Rating action

Scope Ratings UK Limited (Scope) has today assigned a final rating of A+SF to the Class A notes issued by Wolf Receivables Financing 3 Plc.

Class A (XS2712625669), GBP 119,187,000: assigned new rating of A+_SF

Class B (XS2712625743), GBP 126,560,000: not rated

Transaction overview

Wolf Receivables Financing 3 Plc is a GBP 630m gross-book-value (GBV) securitisation of UK re-performing unsecured consumer debt accounts. These re-performing unsecured consumer debt accounts had made payments in at least four of the last six months immediately before the provisional portfolio’s cut-off date 31 August 2023, as per the transaction eligibility criteria. The unsecured receivables comprising the portfolio were purchased by the Hoist UK Group (Hoist) from certain third-party sellers, and the legal and beneficial title to the receivables was assigned to the seller following Lowell’s acquisition of Hoist, UK. The notes will be backed by a very granular portfolio of 234,622 accounts, mostly containing re-performing unsecured receivables under payment plans. The liability structure features a strictly sequential and combined principal repayment waterfall. The rated Class A notes (the senior notes) will benefit from a liquidity reserve that covers senior expenses and senior interest shortfalls. Interest payments on the Class B notes (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 six-year interest rate cap agreement which notional mirrors the senior notes’ expected outstanding principal amount.

Rating rationale

The rating reflects: i) the transaction’s legal and financial structure, ii) the underlying collateral’s quality, iii) Lowell Financials’ experience and incentives as transaction servicer, and iv) 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.

The transaction is exposed to the following key counterparties: Lowell Financial Ltd as servicer; Citibank, N.A., London Branch as issuer account bank, principal paying agent and cash manager; Goldman Sachs International as interest rate cap provider and National Westminster Bank as the collection account bank. 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 and Scope’s ratings.

Key rating drivers

Highly granular portfolio (positive)². The portfolio is exposed to a very large number of 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.

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 rate 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 a combined waterfall, under which all pool collections can be used to repay the rated notes’ outstanding balances as well as senior expenses and interest.

Large balances (negative)^1,2. Most of the portfolio is exposed to accounts with large balances. Larger balances show lower recoveries as the affordability of underlying borrowers does not increase linearly with the increase in balance and the risk of a redefault is higher due to the longer horizon of the debt outstanding. Lowell’s ability to keep customers engaged over long periods (due to its understanding of customers’ circumstances and its arrangement of affordable monthly amounts) mitigates this risk.

Macroeconomic risk (negative)⁵. Inflation in the UK is still elevated despite having fallen from record levels in October 2022. The drivers of inflationary pressures have shifted towards rising prices for food, non-energy goods and services, with a potential negative impact on affordability for the pool’s customers. Efforts by the Bank of England to contain this may be complicated by geopolitical tensions in Eastern Europe and the Middle East. However, past successive interest rate rises are starting to work their way through the economy, and wage increases have partially offset inflationary pressures. The fast-amortising pool is expected to mitigate this risk.

Interest rate mismatch (negative)⁴. The Class A notes pay a floating interest rate while the pool assets do not earn any interest, creating a mismatch of interest flows. A six-year interest rate cap agreement 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, fast deleveraging of the Class A notes will protect them against future possible macroeconomic inflation shocks and the notes could be upgraded.

Reduction on borrower’s available income (downside). A failure by the Bank of England to reduce high inflation, an increase in energy costs and other key commodity prices, or austerity measures triggering a serious economic recession in the UK and a rise in unemployment could all impact the notes 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 reflects the instrument’s expected losses over the weighted average life of the notes 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 extension of the portfolio’s weighted average life by one year, respectively:

Class A notes: sensitivity to the recovery rate, two notches; sensitivity to the portfolio’s weighted average life, two notches.

Rating driver references
1. Historical recovery performance data showing eight years (from Q1 2015 to Q4 2022)
2. Static data tape as of final cut-off date (Confidential)
3. Servicer internal documents and information (Confidential)
4. Transaction documents (Confidential)
5. Scope affirms United Kingdom’s credit ratings

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 1.2 incorporating default and recovery rate assumptions and taking into account the transaction’s main structural features, such as the instruments’ priority of payments, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodologies used for this Credit Rating, (General Structured Finance Rating Methodology, 25 January 2023; Non-Performing Loan ABS Rating Methodology, 3 August 2023; Counterparty Risk Methodology, 13 July 2023) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating is (Scope Cash Flow SF EL Model Version 1.2) 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 this 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: Mirac Ugur, Senior Analyst
Person responsible for approval of the Credit Rating: Olivier Toutain, Executive Director
The Credit Rating was first released by Scope Ratings on 20 December 2023.

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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