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Rating Action:

Moody's assigns definitive ratings to Small Business Origination Loan Trust 2018-1 DAC

16 May 2018

GBP 169.38 million of securities rated

London, 16 May 2018 -- Moody's Investors Service ("Moody's") has today assigned the following ratings to four classes of Notes issued by Small Business Origination Loan Trust 2018-1 DAC ("SBOLT 2018-1", the "Issuer"):

....GBP 128,070,000 Class A Floating Rate Asset-Backed Notes due December 2026, Assigned Aa3 (sf)

....GBP 12,390,000 Class B Floating Rate Asset-Backed Notes due December 2026, Assigned A2 (sf)

....GBP 14,460,000 Class C Floating Rate Asset-Backed Notes due December 2026, Assigned Baa2 (sf)

....GBP 14,460,000 Class D Floating Rate Asset-Backed Notes due December 2026, Assigned Ba2 (sf)

Moody's has not assigned ratings to GBP 26,850,000 Class E Floating Rate Asset-Backed Notes, GBP 14,460,000 Class X Floating Rate Asset-Backed Notes and GBP 10,320,000 Class Z Variable Rate Asset-Backed Notes which will also be issued by the Issuer.

SBOLT 2018-1 is a securitization backed by a static pool of GBP 206,572,566 of small business loans originated through Funding Circle Ltd's ("Funding Circle", the "Originator") online lending platform. The loans were granted to individual entrepreneurs and small and medium-sized enterprises (SME) domiciled in UK. Funding Circle will act as the Servicer and Collection Agent on the loans and P2P Global Investments PLC ( the "Seller") will be the retention holder.

RATINGS RATIONALE

The ratings of the Notes are primarily based on the analysis of the credit quality of the underlying loan portfolio, the structural integrity of the transaction, the roles of external counterparties and the protection provided by credit enhancement. The ratings take into account, among other factors:

(i) a loan-by-loan evaluation of the underlying loan portfolio, complemented by historical performance information as provided by Funding Circle;

(ii) the structural features of the transaction, incorporating relatively high credit enhancement from subordination, high levels of excess spread compared to a conventional ABS SME securitization, and the inclusion of an amortizing cash reserve and non-amortizing liquidity reserve which provide both credit and liquidity coverage over the life of the transaction;

(iii) the appointment of a back-up servicer at closing to mitigate counterparty risk; and

(iv) the legal and structural integrity of the transaction.

In Moody's view, the strong credit positive features of this transaction include, amongst others:

(i) a static portfolio with a short weighted average life of less than 2 years;

(ii) certain portfolio characteristics, such as:

a) high granularity with low single obligor concentrations (for example, the top individual obligor and top 10 obligor exposures are 0.2% and 1.9% respectively) and an effective number above 1,800;

b) the loans' monthly amortisation; and

c) the high yield of the portfolio, with a weighted average interest rate of 10.04%.

(iii) the transaction's structural features, which include:

(a) a cash reserve initially funded at 1.75% of the initial portfolio balance, increasing to 2.75% of the initial portfolio balance before amortising in line with the rated Notes; and

(b) a non-amortising liquidity reserve sized and funded at 0.25% of the initial portfolio balance;

(c) an interest rate cap with a strike of 2% that provides protection against increases on LIBOR due on the rated Floating Rate Asset-Backed Notes.

(iv) no set-off risk, as obligors do not have deposits or derivative contracts with Funding Circle.

However, Moody's notes that the transaction has a number of challenging features, such as

(i) potential misalignment of interest between the Originator and the noteholders as the Originator does not retain a direct economic interest in the transaction. This is partially mitigated by the Seller acting as retention holder, and repurchase and indemnification obligations of the Originator and the Seller in case the representations and warranties are proven incorrect;

(ii) the short operating history of the Originator and Servicer and the rapid growth of its origination volumes, without any experience of a significant economic downturn;

(iii) relatively high industry concentrations as almost 40% of the obligors belong to the top two sectors, namely Services: Business (22%) and Construction & Building (17%), and the high exposure to individual entrepreneurs and micro-SMEs (over 61% of the portfolio); and

(iv) the loans are only collateralized by a personal guarantee, and recoveries on defaulted loans often rely on the realization of this personal guarantee via cashflows from subsequent business started by the guarantor.

Key collateral assumptions:

Mean default rate: Moody's assumed a mean default rate of 11% over a weighted average life of 1.9 years (equivalent to a B2 proxy rating as per Moody's Idealized Default Rates). This assumption is based on:

(i) the available historical vintage data;

(ii) the performance of a previous transaction backed by loans originated by Funding Circle; and

(iii) the characteristics of the loan-by-loan portfolio information.

Moody's also took into account the current economic environment and its potential impact on the portfolio's future performance, as well as industry outlooks or past observed cyclicality of sector-specific delinquency and default rates.

Default rate volatility: Moody's assumed a coefficient of variation (i.e. the ratio of standard deviation over the mean default rate explained above) of 50%, as a result of the analysis of the portfolio concentrations in terms of single obligors and industry sectors.

Recovery rate: Moody's assumed a 25% stochastic mean recovery rate, primarily based on the characteristics of the collateral-specific loan-by-loan portfolio information, complemented by the available historical vintage data.

Portfolio credit enhancement: the aforementioned assumptions correspond to a portfolio credit enhancement of 42%.

As of closing, the loan portfolio of approximately GBP 206.6million was comprised of 4,007 loans to 3,928 borrowers. The average remaining loan balance stood at GBP 51,553, with a weighted average fixed rate of 10.04%, a weighted average remaining term of 44.7 months and a weighted average seasoning of 8.6 months. Geographically, the pool is concentrated mostly in the South East (24.16%) and London (15.17%). The majority of the loans were taken out by borrowers to fund the expansion or growth of their business and each loan benefits from a personal guarantee from (typically) the owner(s) of the business. At closing, any loan more than 30 days in arrears will be excluded from the final pool.

Key Transaction Structure Features:

Cash Reserve Fund: The transaction benefits from a cash reserve fund initially funded at 1.75% of the initial portfolio balance, increasing to 2.75% of the initial portfolio balance before amortising in line with the rated Notes. The reserve fund provides both credit and liquidity protection to the rated Notes.

Liquidity Reserve Fund: The transaction benefits from a separate, non-amortising liquidity reserve fund sized and funded at 0.25% of the initial portfolio balance. When required, funds can be drawn to provide liquidity protection to the senior Notes.

Counterparty Risk Analysis:

Funding Circle (NR) will act as Servicer of the loans and Collection Agent for the Issuer. Link Financial Outsourcing Limited (NR) will act as a warm Back-Up Servicer and Collection Agent.

All of the payments on loans in the securitised loan portfolio are paid into a Collection Account held at Barclays Bank plc (A2 / P-1). There is a daily sweep of the funds held in the Collection Account into the Issuer Account, which is held with Citibank, N.A., London Branch (A1 / (P)P-1), with a transfer requirement if the rating of the account bank falls below A2 / P-1.

Parameter Sensitivities Analysis:

Moody's also tested other sets of assumptions under its Parameter Sensitivities analysis. For instance, if the assumed default rate of 11% used in determining the initial rating was changed to 12.5% and the recovery rate of 25% was changed to 20%, the model-indicated rating for Class A would be unchanged, whilst the model-indicated ratings for Classes B, C and D would be within one notch of the base case rating. For more details, please refer to the full Parameter Sensitivity analysis included in the New Issue Report for this transaction.

Principal Methodology:

The principal methodology used in these ratings was "Moody's Global Approach to Rating SME Balance Sheet Securitizations" published in August 2017. 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:

The Notes' ratings are sensitive to the performance of the underlying loan portfolio, which in turn depends on economic and credit conditions that may change. The evolution of the associated counterparties risk, the level of credit enhancement and the UK's country risk could also impact the Notes' ratings.

The ratings address the expected loss posed to investors by the legal final maturity of the Notes. In Moody's opinion, the structure allows for timely payment of interest on the Class A and ultimate payment of principal with respect to all rated Notes by the legal final maturity. Moody's ratings address only the credit risk associated with the transaction. Other non-credit risks have not been addressed but may have a significant effect on yield to investors.

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 or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

James Morton
VP - Senior 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

Carole Gintz
Associate Managing Director
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.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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