Press Release

DBRS Morningstar Upgrades Rating on Wolf Receivables Financing Plc, Changes Trend to Stable from Negative

Nonperforming Loans

April 21, 2023

DBRS Ratings Limited (DBRS Morningstar) upgraded its rating on the Senior Notes issued by Wolf Receivables Financing Plc (the Issuer) to A (high) (sf) from A (sf) and changed the trend on the rating to Stable from Negative.

The transaction represents the issuance of Senior Notes and Junior Notes (collectively, the Notes). The rating on the Senior Notes addresses the timely payment of interest and the ultimate repayment of principal. DBRS Morningstar does not rate the Junior Notes.

As of December 2021 (the cut-off date), the Notes were backed by a portfolio of UK reperforming unsecured loans with GBP 315 million of gross book value (GBV). The receivables are well diversified, comprising around 357,000 accounts with circa GBP 884 average balance across 2,000 portfolios that were acquired by Lowell Portfolio 1 Limited (Lowell or the Sponsor) over a nine-year period with most of the receivables being acquired between 2017 and 2021. The receivables, mostly associated with a payment plan, are linked with a wide range of underlying product types, with catalogue credit, credit card, personal unsecured loan, and telecommunications service agreements accounting for 33.2%, 31.4%, 14.2%, and 13.6% of the total receivables balance at cut-off, respectively. The remaining 7.3% comprise utility bills, store cards, overdrafts, and mail orders, with about 0.4% categorised as other. About 84% of the total receivables by balance at cut-off were regulated under the Consumer Credit Act and circa 10% were court assigned.

The receivables contain reperforming unsecured claims that were selected based on the following criteria: (1) accounts on payment plans that, over a six-month period before the cut-off date, have been paying at least 80% of the payment plan due amount (in aggregate) and made at least five monthly net positive payments; or (2) other accounts that have made six monthly net positive payments in six months prior to the cut-off date.

As of April 2022 (the Issuance Date), approximately 81.5% of the pool by GBV was associated with an active payment plan with GBP 13.2 average monthly payments. According to the latest information provided by the servicer, in February 2023, 75.3% of the pool by GBV was associated to an active payment plan with GBP 13.4 average monthly payments.

The receivables are mainly serviced by Lowell Financial Ltd (the Servicer), which is part of the Lowell Group, with a small portion serviced by external debt collection agencies and debt management companies.

RATING RATIONALE
The upgrade follows a review of the transaction and is based on the following analytical considerations:
-- Transaction performance: An assessment of portfolio recoveries as of February 2023, focusing on: (1) a comparison between actual collections and the servicer’s initial business plan forecast; (2) the collection performance observed over recent months; and (3) a comparison between the current performance and DBRS Morningstar’s expectations.
-- Updated business plan: The servicer’s updated business plan as of December 2022, received in March 2023, and a comparison with the initial collection expectations.
-- Portfolio characteristics: The loan pool composition as of February 2023 and the evolution of its core features since issuance.
-- Transaction liquidating structure: The order of priority entails a fully sequential amortisation of the Notes (i.e., the Junior Notes will begin to amortise following the full repayment of the Senior Notes). Additionally, interest payments on the Junior notes become subordinated to principal payments on the Senior Notes if the cumulative collection ratio is lower than 90%. This trigger has not been breached on the March 2023 interest payment date, with actual figures at 107.9% according to the servicer.
-- Liquidity support: The transaction benefits from an amortising liquidity reserve providing liquidity to the structure and covering a potential interest shortfall on the Senior Notes and senior fees. The liquidity reserve target amount is equal to 4.5% of the Senior Notes’ principal outstanding balance with a minimum of GBP 500,000 fully funded.
-- The exposure to the transaction account bank and the downgrade provisions outlined in the transaction documents.

TRANSACTION AND PERFORMANCE
According to the latest investor report from March 2023, the outstanding principal amounts of the Senior Notes and the Junior Notes were GBP 40.7 million and GBP 80.0 million, respectively. As of the March 2023 payment date, the balance of the Senior Notes had amortised by 59.5% since issuance and the current aggregated transaction balance was GBP 120.7 million.

As of February 2023, the transaction was performing above the servicer’s business plan expectations. The actual cumulative gross collections equalled GBP 65.5 million whereas the servicer’s initial business plan estimated cumulative gross collections of GBP 60.8 million for the same period. Therefore, as of February 2023, the transaction was overperforming by GBP 4.7 million (+7.9%) compared with the initial business plan expectations.

At issuance, DBRS Morningstar estimated cumulative gross collections for the same period of GBP 38.2 million at the A (sf) stressed scenario. Therefore, as of February 2023, the transaction was performing above DBRS Morningstar’s initial stressed expectations.

Pursuant to the requirements set out in the servicing agreement, in March 2023, the servicer delivered an updated portfolio business plan, which has remained unchanged compared to the executed business plan. The servicer maintains the original assumptions as they are still aligned with the current valuation. The updated DBRS Morningstar A (high) (sf) rating stress assume a haircut of 32.2% to the servicer’s updated business plan, considering future expected collections.

The final maturity of the transaction is in December 2034.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure in Intex Dealmaker.

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

The principal methodology applicable to the rating is: “Master European Structured Finance Surveillance Methodology” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

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/401817/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 this rating include the Issuer, Lowell Financial and HSBC Bank Plc which comprise, in addition to the information received at issuance, the investor report as of March 2023; the updated business plan as of December 2022; the monthly servicer report as of February 2023; and the monthly loan-by-loan report as of February 2023.

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 this rating 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.

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.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):

-- Recovery rates used: Cumulative base case remaining 10-year recovery amount of approximately GBP 81.2 million at the A (high) (sf) stress level, a 5% and 10% decrease in the base case recovery rate.
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 5%, ceteris paribus, would lead to a confirmation on the Senior Notes at A (high) (sf).
-- DBRS Morningstar concludes that a hypothetical decrease of the recovery rate by 10%, ceteris paribus, would lead to a confirmation on the Senior Notes at A (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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Sinem Erol-Aziz, Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 22 April 2022

DBRS Ratings Limited
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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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