DBRS Morningstar Comments on PCL Funding I Limited and PCL Funding III PLC Following Amendments

DBRS Ratings Limited (DBRS Morningstar) reviewed the impact of amendments to the transactions PCL Funding I Limited (PCL 1) and PCL Funding III PLC (PCL 3) and concluded that the amendments will not in and of themselves result in the downgrade or withdrawal of the ratings on either the Class A Eligible Trust Notes of the Series 2012 Variable Funding Notes issued by PCL 1, or the Series 2017-2 Class A, B, and C Notes issued by PCL 3.

The amendments become effective as of 15 June 2020 and have been executed in the context of the Coronavirus Disease (COVID-19) pandemic. The amendments are intended to grant structural flexibility in order to accommodate potential fluctuations in performance by modifying the existing performance triggers that, once breached, would otherwise result in the early amortisation of the notes, while also providing for additional cash trapping in the asset trust reserve fund.

In particular, the average delinquency ratio trigger was amended to 4.50% from 3.75%, with the required reserve amount increasing in the event that the average delinquency ratio exceeds 3.75%. The average default ratio trigger was amended to 2.50% from 2.25%, with the required reserve amount increasing in the event that the average default ratio exceeds 2.25%. The average excess spread ratio trigger was amended to 1.75% from 4.00%, with the required reserve amount increasing in the event that the average excess spread ratio falls below 4.00%. The average payment rate ratio trigger remains unchanged at 3.50%. The increased reserve requirement will be funded through the diversion of excess spread and excess principal or, should these be inadequate, directly by Premium Credit Limited (PCL) as the seller. The amended triggers remain in effect until 15 June 2021, following which they revert to their preamendment state.

In addition, for PCL 1 only, the concentration limit for receivables other than those in the personal lines and schemes segment of the portfolio was increased to 70.0% from 67.5%.

DBRS Morningstar analysed the aforementioned amendments and considers the loosening of the performance triggers to be sufficiently offset by increased credit enhancement resulting from the additional reserve funding requirements.

PCL 1 and PCL 3 form part of PCL’s securitisation programme, which is structured as a master trust. The assets securing the notes are a revolving portfolio of commercial and consumer financing agreements originated by PCL primarily in the United Kingdom, and for the purpose of financing nonlife insurance premiums, sport and leisure membership fees, professional membership fees, and private school tuition.

As of the May 2020 payment date, the average delinquency ratio was 1.65%, the average default ratio was 0.87%, the average payment rate ratio was 4.93%, and the average excess spread ratio was 7.59%.

More information on each transaction can be found at: https://www.dbrsmorningstar.com/issuers/18769/pcl-funding-i-limited and https://www.dbrsmorningstar.com/issuers/22822/pcl-funding-iii-plc.

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 on DBRS Morningstar considerations for European ABS transactions and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar commentary: https://www.dbrsmorningstar.com/research/360735/dbrs-morningstar-releases-commentary-on-risk-exposure-of-european-abs-to-covid-19.

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.

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

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