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

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 167,512,550 Tranche A confirmed at AAA (sf)
-- USD 9,240,000 Tranche B upgraded to AAA (sf) from AA (high) (sf)
-- USD 3,180,000 Tranche C upgraded to AAA (sf) from AA (high) (sf)
-- USD 3,620,000 Tranche D upgraded to AAA (sf) from AA (sf)
-- USD 9,120,000 Tranche E upgraded to AAA (sf) from AA (sf)
-- USD 1,810,000 Tranche F upgraded to AAA (sf) from AA (sf)
-- USD 4,990,000 Tranche G upgraded to AAA (sf) from AA (sf)
-- USD 9,310,000 Tranche H upgraded to AAA (sf) from AA (sf)
-- USD 2,120,000 Tranche I upgraded to AAA (sf) from AA (sf)
-- USD 3,060,000 Tranche J upgraded to AAA (sf) from AA (low) (sf)
-- USD 8,809,997 Tranche K upgraded to AAA (sf) from A (low) (sf)

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. 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 March 2023;
-- Updated default rate, recovery rate, and expected loss assumptions for the reference portfolio; and
-- Current available credit enhancement (CE) to the rated tranches and capacity to withstand losses under stressed interest scenarios.

The transaction is a synthetic balance-sheet collateralised loan obligation structured in the form of a financial guarantee. The tranches are exposed to the credit risk of a portfolio of corporate loans and credit facilities (the Reference Portfolio) originated by Barclays Bank PLC (Barclays).

Barclays bought protection under a credit-linked note (CLN) issued under Colonnade Global 2081-5 that will cover the first USD 55 million of losses under the Reference Portfolio (equivalent to 8.8% of the initial reference portfolio notional of USD 650 million) during the eight-year protection period ending in December 2026. At closing, the transaction benefitted from a three-year revolving period that ended in December 2021. The CLN is issued directly by Barclays, and the investor is exposed to Barclays’ default risk as well as the loss of the Reference Portfolio.

PORTFOLIO PERFORMANCE
As of March 2023, the Reference Portfolio stood at USD 276 million, down from USD 532 million at the last annual review. The Reference Portfolio is fairly granular and 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 Reference Portfolio has slightly deteriorated in terms of DBRS Morningstar’s ratings with increased concentration in the B (sf) and CCC (sf) rating ranges compared with the last annual review, but it has remained stable in terms of DBRS Morningstar’s Country Tiers since closing.

As of March 2023, the cumulative outstanding balance of the defaulted loans at the time of default represented USD 7.1 million or 12.9% of the CLN initial balance, up from 7.2% at the last annual review. Barclays estimates the cumulative loss to date to be USD 3.5 million or 6.3% of the CLN initial balance, up from 2.6% at the last annual review.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
The transaction is subject to interest rate risk as the loans in the Reference Portfolio bear floating interest rates, which could lead to higher losses under the Guarantee in an upward interest scenario. As of March 2023, 0.2% of the Reference Portfolio amount was 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).

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 7.9%, up from 4.3% at the last annual review, and the stressed interest rate index for the obligations denominated in Minority Currencies is 39.4%, up from 21.6% at the last annual review.

DBRS Morningstar calculated the weighted-average recovery rate at each rating level based on the current concentrations in terms of DBRS Morningstar Country Tier, security levels, 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.

The weighted-average DBRS Morningstar Risk Score (DBRS Morningstar WARS) increased to 11.9% from 10.1% at the last annual review. DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and decreased its base recovery rate assumption at the B (sf) rating level to 61.9% from 63.2% at the last annual review, respectively. The increase in the DBRS Morningstar WARS is due to a deterioration of the ratings on the underlying borrowers. The decrease in the recovery rate comes from a higher adjustment for defaulted interest due to the increased interest rate index.

CREDIT ENHANCEMENT
The CE to each tranche consists of the subordination of the junior tranches. As of March 2023, the CE level for each of the tranches increased since the last annual review was as follows:
-- CE for Tranche A to 38.9% from 20.5%
-- CE for Tranche B to 35.6% from 18.7%
-- CE for Tranche C to 34.4% from 18.1%
-- CE for Tranche D to 33.1% from 17.4%
-- CE for Tranche E to 29.8% from 15.7%
-- CE for Tranche F to 29.1% from 15.4%
-- CE for Tranche G to 27.3% from 14.5%
-- CE for Tranche H to 23.8% from 12.7%
-- CE for Tranche I to 23.1% from 12.3%
-- CE for Tranche J to 22.0% from 11.7%
-- CE for Tranche K to 18.8% from 10.1%

The substantial increases in CE for all tranches combined with the reduction in the Reference Portfolio’s weighted-average remaining term to 2.2 years from 2.7 years at the last annual review offset the deterioration in the DBRS Morningstar WARS and in the recovery rate.

Currency risk is limited in this transaction. Although the obligations in the Reference 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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” (7 February 2023), https://www.dbrsmorningstar.com/research/409498/rating-clos-and-cdos-of-large-corporate-credit.

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

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/401817/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 4 May 2022, when DBRS Morningstar removed the ratings from Under Review with Positive Implications and confirmed its provisional ratings on Tranche A, Tranche B, Tranche C, and Tranche D at AAA (sf), AA (high) (sf), AA (high) (sf), and AA (sf), respectively, as well as upgraded its provisional ratings on Tranche E, Tranche F, Tranche G, Tranche H, Tranche I, Tranche J, and Tranche K to AA (sf), AA (sf), AA (sf), AA (sf), AA (sf), AA (low) (sf), and A (low) (sf), respectively, from A (high) (sf), A (sf), A (sf), BBB (sf), BBB (sf), BBB (sf), and BB (high) (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 lead to a confirmation of the ratings on all the tranches in the transaction. A scenario combining both an increase in the base case correlation by 20% and a decrease in the base case recovery rate by 10% would lead to a confirmation of the ratings on all the tranches in the transaction.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Natalia Coman, Assistant Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President
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: https://www.dbrsmorningstar.com/about/methodologies.

-- Rating CLOs and CDOs of Large Corporate Credit (7 February 2023) and the CLO Asset Model v2.2.3.1, https://www.dbrsmorningstar.com/research/409498/rating-clos-and-cdos-of-large-corporate-credit.
-- Master European Structured Finance Surveillance Methodology (7 February 2023),
https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.
-- Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions (17 February 2023),
https://www.dbrsmorningstar.com/research/410076/mapping-financial-institution-internal-ratings-to-dbrs-morningstar-ratings-for-global-structured-credit-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022),
https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022),
https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://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.