DBRS Ratings Limited (DBRS) assigned provisional ratings to 11 tranches of an unexecuted, unfunded financial guarantee (the senior guarantee) regarding a portfolio of corporate loans and credit facilities (the Colonnade Global 2018-2 portfolio) originated or managed by Barclays Bank PLC (Barclays) and its affiliates as follows:
-- USD 1,102,790,000 Tranche A at AAA (sf)
-- USD 21,190,000 Tranche B at AA (high) (sf)
-- USD 6,390,000 Tranche C at AA (sf)
-- USD 7,330,000 Tranche D at AA (low) (sf)
-- USD 20,530,000 Tranche E at A (high) (sf)
-- USD 3,590,000 Tranche F at A (sf)
-- USD 10,930,000 Tranche G at A (low) (sf)
-- USD 20,260,000 Tranche H at BBB (high) (sf)
-- USD 3,990,000 Tranche I at BBB (sf)
-- USD 6,660,000 Tranche J at BBB (low) (sf)
-- USD 19,673,328 Tranche K at BB (high) (sf)
The ratings address the likelihood of a reduction to the respective tranche notional amounts resulting from borrower defaults within the guaranteed portfolio of the notional loan portfolio financial guarantee during the eight-year credit protection period. Borrower default events are limited to failure to pay, bankruptcy and restructuring events.
The ratings take into consideration only the creditworthiness of the reference portfolio. The ratings do not address counterparty risk nor the likelihood of any event of default or termination events under the agreement occurring.
The transaction is a synthetic balance-sheet collateralised loan obligation structured in the form of a financial guarantee. The loans were originated by Barclays’ corporate and investment banking businesses in the Barclays International division over its regular course of business.
Barclays bought protection under a similar financial guarantee for the first loss piece but has not executed the contracts relating to the rated tranches. Under the unexecuted guarantee agreement, Barclays will transfer the remaining credit risk (from 8.25% to 100%) of the same USD 1,333.3 million portfolio.
The ratings assigned by DBRS are expected to remain provisional until the underlying agreements are executed. Barclays may have no intention of executing the senior guarantee. DBRS will maintain and monitor the provisional ratings throughout the life of the transaction or while it continues to receive performance information.
Under the senior guarantee, Barclays will buy protection against principal losses as well as interest accrued prior to the occurrence of a credit event and unpaid interest on the reference portfolio for a period of eight years. The transaction has a three-year replenishment period during which time Barclays can add new reference obligations or increase the notional amount of existing reference obligations. Barclays has implemented rules-based selection guidelines that are designed to minimise the chances that new reference obligations are adversely selected. In addition, the new reference obligations also need to comply with the eligibility criteria and portfolio profile tests that are established to ensure that the credit quality of new reference obligations proposed are similar or better than that of the reference obligations they replace.
The credit facilities under the reference portfolio can be drawn in various currencies but any negative impact from currency movements is neutralised. Therefore, movements in the foreign exchange rate should not have a negative impact on the rated tranches.
However, each reference obligation can reference a broad number of interest rate indices around the world. The interest rate index, spread and interest payment frequency will determine the amount of additional risk that the guarantee has to cover. To address this risk, DBRS calculated stressed interest rates in accordance with its “Interest Rate Stresses for European Structured Finance Transactions” methodology as well as the spread and weighted-average (WA) payment frequency covenants defined as part of the transaction’s portfolio profile tests.
DBRS also took comfort from the portfolio profile test that limits the guaranteed obligations that can be denominated in a currency other than the U.S. dollar, British pound sterling, Japanese yen, Canadian dollar, euro, Swedish krona, Norwegian krone, Danish krone, Australian dollar and Swiss franc (other currencies are referred to as minority currency) to only 2%. DBRS assumed a stressed interest rate index ranging from 8.5% at the AAA (sf) rating stress and 4.4% at the BB (sf) rating stress for the obligations denominated in eligible currencies. DBRS also assumed a stressed interest rate index ranging from 42.4% at the AAA (sf) rating stress and 21.8% at the BB (sf) rating stress for obligations denominated in minority currencies. The analysis was used to haircut the standard recovery rate assumptions applied. For example, at the AAA (sf) stress level, the unsecured recovery rate for an obligor in a DBRS recovery Tier 1 country was reduced to 24.1% from 28.5%. This adjustment was made to account for the additional risk posed by the accrual interest coverage of the guarantee.
For the recovery rate, DBRS applied the senior secured and senior unsecured recovery rates defined in its “Rating CLOs and CDOs of Large Corporate Credit” methodology. The portfolio can reference obligations from obligors based in Australia, Austria, Belgium, Canada, the Cayman Islands, Denmark, Finland, France, Germany, the Republic of Ireland, the Isle of Man, Italy, Japan, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland the United Kingdom or the United States. DBRS applies different recovery rates depending on the recovery tier and seniority. All eligible borrowers will be based in countries with a DBRS recovery Tier 1 (higher recovery) to recovery Tier 4 (lower recovery). The aggregate balance of portfolio for borrowers operating in Tier 1 countries will be at least 81.4% of the total portfolio balance.
The portfolio WA recovery rate was calculated based on the worst-case concentration allowed under the portfolio profile tests and adjusted as per the analysis mentioned above.
DBRS used its CLO Asset Model to determine expected default rates for the portfolio at each rating level. To determine the credit risk of each underlying reference obligation, DBRS relied on either public ratings or a ratings mapping to DBRS ratings of Barclays’ internal ratings models. The mapping was completed in accordance with DBRS’s “Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit Transactions” methodology.
The eligibility criteria and portfolio profile test define key obligor eligibility and exclusion criteria as well as portfolio level concentration limits which DBRS used to determine a worst-case portfolio for the analysis. Relevant portfolio level criteria include the maximum single borrower group concentration of 0.50% and a maximum single DBRS industry concentration of 12%.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology applicable to the ratings is: “Rating CLOs and CDOs of Large Corporate Credit”.
DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.
Other methodologies referenced in this transaction are listed at the end of this press release.
These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.
For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.
The sources of data and information used for these ratings include the Arranger and Beneficiary: Barclays Bank PLC.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, DBRS was not supplied with third party assessments. However, this did not impact the rating analysis.
DBRS considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.
DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
These ratings concern newly issued financial instruments. These are the first DBRS ratings on these financial instruments.
Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.
To assess the impact of a change of the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):
-- Correlation Assumption used: Base Case Correlation (15% intra-industry and 6% inter-industry), a 20% and 40% increase on the base case correlation parameters.
-- Recovery Rates used: Base Case Recovery Rate (ranging between 30.2% and 48.1% at the AAA (sf) to BB (high) (sf) stress level), a 10% and 20% decrease in the Base Case Recovery Rate. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.
DBRS concludes that:
-- A hypothetical increase of the base case correlation by 40%, ceteris paribus, could lead to a downgrade of the rated tranches by up to three notches.
-- A hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, could lead to a downgrade of the rated tranches by up to three notches.
-- A scenario combining both an increase in the correlation by 20% and a decrease in the Recovery Rate by 10% could lead to a downgrade of the rated tranches by up to three notches.
For further information on DBRS historic default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.
Lead Analyst: Carlos Silva, Senior Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 29 November 2018
DBRS Ratings Limited
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Registered in England and Wales: No. 7139960
The rating methodologies used in the analysis of this transaction can be found at:
-- Rating CLOs and CDOs of Large Corporate Credit
-- Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit
-- Interest Rate Stresses for European Structured Finance Transactions
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at firstname.lastname@example.org.