf), below B (low) (sf), below B (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: https://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: Michael Langholz, Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 31 March 2022

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.

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