Fitch Rates Penarth Master Issuer 2016-1 'AAAsf'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned Penarth Master Issuer plc's series 2016-1 notes a final rating as follows:
USD500m Series 2016-1 A1: 'AAAsf'; Outlook Stable
The notes are backed by UK credit card receivables originated by the Bank of Scotland plc (BoS; A+/Stable/F1) and Lloyds Bank plc (Lloyds; A+/Stable/F1).
Fitch has simultaneously affirmed the following tranches:
USD600m Series 2015-2 A1 affirmed at 'AAAsf'; Outlook Stable
GBP200m Series 2015-2 A2 affirmed at 'AAAsf'; Outlook Stable
USD750m Series 2015-1 A1 affirmed at 'AAAsf'; Outlook Stable
GBP500m Series 2015-1 A2 affirmed at 'AAAsf'; Outlook Stable
GBP500m Series 2014-2 A1 affirmed at 'AAAsf'; Outlook Stable
GBP500m Series 2014-1 A2 affirmed at 'AAAsf'; Outlook Stable
GBP1,300m Series 2013-1 A2 affirmed at 'AAAsf'; Outlook Stable
GBP600m Series 2014-2 B1 affirmed at 'Asf'; Outlook Stable
GBP120m Series 2014-2 C1 affirmed at 'BBB+sf'; Outlook Stable
GBP500m Series 2014-2 D1: not rated
KEY RATING DRIVERS
Firm Asset Performance
Fitch is maintaining its base case charge-off expectation for the Penarth trust at 7%, which is at the median of the range (4.5% to 8%) in similar transactions. The agency's base case assumptions for the trust's monthly payment rate (MPR; 18%) and yield rate (16%) also remain unchanged since the most recent issue review in June 2015.
Asset performance is closely linked to the performance of the originator due to the revolving nature of the underlying assets relative to the amortising receivables. Fitch conducted a review of the underwriting and servicing processes at BoS and Lloyds in December 2015. Their policies and procedures were satisfactory at the latest visit, as were implementation and controls.
Interchange Cap Impact
EU regulation limiting interchange fees to 0.3% of transaction amounts came into force in December 2015. The impact on the steady state yield is limited since Fitch has always applied a haircut to this revenue source when setting its yield assumption. Following the introduction of the cap no additional interchange stress was applied in the analysis, given its reduced relevance for the trust.
Fitch will continue to assess whether the cap, and any revenue-generating counter-measures by originators, will have second-order effects on cardholder composition, payment behaviour and eventually trust performance.
US Dollar Swap Counterparty
The 2016-1 A1 notes are denominated in US dollars, while the credit card receivables are denominated in sterling. The issuer entered into a cross-currency swap with Wells Fargo Bank to hedge the currency risk.
Fitch does not consider the subordination clause for swap termination payments to be enforceable should Wells Fargo Bank default as it is a US entity. This corresponds to the minimum rating eligibility (BBB+/F2) for the swap counterparty under Fitch's criteria. Further mitigating factors in line with Fitch's criteria address swap counterparty risk.
Stable Asset Outlook
The performance of credit card trusts continued to improve throughout 4Q15, with charge-off rates improving. Delinquency levels remained largely unchanged, while payment and yield rates declined (see Credit Card Index - UK 1Q16 dated 9 February 2016 on www.fitchratings.com).
Fitch revised its UK GDP growth forecast to 2.1% in its March Global Economic Outlook, from 2.3% for 2016 and kept the forecast of 2.1% for 2017. The agency further believes annual UK unemployment for 2016 and 2017 will fall slightly to 5.2% in 2017 from its forecasted 5.3% for 2016. Fitch therefore maintains its stable outlook for UK credit card debt.
Rating sensitivity to increased charge-off rate
Class A current rating (base case: 7%): 'AAAsf'
Increase base case by 25% for class A: 'AA+sf'
Increase base case by 50% for class A: 'AAsf'
Increase base case by 75% for class A: 'AA-sf'
Rating sensitivity to reduced MPR
Class A current rating (base case: 18%): 'AAAsf'
Reduce base case by 15% for class A: 'AA+sf'
Reduce base case by 25% for class A: 'AA+sf'
Reduce base case by 35% for class A: 'AA-sf'
Rating sensitivity to reduced purchase rate (ie aggregate new purchases divided by aggregate principal repayments in a given month)
Class A current rating (base case: 100%): 'AAAsf'
Reduce base case by 50% for class A: 'AA+sf'
Reduce base case by 75% for class A: 'AA+sf'
Reduce base case by 100% for class A: 'Asf'
Rating sensitivity to increased charge-off rate and reduced MPR
Class A current rating: 'AAAsf'
Increase charge-off rate by 25% and reduce MPR by 15% for class A: 'AA'sf'
Increase charge-off rate by 50% and reduce MPR by 25% for class A: 'A+sf'
Increase charge-off rate by 75% and reduce MPR by 35% for class A: 'BBB+sf'
DUE DILIGENCE USAGE
Fitch was provided with due diligence information from KPMG LLP. The due diligence focused on various data attributes relating to a sample of credit card receivables. Fitch reviewed this information which indicated no adverse findings material to the rating analysis.
Fitch conducted a review of a small targeted sample of the originator's origination files during its last originator review in December 2015. The agency found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio.
Overall, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
SOURCES OF INFORMATION
The information below was used in the analysis.
-Historical performance data for the trust provided by Lloyds from October 2008 to January 2016
-Stratifications of the trust provided by Lloyds as at end-February 2016
-Stratifications of March 2016 account additions provided by Lloyds as at 1 March 2016
-Summary of credit card holder deposits for Lloyds and BoS provided by Lloyds
-Investor reports provided by Lloyds as at 31 March 2016