Rating action

The rating actions are as follows:

Senior notes, GBP 100,600,000: assigned new rating of A_SF

Junior notes, GBP 79,972,036: not rated

Transaction overview

Wolf Receivables Financing Plc is a GBP 315.4m gross-book-value (GBV) securitisation of UK re-performing unsecured consumer debt accounts. These re-performing unsecured consumer debt accounts were paying over the last 6-month period immediately before the cut-off date, as per the transaction eligibility criteria. The unsecured receivables were acquired by Lowell Financial during the past 10 years and were originated by a group of unsecured lenders and credit providers operating in the UK. The notes will be backed by a very granular portfolio of more than 356,000 accounts, mostly related to re-performing unsecured debt accounts under payment plans. The liability structure features a strictly sequential and combined principal repayment waterfall. The rated senior notes will benefit from a liquidity reserve that covers senior expenses and senior interest shortfalls. Interest payments on the junior notes will cease in the event of collateral collection underperformance (subordination event), effectively accelerating the repayment of the senior notes. To mitigate the transaction’s interest rate risk (non-interest bearing assets against floating-rate senior notes liabilities), the structure includes a five-year interest rate cap agreement on the senior notes.

Rating rationale

The rating reflects the transaction’s legal and financial structure, the underlying collateral’s quality, Lowell Financial’s experience and incentives as transaction servicer, and the transaction’s exposure to key counterparties.

The rating is primarily driven by the expected recovery amounts and timing of collections from the UK re-performing unsecured consumer portfolio. The expected collections and timing assumptions consider the portfolio’s characteristics as well as our economic outlook for the UK and assessment of the servicer’s capabilities. The rating is supported by the overcollateralisation available to the senior notes, the protection provided by liquidity reserve, and the interest rate hedging agreement on the senior notes.

The transaction is exposed to the following key counterparties: Lowell Financial Ltd as servicer; National Westminster Bank and Barclays Bank Plc as the collection account banks; HSBC Bank Plc as issuer account bank, administrative agent and cash manager; and Goldman Sachs International as senior notes interest rate cap provider. Counterparty risk is mitigated by the credit quality of the counterparties, structural mechanisms such as the replacement rating triggers, and the limited time exposure. We have assessed the credit quality of the counterparties considering public information.

Key rating drivers

Highly granular portfolio (positive)^1,2. The portfolio is exposed to more than 356,000 debt accounts, making the asset pool among the most granular in the securitisation market. This feature protects the portfolio’s performance against idiosyncratic borrower credit risk and ensures stable cash flows.

Positive selection (positive)^1,2,3. Pool assets are selected to achieve the best performance. Borrowers have some of the best internal scores assigned by the servicer. Other selection criteria, including those relating to originators, current balances and vintage concentrations, have performed the strongest of the transactions featured in historical data available to us, which spans a period of more than 15 years.

Simple structure (positive)⁴. The transaction is static and the notes will amortise fully sequentially. Issuer available fund leakage is limited to a base interest of 3% on the junior notes and is subject to a collection performance trigger.

Liquidity protection (positive)⁴. A cash reserve mitigates liquidity risk in the event of a servicer disruption. Further mitigation comes from the combined waterfall, under which all pool collections can be used to repay the rated notes’ outstanding balances as well as senior expenses and interest.

Macroeconomic risk (negative)⁵. Inflation in the UK is reaching record levels and efforts by the Bank of England to contain it may be complicated by geopolitical tensions in Eastern Europe. A possible future scenario which combines high interest rates and high inflation has never been tested, but we would expect it to adversely impact the disposable income of borrowers. The fast-amortising pool is expected to mitigate this risk.

Originator concentration (negative)². Although the pool is well diversified, with positions originated by a wide range of UK loan/credit card providers, top two originators (we grouped the two originators as one exposure given their close ties) represent more than a third of the pool. Originator concentrations are mitigated by pool selection criteria that limits assets to re-performing debt accounts.

Interest rate mismatch (negative)⁴. The senior notes pay a floating interest rate while the pool assets do not earn any interest, creating a mismatch of interest flows. A five-year interest rate cap agreement on the senior notes mitigates this risk.

Rating-change drivers

Higher pool collections than expected by the servicer (upside). Should the pool perform as defined in the servicer business plan or even better in the first 12 months, then the fast deleveraging of the senior notes will protect them against future possible macro-economic inflation shocks and the note could be upgraded.

Reduction on borrower’s available income (downside). Failure to reduce high inflation by the Bank of England. Increase in energy costs and in other key commodity prices or austerity measures triggering a serious economic recession in the UK and unemployment rise which could impact the note rating negatively.

Quantitative analysis and assumptions

We analysed the transaction’s specific cash flow characteristics. Asset assumptions were captured through rating-conditional gross recovery vectors. The analysis considers the capital structure, the coupon payable on the notes, the interest hedging structure, the servicing fee structure, and the transaction’s senior costs.

The respective rating assigned to the notes reflect the instrument’s expected losses over their weighted average life commensurate with our idealised expected loss table.

Sensitivity analysis

Scope tested the resilience of the rating against deviations in the main portfolio input parameters: the recovery rate and the recovery timing of the portfolio. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the results for the senior rated notes change compared to the assigned credit rating in the following scenarios: i) a decrease in recovery rate by 10%; and ii) an acceleration of long-term redefault rate reducing collections window by 10%, respectively:

Senior notes: sensitivity to the recovery rate, two notches; sensitivity to an acceleration of long-term redefault rate, two notches.

Rating driver references
1. Timeseries data showing almost 15 years (from 2007 to Q3 2021) of monthly historical payments at account level (confidential)
2. Static data tape as of final cut-off date (confidential)
3. Servicer internal documents and information (confidential)
4. Transaction documents (confidential)
5. Scope takes no action on the United Kingdom

Stress testing
Stress testing was performed by applying Credit-Rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Rating’s Cash Flow SF EL Model Version 1.1 incorporating default and recovery rate assumptions over the portfolio’s amortisation period, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.  

Methodology
The methodologies used for this Credit Rating (General Structured Finance Rating Methodology, 17 December 2021; Non-Performing Loan ABS Rating Methodology, 6 August 2021; Methodology for Counterparty Risk in Structured Finance, 13 July 2021), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating is (Cash Flow SF EL Model version 1.1) available in Scope Ratings’ list of models, published under: https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/uk-regulation. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party asset due diligence assessment/asset audit. The external due diligence assessment/asset audit was considered when preparing the Credit Rating and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating is based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This Credit Rating is issued by Scope Ratings UK Limited at 52 Grosvenor Gardens, London, United Kingdom, SW1W 0AU, Tel +44 20 7824 5180. The Credit Rating is EU-endorsed.
Lead analyst: Mark Vrdoljak, Associate Director
Person responsible for approval of the Credit Rating: Benoit Vasseur, Executive Director
The Credit Rating was first released by Scope Ratings on 22 April 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/UK Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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