Research: Rating Action: Moody’s assigns provisional (P) Aaa (sf) ratings to Lotte Card’s credit card deal

KRW300 billion of asset-backed securities rated

Hong Kong, July 26, 2022 – Moody’s Investors Service has assigned provisional (P) Aaa (sf) ratings to the fixed rate bonds to be issued by Supreme Twenty-Second Securitization Specialty Co., Ltd.

The complete rating action is as follows:

Issuer: Supreme Twenty-Second Securitization Specialty Co., Ltd.

…. KRW200,000,000,000 Class A1 Fixed Rate Bonds due 2026, Assigned (P) Aaa (sf)

…. KRW100,000,000,000 Class A2 Fixed Rate Bonds due 2026, Assigned (P) Aaa (sf)

RATIONALE RATINGS

The provisional ratings of the bonds have been based on: (1) the credit quality of the portfolio; (2) the credit enhancement level of 22%; (3) the excess spread and liquidity reserve available to the transaction; (4) the minimum seller interest to account for certain risks, such as fraud and dilutions; (5) the credit quality and expertise of Lotte Card Co., Ltd. (Lotte Card) in its role as servicer; and (6) the structural and legal integrity of the transaction.

There is a high degree of linkage between the ratings of the bonds to the credit quality of Lotte Card, which is acting as sponsor, seller, and servicer.

DESCRIPTION OF TRANSACTION AND ISSUER

This is a securitization transaction sponsored by the Korea-based Lotte Card. The assets backing the bonds consist of present and future receivables under designated credit card accounts originated by Lotte Card.

The portfolio comprises credit card receivables owed by cardholders for their purchases on credit, as well as for drawing cash advances.

Purchases on credit can be repaid, either: (1) in full by the next payment due date (lump sum purchases); (2) on an installment basis, for which principal payment will be made over a fixed term (installment purchases); or (3) in part by the next payment date with a monthly minimum for the cardholders granted a revolving credit limit (revolving payment).

Cash advances drawn by cardholders need to be repaid in full and with interest by a designated payment due date, or by the revolving payment method for the revolving payment accounts.

The transaction’s revolving period ends in February 2025, and a six-month controlled amortization period will then follow. The bonds pay monthly interest at a fixed rate. The principal will be repaid during the controlled amortization period.

With the occurrence and declaration of any of the early amortization triggers, the revolving or the controlled amortization periods will end immediately, and the principal collections will be used to accelerate principal repayments on the bonds.

DESCRIPTION OF THE METHODOLOGY:

The principal methodology used in these ratings was “Moody’s Approach to Rating Credit Card Receivables-Backed Securities” published in July 2022 and available at https://ratings.moodys.com/api/rmc-documents/390486. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Moody’s credit card ABS rating methodology begins by developing a maximum loss that is consistent with a Aaa (sf) rating (Aaa level of credit enhancement given sponsor default (LGSD)), assuming that the sponsor has closed its cardholders’ accounts. This scenario is associated with sponsors that are in or close to default. For Supreme Twenty-Second Securitization Specialty Co., Ltd., the Aaa LGSD is 26.7%.

The key parameters used to derive the Aaa LGSD are: charge off rates (current, long run and peak); payment rates (current and at the start of early amortization), receivable yield rates (current, at the start of early amortization and the compression level due to potential asset-liability mismatches); servicing fees (current and stressed) and the minimum seller’s interest (as per the documents).

For Supreme Twenty-Second Securitization Specialty Co., Ltd., Moody’s assumes a long run charge-off rate of 9%, principal payment rate at the start of early amortization of 10% and receivable yield rate at start of early amortization of 14% .

In a second step, the level of credit enhancement that is consistent with a Aaa (sf) rating is determined by lowering the Aaa LGSD by the applicable “dependency ratio”. This ratio varies according to the sponsor’s credit rating or counterparty risk assessment (CR Assessment), if available.

The higher the sponsor’s credit rating or CR Assessment – as the case may be – the lower the dependency ratio. The ratio reflects the likelihood of the sponsor entering default, so higher-rated sponsors will require lower Aaa enhancement, all else being equal. The result is the minimum Aaa credit enhancement (CE), absent other counterparty or operational risks. For Supreme Twenty-Second Securitization Specialty Co., Ltd., the 22.0% subordination in the subject transaction is sufficient to cover the minimum Aaa CE.

Factors that would lead to an upgrade or downgrade of the ratings:

Factors that may cause a downgrade of the ratings include a significant decline in the overall performance of the pool and a deterioration of the credit profile of the transaction counterparties, including the originator.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

Moody’s either did not receive or take into account one or more third-party due diligence assessment (s) regarding the underlying assets or financial instruments (the “Due Diligence Assessment (s)”) in this credit rating action.

The Due Diligence Assessment (s) referenced herein were prepared and produced solely by parties other than Moody’s. While Moody’s uses Due Diligence Assessment (s) only to the extent that Moody’s believes them to be reliable for purposes of the intended use, Moody’s does not independently audit or verify the information or procedures used by third-party due-diligence providers in the preparation of the Due Diligence Assessment (s) and makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of the Due Diligence Assessment (s).

In rating this transaction, Moody’s uses a cash flow model to determine the collateral loss in a maximum stress scenario. As a second step, Moody’s haircuts this collateral loss based on the sponsor’s credit quality. Finally, Moody’s compares the available credit enhancement with the haircut collateral loss, taking into account loss allocation and other structural features, to determine the model-indicated rating for each instrument.

Moody’s quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows.

For ratings issued on a program, series, category / class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category / class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer / deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity (ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Moody’s considers a rated entity or its agent (s) to be participating when it maintains an overall relationship with Moody’s. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent (s) generally provide Moody’s with information for the purposes of its ratings process. Please refer to https://ratings.moodys.com for the Regulatory Disclosures for each credit rating action, shown on the issuer / deal page, and for Moody’s Policy for Designating Non-Participating Rated Entities, shown on https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK . Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Moody’s Investors Service Hong Kong Limited (“MIS HK”) is not a qualified credit rating agency within Korea. Any rating on any Korean domestic issuance assigned by MIS HK cannot be used within Korea for any regulatory or other purpose which is not permitted under relevant Korean laws or regulations.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer / deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Joe Wong
VP – Sr Credit Officer
Structured Finance Group
Moody’s Investors Service Hong Kong Ltd.
24 / F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong SAR)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Jerome Cheng
Associate Managing Director
Structured Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody’s Investors Service Hong Kong Ltd.
24 / F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong SAR)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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