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    Azure Finance No. 1 PLC U.K. Auto ABS Ratings Raised
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    Azure Finance No. 1 PLC U.K. Auto ABS Ratings Raised

    Overview

    • We have reviewed Azure Finance No. 1's performance by conducting our analysis of the transaction's underlying assets and structural features.
    • Following our review, we have raised our ratings on the class B, C, and D notes.
    • Azure Finance No. 1 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) May 24, 2021--S&P Global Ratings today raised its credit ratings on Azure Finance No. 1 PLC's class B notes to 'AAA (sf)' from 'AA (sf)', class C notes to 'AA+ (sf)' from 'BBB (sf)', and class D notes to 'A (sf)' from 'BB+ (sf)'.

    Today's upgrades 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").

    The transaction has been amortizing strictly sequentially since closing in July 2018, resulting in a significant increase in enhancement for the senior and mezzanine notes (see "New Issue: Azure Finance No. 1 PLC," published on July 12, 2018). As of the March 2021 servicer report, the pool factor had declined to 17.5% (for non-defaulted receivables), and the available credit enhancement for the class B, C, and D notes increased to 83.9%, 46.9%, and 29.7%, respectively, compared with 39.6%, 22.4%, and 14.4% at our last review (see "Azure Finance No. 1 PLC Class A And B U.K. Auto ABS Ratings Raised; Class C And D Ratings Affirmed," published on June 15, 2020).

    Given the current pool factor, the observed gross losses from hostile terminations, currently at 6.9% of the initial pool balance, outperformed our expectations in June 2020. In addition, following COVID-19 borrower defaults have not changed materially.

    The percentage of customers reported as affected by COVID-19 has been moderate in our view, at 6.5% of performing receivables in the latest servicer report. A high portion of these customers have elected payment arrangements as opposed to complete payment deferrals, with approximately 33% of affected customers continuing to pay at least 50% of their scheduled payments and 11% continuing to pay as normal.

    The percentage of customers reported as affected by COVID-19 has improved significantly compared to the peak of the pandemic last year, which as of the June 2020 investor report was 13.5% of the current outstanding balance (for non-defaulted receivables).

    Following our review, we revised our base-case hostile termination assumption to 9.0% from 10.0% at our last review, and we have maintained our base-case voluntary termination assumption unchanged compared to our last review at 3.75%.

    We have maintained our hostile termination (HT) and voluntary termination (VT) multiples, unchanged and in line with our last review.

    We have also maintained the same recovery assumptions as at closing. Lastly, as the collateral backing the notes comprises U.K. fully amortizing fixed-rate auto loan receivables arising under hire purchase (HP) agreements, the transaction is not exposed to residual value risk.

    We have 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, and D notes is sufficient to withstand the credit and cash flow stresses that we apply at the 'AAA', 'AA+', and 'A' rating levels, respectively. We have therefore raised to 'AAA (sf)' from 'AA (sf)' our rating on the class B notes. We have also raised to 'AA+ (sf)' and 'A (sf)' from 'BBB (sf)' and 'BB+ (sf)' our ratings on the class C and D notes, respectively.

    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.

    S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

    Azure Finance No. 1 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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