Rating action

The rating action is as follows:

Senior notes, GBP 40,732,841: upgraded to A+_SF from A_SF

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

Scope’s review was based on servicer, investor and collateral reports as of March 2023.

Transaction overview

Wolf Receivables Financing Plc is a GBP 242.4m (GBP 315.4m at closing) 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. Collections over the review period have been ahead of the business plan expectations thus far (cumulative collections performance vs the business plan at 28 February 2023: 107.9%). The unsecured receivables were acquired by Lowell Financial and were originated by a group of unsecured lenders and credit providers operating in the UK. The portfolio of receivables is very granular consisting of 355,690 accounts, mostly related to re-performing unsecured debt accounts under payment plans.

The liability structure features a strictly sequential and combined repayment waterfall. The rated senior notes benefit from an amortising 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 action reflects the above expectations cumulative collections, future collections and their timings, and the amount of expenses and liability outflows, against Scope’s expectations. Cumulative collection performance was reported at 107.9%, despite the difficult macro-economic environment prevalent in the United Kingdom. Resultantly, given the faster than expected collateral collections and the sequential notes repayment profile, since the closing date 59.5% of the senior notes have already been repaid, while the junior notes balance remained unchanged.

The rating also considered the risk of the difficult macro-economic environment in the UK which is categorized by a cost-of-living crisis, high inflation, and a resultant tightening in monetary policy. However, the latter is in large part mitigated by the hedging strategy in place. The granular nature of the portfolio, the high proportion of payment arrangements in place (75.3% of the portfolio) and the value of the outstanding accounts provided (overcollateralisation) mitigates the idiosyncratic borrower risk and ultimately the impact of the macro-environment.

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 other key counterparties.

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.

Key rating drivers

Highly granular portfolio with the majority of the pool having payment arrangements in place (positive)^1,2,3. The portfolio is exposed to 355,690 debt accounts, making the asset pool among the most granular in the securitisation market. Further to this, 75.3% of the pool have active repayment arrangements in place. These features protect the portfolio’s performance against idiosyncratic borrower credit risk and ensures stable cash flows.

Faster-than-expected cumulative actual pool collections (positive)^1,2,3. Cumulative actual pool collections have outpaced both the original business plan and Scope’s initial expectations. Based on the servicer business plan, cumulative actual pool collections are 107.9% ahead of original expectations for the past 11 months since closing. Owing to the faster than expected collateral collections and the sequential notes repayment profile since closing date the senior notes have already repaid 59.5% of it is initial balance, while the junior notes balance remained unchanged.

Liquidity reserve and interest rate cap (positive). As expected, the liquidity reserve has been funded at its target level, 4.5% of senior notes outstanding. The senior notes also continue to benefit from the interest rate cap which mitigates the upward movement on 1M SONIA to 1.5% until month 60. No structural events have been triggered, these including a disruption event, insolvency event, subordination event amongst others.

Simple structure (positive)^1,2,3. 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.

Macroeconomic risk (negative)⁴. 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 Scope would expect it to adversely impact the disposable income of borrowers. The fast-amortising pool is expected to mitigate this risk.

Originator concentration (negative). Although the pool is well diversified, with positions originated by a wide range of UK loan/credit card providers, top two originators (Scope 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). Although the cap has limited the impact of the rising interest rate environment, the pool assets do not earn any interest which creates a mismatch of interest flows.

Rating-change drivers

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

Reduction in collections (downside). The high inflation prevalent in the UK and the increased monetary tightening by the Bank of England in response has placed significant pressure on UK consumers. This combined with increased energy costs and in increases in other key commodity prices have weakened financial the resilience of UK consumers. This potentially could impact collections and resultantly slow the repayment of the notes, and thereby trigger a downgrade.

Quantitative analysis and assumptions

Scope 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 rating assigned to the notes reflects the instrument’s expected losses over their weighted average life commensurate with Scope’s 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, zero notches; sensitivity to an acceleration of long-term redefault rate, zero notches.

Rating driver references
1. Servicer reports for May 2022 to March 2023 (Confidential)
2. Investor reports for May 2022 to March 2023 (Confidential)
3. Collateral reports for May 2022 to March 2023 (Confidential)
4. 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, 25 January 2023; Non-Performing Loan ABS Rating Methodology, 5 August 2022; Counterparty Risk Methodology, 14 July 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.

The model used for this Credit Rating (Scope Cash Flow SF EL Model Version 1.1), is available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 are 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/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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