DBRS Morningstar Takes Rating Actions on Two Colonnade 2017 Transactions

DBRS Ratings Limited (DBRS Morningstar) discontinued the provisional ratings of the 11 tranches of the unexecuted, unfunded financial guarantee regarding the Colonnade Global 2017-4 portfolio at the request of Barclays Bank PLC (Barclays, the Originator and Beneficiary).

Prior to the discontinuation, DBRS Morningstar conducted an annual review of the transaction and confirmed the provisional ratings of the following 11 tranches:

--USD 1,030,375,004 Tranche A confirmed at AAA (sf)
--USD 18,625,000 Tranche B confirmed at AA (high) (sf)
--USD 5,875,000 Tranche C confirmed at AA (sf)
--USD 7,250,000 Tranche D confirmed at AA (low) (sf)
--USD 21,000,000 Tranche E confirmed at A (high) (sf)
--USD 3,250,000 Tranche F confirmed at A (sf)
--USD 11,375,000 Tranche G confirmed at A (low) (sf)
--USD 19,875,000 Tranche H confirmed at BBB (high) (sf)
--USD 4,250,000 Tranche I confirmed at BBB (sf)
--USD 6,500,000 Tranche J confirmed at BBB (low) (sf)
--USD 21,625,000 Tranche K confirmed at BB (high) (sf)

DBRS Morningstar also confirmed the following provisional ratings of 11 tranches of the unexecuted, unfunded financial guarantee regarding the Colonnade UK 2017-1 portfolio:

--GBP 2,197,866,667 Tranche A confirmed at AAA (sf)
--GBP 40,533,333 Tranche B confirmed at AA (high) (sf)
--GBP 15,466,667 Tranche C confirmed at AA (sf)
--GBP 18,400,000 Tranche D confirmed at AA (low) (sf)
--GBP 28,533,333 Tranche E confirmed at A (high) (sf)
--GBP 8,533,333 Tranche F confirmed at A (sf)
--GBP 24,800,000 Tranche G confirmed at A (low) (sf)
--GBP 36,533,333 Tranche H confirmed at BBB (high) (sf)
--GBP 10,666,667 Tranche I confirmed at BBB (sf)
--GBP 16,266,667 Tranche J confirmed at BBB (low) (sf)
--GBP 29,066,667 Tranche K confirmed at BB (high) (sf)

Each transaction is a synthetic balance-sheet collateralised loan obligation structured in the form of a financial guarantee (the Guarantee). The tranches are collateralised by a portfolio of corporate loans and credit facilities (the Guaranteed Portfolio) originated by Barclays. The rated tranches are unfunded, and the senior guarantee remains unexecuted.
The ratings address the likelihood of a loss under the guarantee on the respective tranche resulting from borrower defaults at the legal final maturity dates falling in December 2024 for Colonnade Global 2017-4 and in December 2025 for Colonnade UK 2017-1. Borrower default events are limited to failure to pay, bankruptcy and restructuring events. The ratings assigned by DBRS Morningstar to each tranche are expected to remain provisional until the senior guarantee is executed. The ratings do not address counterparty risk nor the likelihood of any event of default or termination events under the agreement occurring.

The confirmations follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performance, in terms of cumulative defaults, and compliance with portfolio profile tests under the replenishment period as of the reporting date of August 2019 for Colonnade Global 2017-4 and September 2019 for Colonnade UK 2017-1;
-- Updated default rate, recovery rate and expected loss assumptions for the reference portfolios; and
-- The current available credit enhancement to the rated tranches and capacity to withstand losses under stressed interest scenarios.

PORTFOLIO PERFORMANCE
The transactions are currently within their three-year replenishment periods during which time the Beneficiary can add new reference obligations or increase the notional amount of existing reference obligations provided that they meet eligibility criteria, portfolio profile tests and are made according to replenishment guidelines. The replenishment period for Colonnade Global 2017-4 ends on 21 December 2019 and on 14 December 2020 for Colonnade UK 2017-1.

On 4 October 2019, Barclays introduced an amendment to the selection methodology of the Potential Guaranteed Obligation to be included in the Guaranteed Portfolio of each transaction during its replenishment period. DBRS Morningstar viewed the changes to be neutral to positive for maintaining the portfolio credit quality during the replenishment period, with no impact on the outstanding ratings on both transactions, due to DBRS Morningstar’s assessment of a worst-case portfolio in its analysis. For further details on this amendment, please see: https://www.dbrs.com/research/352421/dbrs-morningstar-comments-on-four-colonnade-transactions-following-amendment.

The Guaranteed Portfolio of Colonnade Global 2017-4 currently stands at USD 1,211 million, below the maximum Guaranteed Portfolio notional amount of USD 1,250 million. The Guaranteed Portfolio of Colonnade UK 2017-1 currently stands at GBP 2,514 million, below the maximum Guaranteed Portfolio notional amount of GBP 2,667 million. For both transactions, the Guaranteed Portfolios are non-granular, composed mainly of revolving credit facilities, bear a floating interest rate and are mainly unsecured. The facilities in each Guaranteed Portfolio are mainly drawn in the Protection Currency, which is U.S. dollars for Colonnade Global 2017-4 and British pound sterling for Colonnade UK 2017-1.

The composition of the Guaranteed Portfolio of Colonnade Global 2017-4 collateral has improved in terms of DBRS ratings with an increased concentration in the AA (low) - BBB (high) rating range since closing but shows a deterioration below the B (low) rating. In addition, the weighted-average remaining term of the Guaranteed Portfolio has been increasing consistently and, although not preventing replenishment, is currently above the prescribed limit defined in the Portfolio Tests.

The composition of the Guaranteed Portfolio of Colonnade UK 2017-1 collateral has improved in terms of DBRS ratings with a migration toward the “A” rating range since closing but shows a deterioration below the BB rating. Both Colonnade Global 2017-4 and Colonnade UK 2017-1 Guaranteed Portfolios are concentrated in DBRS Country Tier 1 by design.

As of September 2019, the Colonnade UK 2017-1 transaction has recorded defaults leading to a reduction of the guarantee amount to GBP 231 million from GBP 240 million. The cumulative defaulted amount represents 0.6% of the maximum Guaranteed Portfolio notional amount. As of the August 2019 monthly report, the Colonnade Global 2017-4 transaction has not recorded any defaults.

The performance observed in terms of defaults and the deterioration in DBRS ratings below investment grade are compensated by the decrease in the weighted-average remaining term of the portfolio, which continues to allow the rated tranches in both transactions to withstand losses at their current rating levels.

PORTFOLIO ASSUMPTIONS
The transactions are subject to interest rate risk as the loans in the Guaranteed Portfolios bear floating interest rates which could lead to higher losses under the Guarantee in an upward interest scenario. In addition, up to 2% of each Guaranteed Portfolio amount can be drawn in currencies other than the U.S. dollar, British pound sterling, euro, Canadian dollar, Swedish krona, Norwegian krone, Danish krone, Australian dollar and Japanese yen (Minority Currencies). To mitigate the interest rate risk, additional covenants on spread and the weighted-average payment frequency of the portfolio are in place.

Based on its “Interest Rate Stresses for European Structured Finance Transactions” methodology and incorporating these covenants, DBRS Morningstar calculated a stressed interest rate index at each rating level for the obligations denominated in Eligible Currencies and Minority Currencies. For example, at the AAA (sf) stress level, for the three transactions, the stressed interest rate index for the obligations denominated in Eligible Currencies is 6.1% and the stressed interest rate index for the obligations denominated in Minority Currencies is 30.3%.

DBRS Morningstar calculated the weighted-average recovery rate at each rating level based on the worst-case concentrations in terms of borrower group, DBRS Industry classification and security levels permissible under the portfolio profile tests and adjusted its assumptions with the projected loss on the guarantee under stressed interest rate scenarios. For example, at the AAA (sf) stress level, the recovery rate was reduced to 35.2% from 39.1% for Colonnade Global 2017-4 and to 24.7% from 28.5% for Colonnade UK 2017-1.

DBRS Morningstar used its CLO Asset Model to update its expected default rates for the portfolio at each rating level. To determine the credit risk of each underlying reference obligation, DBRS Morningstar relied on either public ratings or a mapping from Barclays’ internal ratings models to DBRS ratings. The mapping was completed in accordance with DBRS Morningstar’s “Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit Transactions” methodology.

CREDIT ENHANCEMENT
For Colonnade Global 2017-4, the credit enhancement levels remain the same as at closing, given that no loss has been recorded to date. For Colonnade UK 2017-1, the credit enhancement level of each tranche has decreased since closing, given that losses have been recorded.

Currency risk is mitigated in these transactions. Although the obligations in the Guaranteed Portfolio can be drawn in various currencies, any negative impact from currency movements is overall neutralised and therefore movements in the foreign exchange rate should not have a negative impact on the rated tranches.

Notes:
All figures are in U.S. dollars or British pound sterling unless otherwise noted.

The principal methodology applicable to the ratings is “Rating CLOS and CDOs of Large Corporate Credit”.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

An asset analysis was conducted. Due to the inclusion of a revolving period in the transactions, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

DBRS Morningstar has conducted a review of the transaction legal documents provided in the context of the aforementioned amendment. The other transaction legal documents have remained unchanged since the most recent rating action and as such, a review has not been conducted.

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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include information provided by Barclays.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial ratings, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on these transactions took place on 14 December 2018 and 21 December 2018, when DBRS Morningstar confirmed the provisional ratings of Colonnade UK 2017-1 and Colonnade Global 2017-4, respectively.

The lead analyst responsibilities for these transactions have been transferred to Natalia Coman.

Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar 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, 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.
For Colonnade Global 2017-4, DBRS Morningstar concludes that a hypothetical increase of the Base Case Correlation by 40% or a hypothetical decrease of the Base Case Recovery Rate by 20%, ceteris paribus, would both to a downgrade of the transaction to by up to three notches. A scenario combining both an increase in the Correlation by 20% and a decrease in the Base Case Recovery Rate by 10% would lead to a downgrade of the transaction by up to three notches.

For Colonnade UK 2017-1, DBRS Morningstar concludes that a hypothetical increase of the Base Case Correlation by 40% or a hypothetical decrease of the Base Case Recovery Rate by 20%, ceteris paribus, would each lead to a confirmation of the transaction at its current rating levels and a downgrade of the transaction by up to one notch. A scenario combining both an increase in the Correlation by 20% and a decrease in the Base Case Recovery Rate by 10% would lead to a downgrade of the transaction by up to one notch.

For further information on DBRS Morningstar historical 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: Natalia Coman, Senior Financial Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 14 December 2017 for Colonnade UK 2017-1 and 21 December 2017 for Colonnade Global 2017-4

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
London EC3M 3BY United Kingdom
Registered and incorporated under the laws of England and Wales: Company No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

--Rating CLOs and CDOs of Large Corporate Credit
--Master European Structured Finance Surveillance Methodology
--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
--Operational Risk Assessment for European Structured Finance Originators
--Operational Risk Assessment for European Structured Finance Servicers

A description of how DBRS Morningstar 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 info@dbrs.com.