DBRS Morningstar Upgrades Non-Senior Colonnade CRE 2017-1 Sarl Tranches

DBRS Ratings Limited (DBRS Morningstar) upgraded the provisional ratings of 10 tranches of an unexecuted, unfunded financial guarantee (the Senior Guarantee) referencing a portfolio of commercial real estate (CRE) loans originated and managed by Barclays Bank PLC (Barclays) and its affiliates as follows:

-- GBP 51,854,094 Tranche B to AAA (sf) from AA (high) (sf)
-- GBP 49,025,689 Tranche C to AAA (sf) from AA (sf)
-- GBP 32,055,258 Tranche D to AAA (sf) from AA (low) (sf)
-- GBP 30,169,655 Tranche E to AAA (sf) from A (high) (sf)
-- GBP 29,226,853 Tranche F to AAA (sf) from A (sf)
-- GBP 43,368,879 Tranche G to AAA (sf) from A (low) (sf)
-- GBP 41,797,543 Tranche H to AA (high) (sf) from BBB (high) (sf)
-- GBP 37,083,534 Tranche I to AA (low) (sf) from BBB (sf)
-- GBP 57,825,172 Tranche J to A (sf) from BBB (low) (sf)
-- GBP 10,284,609 Tranche K to A (low) (sf) from BB (high) (sf)

DBRS Morningstar also confirmed its provisional AAA (sf) rating of the GBP 994,302,842 Tranche A.

All trends are Stable.

The rating upgrades are as a result of significantly increased credit enhancement for all rated classes after the repayment of 33 loans in the referenced portfolio. At inception, 88 loans were referenced in the transaction whereas only 55 loans remained as of Q3 2019. As a result, the guaranteed obligation notional amount (GONA) reduced to GBP 1.6 billion from GBP 3.1 billion at issuance (GBP 2.9 billion as of Q3 2018). Nevertheless, only Tranche A has amortised and the GBP 251.5 first-lost piece remains the same and now provides much higher credit enhancement to all the DBRS Morningstar rated notes. Accordingly, DBRS Morningstar upgraded most of the tranches and confirmed the rating of Tranche A.

Colonnade CRE 2017-1 SARL is a synthetic balance sheet commercial mortgage-backed securities structured in the form of a financial guarantee. Barclays bought protection under a junior financial guarantee for the first-lost piece (FLP) from Colonnade CRE 2017-1 Sarl but has not executed the contracts relating to the senior tranches (the senior financial guarantee). Under the unexecuted guarantee agreement and as of Q3 2019, Barclays transferred the remaining credit risk (from 15.4% to 100%) of the portfolio. DBRS Morningstar only rates the senior financial guarantee tranches, which were not executed at closing, and as such, DBRS Morningstar’s ratings remain provisional. The junior tranche was sold and executed at closing. The financial guarantees reference 55 loans that are all fully ring-fenced, have no additional subordinated debt and set to expire in June 2023 at the latest. The transaction does not include any revolving periods, although the referenced loans may be subject to extensions or refinancings.

As mentioned above, the transaction has greatly amortised after the repayment of 33 loans. Compared with last review, the portfolio’s total facility commitment (including undrawn facilities) reduced to GBP 2.0 billion from GBP 3.3 billion at Q3 2018, which translated to an amortised GONA of GBP 1.6 billion compared with GBP 2.9 billion at the last review, or GBP 3.1 billion at inception. As of the last reporting date, 16 borrowers had not yet fully used their facilities. To reflect the possibility of further drawings, DBRS Morningstar underwrote the loans assuming they are fully drawn.

The portfolio’s market value (MV) also reduced to GBP 6.2 billion from GBP 11.3 billion since the last review. The geographical concentration of the portfolio has slightly shifted away from Greater London with Greater London now representing 52.0% of portfolio’s MV compared with 59.0% as of Q3 2018. Meanwhile, other regional markets have increased their weights over the last 12 months: the South East rose to 9.0% of MV from 8.7%, the North West rose to 7.1% of MV from 5.8%, Scotland rose to 6.4% of MV from 5.3%, and the South West rose to 7.7% MV from 5.2%. As pointed out in the last review, DBRS Morningstar notes that CRE asset value is strongly linked to the economic performance of the UK economy, which could be affected by Brexit. DBRS Morningstar did not apply any additional value stress on the portfolio in this rating action; however, additional stress might be warranted following a stressed Brexit scenario, and/or if DBRS Morningstar downgrades the United Kingdom of Great Britain and Northern Ireland below its current AAA rating.

DBRS Morningstar based its analysis of the syndicated loans on the presyndication amount and then scaled back the debt amount to the securitised portion when calculating transaction-level proceeds. DBRS Morningstar followed the same method as at issuance to size the portfolio and compared the sizing outcome with the Q3 2019 reported GONA. The sizing output showed a significant increase in credit quality across all classes, which is also evidenced in the increased credit enhancements. In accordance with the sequential paydown structure, the amortisation proceeds have been allocated to amortise Tranche A, which now stands at GBP 994.3 million compared with GBP 2.5 billion at issuance, equating to a 39.6% reduction. As a result, the FLP now represents 15.4% of the GONA, thus providing higher credit enhancement for all DBRS Morningstar rated tranches.

DBRS Morningstar will maintain and monitor the provisional ratings throughout the life of the transaction or while it continues to receive performance information.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the ratings is: “European CMBS Rating and Surveillance Methodology”.

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

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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 these ratings include Barclays Bank Plc.

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

At the time of the initial rating, DBRS Morningstar was 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 this transaction took place on 17 December 2018, when DBRS Morningstar confirmed its provisional ratings on all the tranches.

The lead analyst responsibilities for this transaction have been transferred to Dinesh Thapar.

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 with the parameters used to determine the ratings (the Base Case):

A decrease of 5% and 20% in the DBRS Morningstar values, derived by more conservative DBRS Morningstar’s underwriting assumptions, would lead to the following ratings:

Tranche A Notes Risk Sensitivity:
--5% decline in DBRS Morningstar value, expected rating of Class A Notes to AAA (sf)
--10% decline in DBRS Morningstar value, expected rating of Class A Notes to AAA (sf)

Tranche B Notes Risk Sensitivity:
--5% decline in DBRS Morningstar value, expected rating of Class B Notes to AAA (sf)
--10% decline in DBRS Morningstar value, expected rating of Class B Notes to AAA (sf)

Tranche C Notes Risk Sensitivity:
--5% decline in DBRS Morningstar value, expected rating of Class C Notes to AAA (sf)
--10% decline in DBRS Morningstar value, expected rating of Class C Notes to AAA (sf)

Tranche D Notes Risk Sensitivity:
--5% decline in DBRS Morningstar value, expected rating of Class D Notes to AAA (sf)
--10% decline in DBRS Morningstar value, expected rating of Class D Notes to AAA (sf)

Tranche E Notes Risk Sensitivity:
--5% decline in DBRS Morningstar value, expected rating of Class E Notes to AAA (sf)
--10% decline in DBRS Morningstar value, expected rating of Class E Notes to AA (high) (sf)

Tranche F Notes Risk Sensitivity:
--5% decline in DBRS Morningstar value, expected rating of Class F Notes to AAA (sf)
--10% decline in DBRS Morningstar value, expected rating of Class F Notes to AA (low) (sf)

Tranche G Notes Risk Sensitivity:
--5% decline in DBRS Morningstar value, expected rating of Class G Notes to AA (sf)
--10% decline in DBRS Morningstar value, expected rating of Class G Notes to A (high) (sf)

Tranche H Notes Risk Sensitivity:
--5% decline in DBRS Morningstar value, expected rating of Class H Notes to A (high) (sf)
--10% decline in DBRS Morningstar value, expected rating of Class H Notes to A (low) (sf)

Tranche I Notes Risk Sensitivity:
--5% decline in DBRS Morningstar value, expected rating of Class I Notes to A (sf)
--10% decline in DBRS Morningstar value, expected rating of Class I Notes to BBB (high) (sf)

Tranche J Notes Risk Sensitivity:
--5% decline in DBRS Morningstar value, expected rating of Class J Notes to BBB (high) (sf)
--10% decline in DBRS Morningstar value, expected rating of Class J Notes to BBB (sf)

Tranche K Notes Risk Sensitivity:
--5% decline in DBRS Morningstar value, expected rating of Class K Notes to BBB (high) (sf)
--10% decline in DBRS Morningstar value, expected rating of Class K Notes to BBB (sf)

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: Dinesh Thapar, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 18 December 2017

DBRS Ratings Limited
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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.

-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- European CMBS Rating and Surveillance Methodology

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.