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Rating Action:

Moody's assigns definitive ratings to Auto ABS issued by Dowson 2020-1 plc

24 Mar 2020

London, 24 March 2020 -- Moody's Investors Service ("Moody's") has assigned the following definitive ratings to Notes issued by Dowson 2020-1 plc:

....GBP147.4M Class A Floating Rate Notes due April 2027, Definitive Rating Assigned Aaa (sf)

....GBP41.8M Class B Floating Rate Notes due April 2027, Definitive Rating Assigned A1 (sf)

....GBP12.1M Class C Floating Rate Notes due April 2027, Definitive Rating Assigned Baa3 (sf)

....GBP9.9M Class D Floating Rate Notes due April 2027, Definitive Rating Assigned Ba2 (sf)

....GBP8.8M Class E Floating Rate Notes due April 2027, Definitive Rating Assigned B3 (sf)

....GBP19.8M Class X Floating Rate Notes due April 2027, Definitive Rating Assigned Caa1 (sf)

The transaction is a static cash securitisation of agreements entered into for the purpose of financing vehicles to obligors in the United Kingdom by Oodle Financial Services Limited ("Oodle") (NR). This is the second public securitisation transaction sponsored by Oodle. The originator will also act as the servicer of the portfolio during the life of the transaction.

The portfolio of receivables backing the Notes consists of Hire Purchase ("HP") agreements granted to individuals resident in the United Kingdom. Hire Purchase agreements are a form of secured financing without the option to hand the car back at maturity. Therefore, there is no explicit residual value risk in the transaction. Under the terms of the HP agreements, the originator retains legal title to the vehicles until the borrower has made all scheduled payments required under the contract.

As of 1 March 2020, the definitive portfolio of underlying assets totaling GBP 220.01 million, the portfolio consisted of 25,122 agreements mainly originated in the second semester of 2019 and predominantly made of used (99%) vehicles distributed through national and regional dealers as well as brokers. It has a weighted average seasoning of 5.3 months and a weighted average remaining term of 4.4 years. The definitive pool's current weighted average LTV is 99.1%.

RATINGS RATIONALE

The transaction's main credit strengths are the significant excess spread, the static and granular nature of the portfolio, and counterparty support through the back-up servicer (The Nostrum Group Ltd trading as Equiniti Credit Services (NR)), interest rate hedge provider (BNP Paribas (Aa3(cr)/ P-1(cr)) and independent cash manager (Citibank N.A., London Branch (Aa3(cr)/ P-1(cr)). The structure contains specific cash reserves for each asset-backed tranche which cumulatively equal 1.3% of the pool and will amortise in line with the notes. Each tranche reserve will be purely available to cover liquidity shortfalls related to the relevant Note throughout the life of the transaction and can serve as credit enhancement following the tranche's repayment. The Class A reserve provides approximately 6 months of liquidity at the beginning of the transaction. The provisional portfolio has an initial yield of 16.78% (excluding fees). Available excess spread can be trapped to cover defaults and losses, as well as to replenish the tranche reserves to their target level through the waterfall mechanism present in the structure.

However, Moody's notes some credit weaknesses in the transaction. First, the definitive pool includes material exposure to higher risk borrowers. For example, some borrowers may previously have been on debt management plans, received county court judgments within recent years, or currently be in low level arrears on other unsecured contracts. Although these features are reflected in the originator's scorecard, and exposure to the highest risk borrowers (risk tiers 6-8 under the originator's scoring) is limited at 13.5% of the pool, the effect is that the definitive pool is riskier than a typical benchmark UK prime auto pool. Second, operational risk is higher than a typical UK auto deal because Oodle is a small, unrated entity acting as originator and servicer to the transaction. The transaction does envisage certain structural mitigants to operational risk such as a back-up servicer, independent cash manager, and tranche specific cash reserves, which cover approximately 6 months of liquidity for the Class A Notes at deal close. Third, the structure does not include principal to pay interest for any class of Notes, which makes it more dependent on excess spread and the tranche specific cash reserves combined with the back-up servicing arrangement to maintain timeliness of interest payments on the Notes. Fourth, the historic vintage default and recovery data is limited, reflecting Oodle's short trading history (it began lending meaningful amounts in its current form in 2018). The data covers approximately three years that Oodle has been originating.

In addition, the underlying obligors may exercise the right of voluntary termination as per the Consumer Credit Act, whereby an obligor has the option to return the vehicle to the originator as long as the obligor has made payments equal to at least one half of the total financed amount. If the obligor returns the vehicle, the issuer may be exposed to residual value risk. The potential for additional losses due to these risks has been incorporated into Moody's quantitative analysis.

The automotive sector is undergoing a technology-driven transformation which will have credit implications for auto finance portfolios. Technological obsolescence shifts in demand patterns and changes in government policy may result in some segments experiencing greater volatility in the level of recoveries compared with historical data. For example, older diesel engines have declined in popularity and older engine types face restrictions in certain metropolitan areas. Similarly, the rise in popularity of Alternative Fuel Vehicles (AFVs) introduces uncertainty in the future price trends of both legacy engine types and AFVs themselves because of evolutions in technology, battery costs and government incentives. Diesel cars constitute 65.3% of the securitised provisional portfolio.

Moody's analysis focused, among other factors, on (i) an evaluation of the underlying portfolio; (ii) historical performance information; (iii) the credit enhancement provided by subordination, by the excess spread and the tranche reserves; (iv) the liquidity support available in the transaction through the tranche reserves; (v) the back-up servicing arrangement of the transaction; (vi) the independent cash manager and (vii) the legal and structural integrity of the transaction.

Our analysis has considered the increased uncertainty relating to the effect of the coronavirus outbreak on the UK economy as well as the effects that the announced government measures, put in place to contain the virus, will have on the performance of consumer assets. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. It is a global health shock, which makes it extremely difficult to provide an economic assessment. The degree of uncertainty around our forecasts is unusually high.

MAIN MODEL ASSUMPTIONS:

Moody's determined portfolio lifetime expected defaults of 15.0%, expected recoveries of 30.0% and a Aaa portfolio credit enhancement ("PCE") of 40.0% related to the borrower receivables. The expected default captures our expectations of performance considering the current economic outlook, while the PCE captures the loss we expect the portfolio to suffer in the event of a severe recession scenario. Expected defaults and PCE are parameters used by Moody's to calibrate its lognormal portfolio default distribution curve and to associate a probability with each potential future default scenario in its ABSROM cash flow model.

The portfolio expected mean default level of 15.0% is higher than other UK auto transactions and is based on Moody's assessment of the lifetime expectation for the pool taking into account (i) the higher average risk of the borrowers, (ii) the historic performance of the loan book of the originator, (iii) benchmark transactions and (iv) other qualitative considerations.

The PCE of 40.0% is higher than the average of its UK auto peers and is based on Moody's assessment of the pool taking into account the higher risk profile of the pool borrowers and relative ranking to originator peers in the UK auto and consumer markets. The PCE of 40% results in an implied coefficient of variation ("CoV") of 33.0%.

METHODOLOGY:

The principal methodology used in these ratings was "Moody's Global Approach to Rating Auto Loan- and Lease-Backed ABS" published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:

Factors that may cause an upgrade of the ratings of Class B to X Notes include significantly better than expected performance of the pool together with an increase in credit enhancement of Notes.

Factors that may lead to a downgrade of the ratings of the Notes include significantly higher losses compared to our expectations at closing, due to either increased rates of voluntary terminations (pursuant to the Consumer Credit Act), worse than expected vehicle sale realisation values, significant deterioration of the credit profile of the originator or other key transaction counterparties and a significant deterioration of the economy.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gabriele Gramazio
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Armin Krapf
VP - Senior Credit Officer
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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