Morningstar DBRS assigns provisional ratings to UK SME loan securitisation

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Morningstar DBRS UK SME ratings

Highlights

Morningstar DBRS assigned provisional ratings of (P) A (high) (sf), (P) BBB (sf), and (P) BB (high) (sf) to Small Business Origination Loan Trust 2026-1 DAC's Class A, B, and C notes, respectively.
The GBP 330 million provisional portfolio comprises 3,558 loans averaging GBP 92,727 each, with top 10 obligor concentration at 2.3% and a 13.5% weighted-average fixed interest rate.
The transaction structure features 1.75% initial cash reserve, GBP 1.6 million liquidity reserve, pro rata amortisation triggers, and an interest rate swap to mitigate fixed/floating exposure.

Transaction structure and rating rationale

As reported by Morningstar DBRS, DBRS Ratings Limited assigned provisional ratings of (P) A (high) (sf) to the Class A Loan Note, (P) BBB (sf) to the Class B Notes and (P) BB (high) (sf) to the Class C Notes to be issued by Small Business Origination Loan Trust 2026-1 DAC.

The transaction is structured as a static securitisation of loans originated through the Funding Circle Ltd. lending platform to UK-based small and medium-size enterprises and sole traders. The loans have a maximum maturity of six years and amortise monthly under a French amortisation profile, producing a weighted-average life of 2.7 years.

Morningstar DBRS says the structure allows pro rata amortisation until certain sequential switch events occur, including when the outstanding principal balance of the notes falls to 45.0% or less of the closing balance, when cumulative defaults breach set thresholds over time, or 21 months after closing. The deal also includes an interest rate swap to reduce the mismatch between fixed-rate loans and floating-rate notes, as well as a back-up servicer to limit servicing disruption risk.

At closing, the cash reserve is funded at 1.75% of the initial portfolio balance and later targets the lower of 2.75% of the initial portfolio balance or 5.5% of the outstanding principal balance of the rated notes. A separate non-amortising liquidity reserve of GBP 1.6 million is available to cover interest shortfalls on the most senior rated notes outstanding from time to time.

Portfolio composition and market implications

The provisional portfolio contains 3,558 loans to 3,541 borrowers, with an average outstanding principal balance of GBP 92,727. The largest single borrower concentration is 0.2% of the portfolio, while the top five and top 10 obligors account for 1.2% and 2.3% respectively.

Geographically, the largest borrower concentrations are in the South-East, the Midlands and London, representing 25.8%, 14.8% and 13.1% of the portfolio balance. Morningstar DBRS says the portfolio carries a weighted-average fixed interest rate of 13.5%, giving the structure significant excess spread that can be used to cure principal shortfalls through a principal deficiency ledger mechanism.

For its analysis, Morningstar DBRS used annual default probability assumptions of 2.5% for A bands, 4.6% for B bands, 7.2% for C and 9.9% for D, based on historical data provided by Funding Circle. It says there are no loans under forbearance measures in the pool, while Citibank, N.A., London Branch serves as issuer account bank and J.P. Morgan SE is the initial swap counterparty.

Morningstar DBRS also says no environmental, social or governance factors had a significant or relevant effect on the credit analysis. The ratings address the credit risk linked to the identified financial obligations under the transaction documents, including related interest payments and class balances.

Our earlier coverage of the Navient Education Loan Trust 2026-A securitisation reviewed Morningstar DBRS’s finalised provisional ratings across four tranches and the key drivers behind them. We highlighted the deal’s credit enhancement package—overcollateralisation, subordination, reserves and excess spread—alongside a sequential-pay structure with turbo amortisation features and related legal and operational assessments of the parties involved.

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