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Rating Action:

Moody's upgrades Motability Operations' LT Issuer rating to A1, with a stable outlook

16 Sep 2015

London, 16 September 2015 -- Moody's Investors Service upgraded the long-term issuer and senior unsecured ratings of Motability Operations Group plc (MO) to A1 stable from A2 positive. The ratings upgrade reflects MO's continued capital build, reinforced by improved risk controls and enhanced value proposition for customers. MO's exposure to residual value risk in the fleet, as well as insurance risk, is mitigated by the firm's continued conservative approach and track record in managing both risks. Concurrently, Moody's has affirmed MO's Prime 1 short-term ratings.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Even with growth in the business and its operating lease assets, MO continues to build its relative capital levels through profits derived from both leasing income and gains from the sale of vehicles. We attribute this capital build to the firm's continued cost takeout effort as well as benefits due to MO's entrenched position in the delivery of the Motability Scheme. This build up in reserves not only provides a buffer against residual value risk, but also reinforces the firm's financial flexibility, allowing MO to invest in initiatives to improve the user experience and to continue to make discretionary contributions to the Motability Charity. We anticipate capital to continue to build, given MO's shareholders are not entitled to a dividend, allowing MO to continue to support its various initiatives while ensuring appropriate buffers are in place. During 2013 and 2014 MO contributed GBP200 million to the Motability charity to fund expected transitional support payments for customers who lose their ability to use the Motability Scheme. As a consequence of the UK government's implementation of the Personal Independent Payment (PIP) program, some recipients of the Disability Living Allowance may not qualify for the higher rate allowance required to continue with the Motability Scheme. The Motability scheme ("the Scheme") enables disabled people in the U.K. who receive the relevant qualifying allowance to choose to use it to lease a new vehicle through the Scheme.

Residual value risk has continued to be managed in a conservative manner and risk governance has been further enhanced with the addition of a risk director who has the power of veto to ensure risk appetite is respected. The risk director's reporting lines demonstrate appropriate levels of independence and the new director is empowered to attend all governance committees.

The rating upgrade also considers the new structure of the fleet's motor insurance arrangement whereby MO, through its reinsurance captive, MO Reinsurance Ltd (MORL), participates in a proportion of premium exposure. This new arrangement was launched in October 2013, over which time management have shown a level of conservatism in its undertaking, consistent with its approach towards managing residual value risk. Given the mitigants in place through both reinsurance on individual claims, as well as stop loss reinsurance, the exposure should be manageable on an ongoing basis, given current capital levels and levels of profitability. For further detail on the reinsurance arrangement, please refer to our Issuer Comment entitled "Motability Operations' new insurance arrangement adds manageable risks to its business model" published on 1 July 2013. We will continue to monitor the new arrangement as the migration from the old structure to the new structure continues toward full implementation.

As part of our analysis we have made several adjustments to the unadjusted outputs of the Finance Company scorecard to better reflect the unique aspects of MO's business profile. Regarding the financial factors, the Lease Residual Value Exposure to TCE has been scored Baa from the computed score of Ba, to reflect the ongoing support received through the MO's VAT concession and the manufacturer discounts MO is able to negotiate through their buying power. PPI/AMA has been scored Aa/A from the unadjusted score of Baa, to reflect the profitability levels prior to discretionary donations made by MO to the Motability charity.. In regard to non-financial factors, potential volatility of assets/cash flows and risk management have been scored Aa/A, reflecting both the stability of the MO franchise, as well as the enhancements made to the risk structure with the recent addition of a risk director. Finally, we have adjusted the operating diversification score to Ba from B to reflect MO's entrenched positioning, albeit narrow breadth. This feature of MO's business is further reflected by an additional upwards notch made to the scorecard outcome. Altogether, in adjusting for MO's unique features, the scorecard reflects our assigned standalone score of a3. For further information on considerations for adjustments made, please refer to MO's most recent credit opinion.

Moody's support assumption, reflects two notches of uplift from the a3 standalone credit assessment, bringing MO's long-term issuer rating to A1. We maintained support at two notches to reflect the likelihood the UK government will provide support to the operation and bondholders in the event of MO's failure, on an interim basis, to maintain existing operations and capital market activities, until a successor firm is setup with the ability to provide beneficiaries with lease cars. The Scheme benefits from patronage from the Queen and broad support from across the UK political spectrum.

MO operates a unique franchise in car leasing within the UK, providing leased vehicles to 651,000 recipients of UK Government-funded mobility allowances, on a rolling seven-year exclusivity contract with Motability. MO faces limited credit risk exposure as it collects participant allowances, which covers all Scheme related costs, directly from the UK Government.

WHAT COULD CHANGE THE RATING - UP

Upward pressure on the ratings is unlikely given the recent rating upgrade and narrow, albeit entrenched, purpose of the MO franchise.

WHAT COULD CHANGE THE RATING - DOWN

Downward pressure on the rating would come from MO reducing its reserves significantly, shortening the average maturity profile of its debt or facing material losses in its management of residual values. In addition, downward pressure could develop on MO's ratings if MORL, the Isle of Man insurance subsidiary, were to face significant losses not covered by the reinsurance program.

LIST OF AFFECTED RATINGS

MOTABILITY OPERATIONS GROUP PLC

- Long-term Issuer Rating upgraded to A1 stable from A2 positive

- Short-term issuer rating affirmed at Prime 1

- Backed Senior unsecured ratings upgraded to A1 stable from A2 positive

- Backed Senior Unsecured medium-term note program upgraded to (P)A1 from (P)A2

- Backed Short-term program affirmed at (P)Prime 1

- Outlook, Stable

The principal methodology used in this rating was Finance Company Global Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Michael Eberhardt, CFA
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Nicholas Hill
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

Moody's upgrades Motability Operations' LT Issuer rating to A1, with a stable outlook
No Related Data.
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