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    Azure Finance No. 2 Class B, C, D, And E U.K. Auto ABS Notes Ratings Raised Following Review; Other Ratings Affirmed
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    Azure Finance No. 2 Class B, C, D, And E U.K. Auto ABS Notes Ratings Raised Following Review; Other Ratings Affirmed

    Overview

    • We reviewed Azure Finance No. 2's performance by conducting our analysis of the transaction's underlying assets and structural features.
    • Following our review, we raised our ratings on the class B, C, D-Dfrd, and E-Dfrd notes. At the same time, we affirmed our ratings on the class A and F-Dfrd notes.
    • Azure Finance No. 2 is an asset-backed securitization backed by a portfolio of U.K. auto loan receivables originated by Blue Motor Finance.

    LONDON (S&P Global Ratings) July 26, 2022--S&P Global Ratings today raised its credit ratings on Azure Finance No.2 PLC's class B notes to 'AAA (sf)' from 'AA+ (sf)', class C notes to 'A+ (sf)' from 'A (sf)', class D-Dfrd notes to 'A- (sf)' from 'BBB (sf)', and class E-Dfrd notes to 'B+ (sf)' from 'B (sf)'. At the same time, we affirmed our 'AAA (sf)' and 'CCC+ (sf)' ratings on the class A and F-Dfrd notes, respectively.

    Today's rating actions follow our review of the transaction's performance and the application of our current criteria, and reflect our assessment of the payment structure according to the transaction documents (see "Related Criteria").

    We analyzed the transaction's credit risk under our updated global auto ABS criteria, which fully supersede our previous auto ABS criteria. Our standard recovery rate assumption for investment and speculative grade ratings was replaced with tiered recoveries (recovery rate base case and increasingly stressful recovery rate haircuts at higher ratings). Our rising, flat, and down stress interest rate scenarios were replaced by interest rate curves based on the Cox-Ingersoll-Ross framework specific to each rating category.

    The transaction has amortized strictly sequentially since closing in July 2020 (see "New Issue: Azure Finance No.2 PLC," published on July 28, 2020). This has resulted in increased credit enhancement for the outstanding notes, most notably for the senior and mezzanine notes. As of the April 2022 servicer report, the pool factor had declined to 37.9% (for non-defaulted receivables), and the available credit enhancement for the class A, B, C, D-Dfrd, and E-Dfrd notes had increased to 88.3%, 51.4%, 27.6%, 19.7%, and 9.8%, respectively, compared with 34.6%, 20.6%, 11.6%, 8.6%, and 4.8% at closing. As the class F-Dfrd notes are only backed by the reserve fund, there is no increase in credit enhancement for this class of notes. The uncollateralized class X1-Dfrd and X2 notes have now redeemed.

    Realized losses, both from hostile and voluntary terminations, are in line with our expectation at our last review.

    Observed gross losses from hostile terminations and voluntary terminations are currently (based on the April 2022 investor report) at 3.2% and 0.7%, respectively.

    We therefore maintained our base-case hostile termination assumption at 7.75%. We removed a 0.25% COVID-19 adjustment from our base-case voluntary termination assumption. Consequently, we revised our voluntary termination base-case to 3.50% from 3.75% at closing.

    Given the well-seasoned pool and relatively low pool factor, we reduced the applicable multiple at the 'AAA' rating level to 4.00x from 4.25x at closing for hostile terminations, and to 2.00x from 2.70x at closing for voluntary terminations.

    The purchased loan receivables arise from used car financing, predominantly in the near-prime market. As such, the transaction includes receivables with relatively long original maturities of up to 85 months, original loan-to-value (LTV) ratios up to 125%, and higher vehicle ages. The age distribution of the vehicles, based on the April 2022 investor report suggests that a fifth of the portfolio could be non-euro 6 diesel-powered vehicles, which we believe could face lower recoveries. We factored these while determining our recovery rate haircuts to determine the stressed recovery assumption.

    Based on this and the observed recoveries on defaulted receivables so far, we considered a recovery rate base-case of 40.0% for all rating levels. For recoveries related to hostile terminations, we assumed 100% to be realized nine months after default. We did not apply any recovery lag for voluntary terminations since vehicles must be returned by the obligors to exercise this right.

    Lastly, as the collateral backing the notes comprises U.K. fully amortizing fixed-rate auto loan receivables arising under hire purchase agreements, the transaction is not exposed to residual value risk.

    Table 1

    Credit Assumptions Summary--Current Review
    Rating level Cumulative HT base-case (%) HT stress multiple (x) Stressed cumulative HT (%) Cumulative VT base-case (%) VT stress multiple (x) Stressed cumulative VT (%) Recovery rate haircut (%) Stressed recovery rate (%) Stressed cumulative net losses (%)
    AAA 7.75 4.00 31.00 3.5 2 7.00 25 30.00 26.60
    A+ 7.75 2.50 19.38 3.5 1.63 5.71 20.6 31.76 17.11
    A- 7.75 1.83 14.18 3.5 1.42 4.97 17.5 33.00 12.83
    BBB+ 7.75 1.75 13.56 3.5 1.38 4.83 16.9 33.24 12.28
    BBB- 7.75 1.42 11.01 3.5 1.2 4.20 13.3 34.68 9.93
    B+ 7.75 1.13 8.76 3.5 1.05 3.68 7.5 37.00 7.83
    B 7.75 1.00 7.75 3.5 1 3.50 5 38.00 6.98
    Based on the closing pool balance. HT--Hostile termination. VT--Voluntary termination.

    We performed our cash flow analysis to test the effect of the amended credit assumptions and deleveraging in the structure.

    Our cash flow analysis indicates that the available credit enhancement for the class B, C, D-Dfrd, and E-Dfrd notes is sufficient to withstand the credit and cash flow stresses that we apply at the 'AAA', 'A+', 'A-' and 'B+' ratings, respectively. We therefore raised to 'AAA (sf)', 'A+ (sf)', 'A- (sf)' and 'B+ (sf)', from 'AA+ (sf)', 'A (sf)', 'BBB (sf)', and 'B (sf)' our ratings on the class B, C, D-Dfrd, and E-Dfrd notes, respectively.

    Our cash flow analysis indicates that the available credit enhancement for the class A notes is sufficient to withstand the credit and cash flow stresses that we apply at the 'AAA' rating. We therefore affirmed our rating on the class A notes.

    The class F-Dfrd notes do not pass a 'B' level of credit and cash flow stress. We believe this class of notes is vulnerable to nonpayment, and depends on favorable business, financial, or economic conditions to be repaid, according to our criteria for assigning 'CCC+', CCC, 'CCC-', and 'CC' ratings (see "Related Criteria"). We therefore affirmed our 'CCC+ (sf)' rating on the class F-Dfrd notes.

    Our credit stability analysis indicates that the maximum projected deterioration that we would expect at each rating level for one-year horizons under moderate stress conditions is in line with our criteria.

    There are no rating constraints under our operational risk criteria. In addition, there are no rating constraints under our counterparty or structured finance sovereign risk criteria, and legal risks continue to be adequately mitigated, in our view.

    Azure Finance No. 2 securitizes a portfolio of auto loan receivables, which Blue Motor Finance granted to its U.K. clients.

    Related Criteria

    Related Research

    Primary Credit Analyst:Marta O'Gorman, London + 44 20 7176 2523;
    marta.ogorman@spglobal.com

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