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Scope upgrades senior notes of Wolf Receivables Financing Plc to AA(SF) - UK Re-performing accounts
Rating action
Scope has completed a monitoring review of the following notes issued by Wolf Receivables Financing Plc:
Senior Note, GBP 13,388,276: upgraded to AASF from A+SF
Junior Note, GBP 79,972,036: not rated
Scope’s review was based on servicer, investor and collateral reports as of January 2024.
Transaction overview
Wolf Receivables Financing Plc is a GBP 208.3m (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, as per the transaction eligibility criteria. 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-expected cumulative collections, future collections and their timings, and the amount of expenses and liability outflows, against Scope’s expectations. Cumulative performance ratio was reported at 107.7%, despite the difficult macro-economic backdrop in the UK. 86.7% of the senior notes have already been repaid since the closing date, while the junior notes balance remained unchanged.
The rating also considered macro-economic risks in the UK including cost-of-living crisis, high inflation, and tighter monetary policy. However, the latter is in large part mitigated by the hedging strategy in place. The granular nature of the portfolio and the high proportion of payment arrangements in place (70% of the portfolio) mitigates the idiosyncratic borrower risk.
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
The key rating drivers remain aligned with those disclosed on our previous rating action release dated 27 March 2023:
Granular portfolio (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, 70% 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 collections (positive)1,2,3. Cumulative collections stand at 107.7% of the original business plan, outpacing both servicer’s and Scope’s expectations at closing. Therefore, the senior notes have grossly deleveraged, already repaying 86.7% of its initial balance.
Interest rate cap and liquidity reserve (positive). The senior notes continue to benefit from the interest rate cap which mitigates the effect of increased interest rates since closing. The structure also features a liquidity reserve covering 10 months of senior expenses and capped senior note interest.
Simple structure (positive)1,2,3. The transaction is static, and the notes amortises 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 remain elevated although decreasing from a peak of 9.6% to 4.2%, from October 2022 to December 2023. Scope expects interest rates to stay high during 2024 before slightly being cut in the second half. Lingering high inflation combined with tighter monetary policy could adversely impact the disposable income of borrowers.
Originator concentration (negative)1,2,3. 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)1,2,3. 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 triggering 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 respective rating assigned to the notes reflects the instrument’s expected losses over their weighted average life of the notes commensurate with Scope’s idealised expected loss table.
Sensitivity analysis
Scope tested the resilience of the rating to deviations in recovery rates and 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 senior notes would change compared to the assigned rating in the event of:
-
10% haircut to recoveries, zero notch;
- a one-year increase in weighted-average-life, zero notch.
Rating driver references
1. Servicer reports (Confidential)
2. Investor reports (Confidential)
3. Collateral reports (Confidential)
4. 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 Ratings’ Cash Flow Structured Finance Expected Loss Model Version 1.2 incorporating relevant asset 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 (Cash Flow Structured Finance Expected Loss 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 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 at closing. 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: Mirac Ugur, Senior Analyst
Person responsible for approval of the Credit Rating: Antonio Casado, Managing Director
The Credit Rating was first released by Scope Ratings on 22 April 2022. The Credit Rating was last updated on 27 March 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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