Press Release

DBRS Morningstar Finalises Provisional Ratings on Cardiff Auto Receivables Securitisation 2022-1 plc

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February 14, 2022

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the following classes of Notes (the Rated Notes) issued by Cardiff Auto Receivables Securitisation 2022-1 plc (the Issuer):

-- Class A Notes at AAA (sf)
-- Class B Notes at A (high) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (low) (sf)
-- Class E Notes at BB (sf)

DBRS Morningstar did not assign a rating to the Class S Notes (together with the Rated Notes, the Notes) also issued in this transaction.

The Issuer is a public limited company incorporated under the laws of England and Wales, acting as a special-purpose entity specifically for the purpose of this transaction.

The ratings on the Rated Notes address the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date.

The Notes are collateralised by a static portfolio of GBP 610 million in receivables related to personal contract purchase (PCP) auto loans granted by Black Horse Limited (Black Horse or the Seller) to borrowers in England and Wales. The underlying motor vehicles related to the finance contracts consist of both new and used vehicles. The receivables are serviced by Black Horse.

PCP agreements include a component related to guaranteed future values (GFV). The GFV affords the borrower an option to hand back the underlying vehicle at contract maturity as an alternative to repaying or refinancing the final balloon payment; this feature directly exposes the Issuer to residual value (RV) risk. The portfolio also includes certain receivables regulated by the UK Consumer Credit Act (CCA). Pursuant to sections 99 and 100 of the CCA, obligors may voluntarily terminate (VT) their loan agreement once one-half of the monies due under the agreement has been paid. Black Horse’s sale of a vehicle returned after the obligor exercises its right to VT may result in recoveries less than what remains outstanding under the financing contract; this feature directly exposes the Issuer to VT risk.

DBRS Morningstar based its ratings on the following analytical considerations:
-- The transaction capital structure, including form and sufficiency of available credit enhancement;
-- Relevant credit enhancement in the form of subordination, the liquidity reserve, and excess spread;
-- Credit enhancement levels that are sufficient to support DBRS Morningstar’s projected cumulative net loss and RV loss under various stressed cash flow assumptions for the Rated Notes;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested. The ratings assigned to the Rated Notes address the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date;
-- Black Horse’s capabilities with regard to originations, underwriting, and servicing and its financial strength;
-- The transaction parties’ financial strength with regard to their respective roles;
-- The credit quality of the collateral and historical and projected performance of the Seller’s portfolio;
-- The sovereign rating on the United Kingdom, currently at AA (high) with a Stable trend; and
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that address the true sale of the assets to the Issuer.

TRANSACTION STRUCTURE
The transaction incorporates separate interest and principal waterfalls that allow for the fully sequential payment of both interest and principal among the Notes. Available interest collections are available to cover principal deficiencies in relation to each of the Rated Notes after interest has been paid in relation to the same class of Rated Notes and the respective class’ liquidity reserve subledger has been replenished.

The structure benefits from a liquidity reserve fund comprising five subledgers, each linked to a class of Rated Notes. The target size of each subledger is 0.75% of the principal amount outstanding of the related Class of Rated Notes as at the closing date. The liquidity reserve forms part of the available interest collections, but is not available to cover principal deficiencies allocated to note specific ledgers. On the redemption of a class of Rated Notes, the balance of the related liquidity reserve subledger is released back to the subordinated loan provider.

All underlying contracts are fixed rate while the Class B Notes to the Class E Notes are floating-rate obligations. Interest rate risk for the Class B to Class E Notes is mitigated through an interest rate swap provided by Black Horse and guaranteed irrevocably and unconditionally by Lloyds Bank plc (Lloyds Bank). The Class A Notes and Class S Notes both attract fixed interest rates.

DBRS Morningstar analysed the transaction cash flow structure in Intex DealMaker.

COUNTERPARTIES
Lloyds Bank has been appointed as the Issuer’s account bank for the transaction. DBRS Morningstar has a Long-Term Issuer Rating of AA (low) and a Long Term Critical Obligations Rating of AA (high) with Negative trends on Lloyds Bank. The transaction documents contain downgrade provisions relating to the account bank consistent with DBRS Morningstar’s criteria.

Black Horse has been appointed as the swap counterparty backed by a guarantee provided by Lloyds Bank. DBRS Morningstar reviewed the guarantee and legal opinion confirming that it represents an irrevocable and unconditional obligation. DBRS Morningstar does not rate Black Horse. The hedging documents contain downgrade provisions consistent with DBRS Morningstar’s criteria.

CORONAVIRUS DISEASE (COVID-19) CONSIDERATIONS
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 asset-backed securities (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 9 December 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/389454/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 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.

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: 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.

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” 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 Black Horse and its agent, Lloyds Bank.

DBRS Morningstar received the following data and information:
-- Static monthly cumulative PCP gross loss and recovery data from August 2009 and up to November 2021, split by credit defaults and VTs new and used vehicles;
-- Dynamic PCP delinquency data from April 2012 to November 2021 split by new and used vehicles;
-- Prepayment data from April 2012 to November 2021;
-- Loan-level characteristics as at 2 February 2021; and
-- Historic PCP RV realisation and maturity data.

DBRS Morningstar did not rely on 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.

Sensitivity Analysis: 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):

-- Expected default (credit defaults and voluntary terminations): 6.2%
-- Expected recovery rate: 81.8%
-- Loss given default (LGD): 51.4% for the AAA (sf) scenario.
-- RV loss at maturity: 41.9% for the AAA (sf) scenario.

Scenario 1: A 25% increase in the expected default and LGD.
Scenario 2: A 50% increase in the expected default and LGD.
Scenario 3: A 25% increase in the RV loss.
Scenario 4: A 25% increase in the expected default and LGD and a 25% increase in the RV loss.
Scenario 5: A 50% increase in the expected default and LGD and a 25% increase in the RV loss.
Scenario 6: A 50% increase in the expected RV loss.
Scenario 7: A 25% increase in the expected default and LGD and a 50% increase in the RV loss.
Scenario 8: A 50% increase in the expected default and LGD and a 50% increase in the RV loss.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios will be:
-- Class A Notes: AA (sf), AA (low) (sf), AA (high) (sf), AA (sf), A (high) (sf), AA (sf), AA (low), A (sf)
-- Class B Notes: A (sf), A (low) (sf), A (sf), A (low) (sf), BBB (high) (sf), A (low) (sf), BBB (high) (sf), BBB (sf)
-- Class C Notes: BBB (high) (sf), BBB (sf), BBB (high) (sf), BBB (sf), BBB (low) (sf), BBB (low) (sf), BBB (low) (sf), BB (high) (sf)
-- Class D Notes: BBB (low) (sf), BB (high) (sf), BB (high) (sf), BB (high) (sf), BB (sf), BB (sf), BB (sf), BB (low) (sf)
-- Class E Notes: BB (sf), BB (low) (sf), BB (low) (sf), BB (low) (sf), B (high) (sf), BB (low) (sf), B (high) (sf), B (high) (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: Miklos Halasz, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 7 February 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: 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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