GBP [] million ABS Notes rated, relating to a portfolio of UK auto loans
London, 09 April 2021 -- Moody's Investors Service ("Moody's") has assigned the following provisional
ratings to Notes to be issued by Dowson 2021-1 plc:
....GBP []M Class A Floating Rate Notes
due March 2028, Assigned (P)Aaa (sf)
....GBP []M Class B Floating Rate Notes
due March 2028, Assigned (P)Aa2 (sf)
....GBP []M Class C Floating Rate Notes
due March 2028, Assigned (P)A3 (sf)
....GBP []M Class D Floating Rate Notes
due March 2028, Assigned (P)Ba1 (sf)
....GBP []M Class E Floating Rate Notes
due March 2028, Assigned (P)B1 (sf)
....GBP []M Class F Floating Rate Notes
due March 2028, Assigned (P)Caa2 (sf)
....GBP []M Class X Floating Rate Notes
due March 2028, Assigned (P)Caa2 (sf)
RATINGS RATIONALE
The Notes are backed by a static pool of UK auto finance contracts originated
by Oodle Financial Services Limited ("Oodle") (NR). This is the
third 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 auto finance contracts 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.
The portfolio of assets amount to approximately GBP 293,857,798.5
million as of 18 March 2021 pool cut-off date. The portfolio
consisted of 33,990 agreements mainly originated in 2020 and predominantly
made of used (99%) vehicles distributed through national and regional
dealers as well as brokers. It has a weighted average seasoning
of 10.3 months and a weighted average remaining term of 3.9
years.
The ratings are primarily based on the credit quality of the portfolio,
the structural features of the transaction and its legal integrity.
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 (Equiniti Gateway Limited
(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 1.34% 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 7 months of liquidity at the
beginning of the transaction. The portfolio has an initial yield
of 17.17% (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 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 8.9% of the pool,
the effect is that the 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 7 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 four years
that Oodle has been originating.
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.
Moody's determined portfolio lifetime expected defaults of 17.0%,
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 17.0% 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 29.7%.
CURRENT ECONOMIC UNCERTAINTY:
The coronavirus pandemic has had a significant impact on economic activity.
Although global economies have shown a remarkable degree of resilience
to date and are returning to growth, the uneven effects on individual
businesses, sectors and regions will continue throughout 2021 and
will endure as a challenge to the world's economies well beyond the end
of the year. While persistent virus fears remain the main risk
for a recovery in demand, the economy will recover faster if vaccines
and further fiscal and monetary policy responses bring forward a normalization
of activity. As a result, there is a heightened degree of
uncertainty around our forecasts. Our analysis has considered the
effect on the performance of consumer assets from a gradual and unbalanced
recovery in the UK economic activity.
We regard the coronavirus outbreak as a social risk under our ESG framework,
given the substantial implications for public health and safety.
The principal methodology used in these ratings was "Moody's Global Approach
to Rating Auto Loan- and Lease-Backed ABS" published in
December 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1202515.
Alternatively, 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 would lead to an upgrade of the ratings of Class B-X
Notes include significantly better than expected performance of the pool
together with an increase in credit enhancement of Notes.
Factors that would lead to a downgrade of the ratings include: (i)
increased counterparty risk leading to potential operational risk of (a)
servicing or cash management interruptions and (b) the risk of increased
swap linkage due to a downgrade of swap counterparty ratings; and
(ii) economic conditions being worse than forecast resulting in higher
arrears and losses.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
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.
Carmen Brunetti Llavona
Associate Lead 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
