Morningstar DBRS finalises ratings on UK SME loan securitisation notes

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UK SME loan securitisation ratings

Highlights

Morningstar DBRS finalised ratings for Small Business Origination Loan Trust 2026-1 DAC at A (high) (sf) for Class A, BBB (sf) for Class B, and BB (high) (sf) for Class C notes, with no rating for Class Z or R notes.
The GBP353.3 million static SME loan portfolio comprises 3,790 loans with a weighted-average fixed interest rate of 13.5%, average loan size GBP93,225, and largest single borrower at 0.2% concentration.
The transaction features a 1.75% cash reserve at closing, GBP1.8 million non-amortising liquidity reserve, pro rata amortisation switching to sequential upon trigger events, and an interest rate swap to manage asset-liability mismatch.

Ratings and transaction structure

As reported by Morningstar DBRS, DBRS Ratings Limited finalises provisional credit ratings of A (high) (sf) for the Class A Loan Note, BBB (sf) for the Class B Notes, and BB (high) (sf) for the Class C Notes issued by Small Business Origination Loan Trust 2026-1 DAC. The agency does not rate the Class Z Notes or Class R Notes in the transaction.

The deal is a cash flow securitisation of loans originated through the Funding Circle lending platform and is structured as a static portfolio, meaning the issuer is not required to buy replacement assets or add new loans. The loans have a maximum maturity of six years, amortise monthly under a French amortisation profile, and produce a weighted-average life of 2.7 years.

The transaction amortises on a pro rata basis until specified switch events occur, including when the notes' aggregate outstanding principal balance falls to 45.0% or less of the balance at closing, when cumulative defaults breach set thresholds over time, or when 21 months have passed after closing. After any of those triggers, amortisation becomes sequential, while an enforcement event would combine principal and interest into a single priority of payments.

Two reserves are set 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, while a non-amortising GBP1.8 million liquidity reserve is available to cover interest shortfalls on the most senior rated notes outstanding.

Morningstar DBRS also says an interest rate swap helps limit the mismatch between the fixed-rate loan portfolio and the floating-rate notes. It adds that the appointment of a back-up servicer reduces servicing continuity risk, and that the portfolio's excess spread can be used to cure principal shortfalls through a principal deficiency ledger mechanism.

Portfolio composition and market implications

The underlying portfolio consists of 3,790 loans to 3,772 borrowers with a total balance of GBP353.3 million. Average outstanding principal per loan stands at GBP93,225, the largest single borrower concentration is 0.2% of the pool, and the top five and top 10 obligors account for 1.1% and 2.2% of the portfolio, respectively.

The purchase of the final portfolio takes economic effect as of 30 April 2026. Borrower concentration is highest in the South-East at 25.9%, followed by the Midlands at 15.2% and London at 13.4%, giving the transaction broad but still regionally tilted exposure to the UK SME economy.

For credit analysis, Morningstar DBRS uses Funding Circle historical data and applies annual default probability assumptions of 2.5% for A risk bands, including A+ and A2, 4.6% for B bands, including B2, 7.2% for C, and 9.9% for D. It says there are no loans under forbearance measures in the pool, and notes the portfolio's weighted-average fixed interest rate stands at 13.5%.

On counterparties, Citibank, N.A., London Branch serves as issuer account bank and J.P. Morgan SE is the initial interest rate swap counterparty. Morningstar DBRS says both meet its criteria for their roles, although it notes the swap downgrade provisions are not fully consistent with its criteria and will be monitored. The agency also says no environmental, social, or governance factors have a significant or relevant effect on the credit analysis.

Our earlier coverage of Hermitage 2026 plc’s UK equipment finance securitisation explained how provisional ratings were assigned across multiple note classes ahead of issuance. We noted that the transaction is backed by Haydock Finance Limited’s hire purchase and finance lease receivables and features a 12-month revolving period, showing how tranche structure and credit enhancement are used to allocate risk for investors.

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