Press Release

DBRS Morningstar Upgrades and Confirms Provisional Ratings on Colonnade Programme - Series Global 2018-5

Structured Credit

October 01, 2021

DBRS Ratings Limited (DBRS Morningstar) took the following rating actions on its provisional ratings on 11 tranches of the unexecuted, unfunded financial guarantee (the Guarantee) in the Colonnade Programme - Series Global 2018-5 (Colonnade Global 2018-5) portfolio:

-- USD 514,740,000 Tranche A confirmed at AAA (sf)
-- USD 9,240,000 Tranche B confirmed at AA (high) (sf)
-- USD 3,180,000 Tranche C upgraded to AA (high) (sf) from AA (sf)
-- USD 3,620,000 Tranche D upgraded to AA (sf) from AA (low) (sf)
-- USD 9,120,000 Tranche E upgraded to A (high) (sf) from A (sf)
-- USD 1,810,000 Tranche F confirmed at A (sf)
-- USD 4,990,000 Tranche G upgraded to A (sf) from A (low) (sf)
-- USD 9,310,000 Tranche H confirmed at BBB (sf)
-- USD 2,120,000 Tranche I upgraded to BBB (sf) from BBB (low) (sf)
-- USD 3,060,000 Tranche J upgraded to BBB (sf) from BBB (low) (sf)
-- USD 8,809,997 Tranche K confirmed at BB (high) (sf)

The transaction is a synthetic balance-sheet collateralised loan obligation (CLO) structured in the form of a Guarantee. The tranches are exposed to the credit risk of a portfolio of corporate loans and credit facilities (the Guaranteed Portfolio) originated by Barclays Bank PLC (Barclays or the Beneficiary). The rated tranches are unfunded and the senior guarantee remains unexecuted. The junior guarantee was executed in December 2018 with an initial balance of USD 55 million and has a duration of eight years.

The ratings address the likelihood of a loss under the guarantee on the respective tranche resulting from borrower defaults at the legal final maturity date in December 2026. Borrower default events are limited to failure to pay, bankruptcy, and restructuring. The ratings that DBRS Morningstar assigned to each tranche are expected to remain provisional until the senior guarantee is executed. The ratings do not address counterparty risk or the likelihood of any event of default or termination events under the agreement occurring.

The rating actions follow an annual review of the transaction 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 2021;
-- Updated default rate, recovery rate, and expected loss assumptions for the reference portfolio;
-- Current available credit enhancement (CE) to the rated tranches and capacity to withstand losses under stressed interest scenarios; and
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

PORTFOLIO PERFORMANCE
The transaction is currently within its three-year replenishment period, 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 and portfolio profile tests, and are made according to replenishment guidelines. The replenishment period ends in December 2021.

The Guaranteed Portfolio currently stands at USD 621 million, below the maximum Guaranteed Portfolio notional amount of USD 623 million. The Guaranteed Portfolio is fairly granular, composed mainly of revolving credit facilities, bears a floating interest rate, and is mainly unsecured. The facilities are mainly drawn in the protection currency of the Guarantee, which is U.S. dollars.

The composition of the Guaranteed Portfolio has improved in terms of DBRS Morningstar’s ratings with increased concentration in the A (sf) and BBB (sf) rating ranges compared with one year ago, while it has remained stable in terms of DBRS Morningstar’s Country Tiers since closing.

In terms of the DBRS Morningstar Industry concentrations and borrower group concentrations that are both prescribed by the portfolio profile tests, the Guaranteed Portfolio is at the limits prescribed by the Portfolio Profile Tests.

As of August 2021, the cumulative outstanding balance of the defaulted loans at the time of default represented USD 4.0 million or 7.2% of the Guarantee initial balance, up from 5.2% a year ago. Barclays estimates the cumulative loss to date at USD 1.4 million or 2.6% of the Guarantee initial balance. As of August 2021, the portfolio profile tests allowing further replenishment of the Guaranteed Portfolio were all met.

PORTFOLIO ASSUMPTIONS AND KEY RATING DRIVERS
The transaction is subject to interest rate risk as the loans in the Guaranteed Portfolio bear floating interest rates, which could lead to higher losses under the Guarantee in an upward interest scenario. In addition, up to 2% of the Guaranteed Portfolio amount can be drawn in currencies (Minority Currencies) other than the U.S. dollar, British pound sterling, euro, Canadian dollar, Swedish krona, Norwegian krone, Danish krone, Australian dollar, Japanese yen, and Swiss franc (Eligible 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, the stressed interest rate index for the obligations denominated in Eligible Currencies is 5.2%, up from 4.6% a year ago, and the stressed interest rate index for the obligations denominated in Minority Currencies is 26.2%, down from 22.9% a year ago.

DBRS Morningstar calculated the weighted-average recovery rate at each rating level based on the worst-case concentrations in terms of DBRS Morningstar Country Tier, security levels permissible under the portfolio profile tests, borrower group, and DBRS Morningstar Industry classification and adjusted its assumptions with the projected loss on the Guarantee under stressed interest rate scenarios.

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 Morningstar ratings. DBRS Morningstar completed the mapping in accordance with its “Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions” methodology.

DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and decreased its base case probability of default (PD) assumption and recovery rate assumptions to 10.6% and 54.9%, respectively, from 13.0% and 55.2% a year ago, respectively. The decrease in the base case PD is due to a combination of the decrease in the guarantee coverage time and a lower weighted-average risk factor of 8.9%, down from 9.8%. DBRS Morningstar’s assumptions incorporates adjustments in the context of the coronavirus pandemic. DBRS Morningstar estimated that, as of August 2021, 1.8% and 23.5% of the outstanding portfolio balance belonged to industries classified in mid-high and high-risk economic sectors, respectively, and applied a one- and two-notch downgrade to the borrower’s DBRS Morningstar rating, respectively, down from 2.0% and 24.3% a year ago, respectively.

CREDIT ENHANCEMENT
The CE to each tranche consists of the subordination of the junior tranches. Given that losses have been recorded, the CE level for each of the tranches slightly decreased for all tranches since a year ago, except for Tranche A which is stable at 17.5%:
-- CE decreased to 16.0% from 16.1% for Tranche B
-- CE decreased to 15.5% from 15.6% for Tranche C
-- CE decreased to 14.9% from 15.0% for Tranche D
-- CE decreased to 13.4% from 13.5% for Tranche E
-- CE decreased to 13.1% from 13.2% for Tranche F
-- CE decreased to 12.3% from 12.4% for Tranche G
-- CE decreased to 10.8% from 10.9% for Tranche H
-- CE decreased to 10.5% from 10.6% for Tranche I
-- CE decreased to 10.0% from 10.1% for Tranche J
-- CE decreased to 8.6% from 8.7% for Tranche K

Currency risk is mitigated in this transaction. 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.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many CLO transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For this transaction, DBRS Morningstar downgraded the internal credit estimate or the DBRS Morningstar rating of obligors in mid-high or high-risk industries by one or two notches based on their perceived exposure to the adverse disruptions of the coronavirus.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
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” (8 February 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

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.

An asset analysis was conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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

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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include reference registries and portfolio reports 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 this transaction took place on 2 October 2020, when DBRS Morningstar confirmed its provisional ratings on Tranches A, B, C, D, F, G, J, and K at AAA (sf), AA (high) (sf), AA (sf), AA (low) (sf), A (sf), A (low) (sf), BBB (low) (sf), and BB (high) (sf), respectively, and downgraded its provisional ratings on Tranches E, H, and I to A (sf), BBB (sf), and BBB (low) (sf), respectively, from A (high) (sf), BBB (high) (sf), and BBB (sf), respectively.

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

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 downgrade of all the tranches of the transaction by up to two 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 a downgrade of all the tranches of the transaction by up to two notches.

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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Natalia Coman, Senior Analyst
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 21 December 2018

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
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.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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