DBRS Assigns Provisional Ratings to 11 Tranches of the Colonnade CRE 2017-1 Sarl Financial Guarantee

DBRS Ratings Limited (DBRS) assigned provisional ratings to 11 tranches of an unexecuted, unfunded financial guarantee (the Senior Guarantee) referencing a portfolio of commercial real estate (CRE) loans (the Portfolio) originated and managed by Barclays Bank PLC (Barclays) and its affiliates as follows:

-- GBP 2,508,481,090 Tranche A at AAA (sf)
-- GBP 51,854,094 Tranche B at AA (high) (sf)
-- GBP 49,025,689 Tranche C at AA (sf)
-- GBP 32,055,258 Tranche D at AA (low) (sf)
-- GBP 30,169,655 Tranche E at A (high) (sf)
-- GBP 29,226,853 Tranche F at A (sf)
-- GBP 43,368,879 Tranche G at A (low) (sf)
-- GBP 41,797,543 Tranche H at BBB (high) (sf)
-- GBP 37,083,534 Tranche I at BBB (sf)
-- GBP 57,825,172 Tranche J at BBB (low) (sf)
-- GBP 10,284,609 Tranche K at BB (high) (sf)

All trends are stable.

The transaction 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 (JFG) for the first loss piece (FLP) from Colonnade CRE 2017-1 Sarl but has not executed the contracts relating to the senior tranches (senior financial guarantee, SFG). Under the unexecuted guarantee agreement, Barclays will transfer the remaining credit risk (from 8% to 100%) of the Portfolio. DBRS only rates the SFG tranches, which will not be executed at closing and DBRS’s ratings will remain provisional. The junior tranche will be sold with the JFG executed. The financial guarantees reference 88 UK loans, all fully ring-fenced with no additional subordinated debt, and are set to expire in October 2022 at the latest. The transaction does not envisage any revolving period although the referenced loans may be subject to extension/refinancing.

As commonly seen in CRE lending, some of the referenced loans are syndicated. Also, the loans granted by Barclays generally comprise a term facility and revolving credit facility (RCF) and, as of the cut-off date, 27 borrowers have not yet fully utilised their facilities. The total undrawn facilities as of the cut-off date amounted to GBP 375 million based on Barclays’ share post-syndication. To reflect the possibility of further drawing, DBRS has analysed all the loans assuming they are fully drawn (term facility and RCF). Additionally, DBRS has underwritten the loans based on the pre-syndication amount and then scaled back the debt amount to the guaranteed portion (Barclays’ share in syndication) when calculating transaction-level exposures.

The large majority of the loans pay a floating interest rate and some of the loans have overcollateralisation or a pledge on the borrower’s business account, thus increasing the Portfolio’s interest coverage ratio (ICR) to 3.73x.

There are 2,874 properties securing the whole Portfolio, with the highest concentrations in Greater London (58.0% by MV), the South East (8.6% by MV) and the North West (6.3% by MV). On average, there are 33 properties per loan. The market values are heavily concentrated in office (44.7% by MV), retail (23.1% by MV) and multifamily (17.6% by MV). DBRS has conducted walk-by/drive-by site visits on a sample of the Portfolio and all the properties appeared to be in average or above-average condition and well tenanted.

The transaction also has built in pre-authorised amendments (BAU Amendment) which effectively allow Barclays to modify loan terms provided that such amendment does not have a material adverse impact on the credit profile of the referenced loan. The BAU Amendment includes but is not limited to extension of interest payment and/or loan maturity date and relaxation of loan-to-value (LTV) ratios subject to the loan meeting minimum debt yield ratio requirement (Debt Yield Ratio is defined as the Net Operating Income divided by the outstanding debt loan amount). Accordingly, DBRS has simulated a worst-case scenario in which all the loans have reached their maximum leverage level allowed in the BAU Amendment.

Because of the high granularity of the Portfolio, DBRS has conducted detailed underwriting exercise on the 22 largest loans covering 63% of the total Portfolio cut-off balance. A net recovery assumption, derived from the underwriting exercise, was then applied to the remainder of the Portfolio to calculate their corresponding DBRS values.

To calculate the net recovery for each rating level, each loan’s DBRS value was sized based on corresponding property type parameters detailed in the agency’s “European CMBS Rating and Surveillance Methodology”, with the non-conforming property types taken a penalty on net recovery rate. The underwritten loans also received parameter adjustments based on their characteristics. A positive credit adjustment has been allocated to all rated classes to reflect the high granularity of the Portfolio.

As a whole, the Portfolio has a large exposure to the overall UK economy given its large tenant base and the embedded correlation between CRE market and economy outlook. Therefore, should the UK economy deteriorate in the future and/or DBRS downgrades the rating of the UK below its current AAA level, DBRS’s provisional ratings may come under pressure.

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

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 Barclays Bank PLC., KPMG and the relevant borrowers of each loan.

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

At the time of the initial rating DBRS was 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 a newly issued financial instrument. These are the first DBRS ratings on this financial instrument.

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

To assess the impact of changing 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”):

A decrease of 5% and 20% in the DBRS values, derived by more conservative DBRS’s underwriting assumptions, would lead to a downgrade of the rated tranches as noted below:

Tranche A Notes Risk Sensitivity:

--5% decline in DBRS NCF, expected rating of Class A Notes to AA (low) (sf)
--10% decline in DBRS NCF, expected rating of Class A Notes to A (low) (sf)

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

Tranche C Notes Risk Sensitivity:
--5% decline in DBRS NCF, expected rating of Class C Notes to A (low) (sf)
--10% decline in DBRS NCF, expected rating of Class C Notes to BBB (sf)

Tranche D Notes Risk Sensitivity:
--5% decline in DBRS NCF, expected rating of Class D Notes to A (low) (sf)
--10% decline in DBRS NCF, expected rating of Class D Notes to BBB (low) (sf)

Tranche E Notes Risk Sensitivity:
--5% decline in DBRS NCF, expected rating of Class E Notes to BBB (high) (sf)
--10% decline in DBRS NCF, expected rating of Class E Notes to BBB (low) (sf)

Tranche F Notes Risk Sensitivity:
--5% decline in DBRS NCF, expected rating of Class F Notes to BBB (sf)
--10% decline in DBRS NCF, expected rating of Class F Notes to BBB (low) (sf)

Tranche G Notes Risk Sensitivity:
--5% decline in DBRS NCF, expected rating of Class G Notes to BBB (low) (sf)
--10% decline in DBRS NCF, expected rating of Class G Notes to BB (high) (sf)

Tranche H Notes Risk Sensitivity:
--5% decline in DBRS NCF, expected rating of Class H Notes to BBB (low) (sf)
--10% decline in DBRS NCF, expected rating of Class H Notes to BB (sf)

Tranche I Notes Risk Sensitivity:
--5% decline in DBRS NCF, expected rating of Class I Notes to BB (high) (sf)
--10% decline in DBRS NCF, expected rating of Class I Notes to BB (low) (sf)

Tranche J Notes Risk Sensitivity:
--5% decline in DBRS NCF, expected rating of Class J Notes to BB (sf)
--10% decline in DBRS NCF, expected rating of Class J Notes to B (sf)

Tranche K Notes Risk Sensitivity:
--5% decline in DBRS NCF, expected rating of Class K Notes to BB (low) (sf)
--10% decline in DBRS NCF, expected rating of Class K Notes to B (sf)

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS’s outlooks and ratings are monitored.

For further information on DBRS 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: Rick Shi, Senior Financial Analyst
Rating Committee Chair: Jerry van Koolbergen
Initial Rating Date: 18 December 2017

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Registered in England and Wales: 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
-- Unified Interest Rate Model for European Securitisations
-- European CMBS Rating and Surveillance Methodology

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 info@dbrs.com.