DBRS Confirms Provisional Ratings of Colonnade Global 2017-3

DBRS Ratings Limited (DBRS) confirmed its provisional ratings of 11 tranches issued by Colonnade Global 2017-3 (the Issuer) as follows:

-- USD 1,364,423,529 Tranche A at AAA (sf)
-- USD 22,070,588 Tranche B at AA (high) (sf)
-- USD 8,564,706 Tranche C at AA (sf)
-- USD 10,211,765 Tranche D at AA (low) (sf)
-- USD 19,764,706 Tranche E at A (high) (sf)
-- USD 5,929,412 Tranche F at A (sf)
-- USD 15,482,353 Tranche G at A (low) (sf)
-- USD 21,411,765 Tranche H at BBB (high) (sf)
-- USD 7,082,353 Tranche I at BBB (sf)
-- USD 9,552,941 Tranche J at BBB (low) (sf)
-- USD 22,564,706 Tranche K at BB (high) (sf)

The ratings confirmed by DBRS are expected to remain provisional until the moment the underlying agreements are executed. However, it is important to note that Barclays (the Originator) may have no intention of executing the senior guarantee. DBRS will maintain and monitor the provisional ratings throughout the life of the transaction or while it continues to receive performance information.

The ratings address the likelihood of a reduction to the respective tranche notional amounts resulting from borrower defaults within the guaranteed portfolio of the notional loan portfolio financial guarantee during the eight-year credit protection period. The borrower default events are limited to failure to pay, bankruptcy and restructuring.

The ratings take into consideration the creditworthiness of the reference portfolio only. The ratings do not address counterparty risk or the likelihood of any event of default or termination events under the agreement occurring.

The transaction is a synthetic balance-sheet collateralised loan obligation structured in the form of a financial guarantee. The loans were originated by Barclays’ investment banking division.

Barclays bought protection under a similar financial guarantee for the first loss piece but has not executed the contracts relating to the rated tranches. Under the unexecuted guarantee agreement, Barclays will transfer the remaining credit risk (to 100% from 8.5%) of the same USD 1,647 million portfolio.

The confirmation follows an annual review of the transaction.

Based on the investor report, as of August 2018 there were no cumulative defaults and the credit enhancement levels for each of the tranches remain the same as at closing.

The transaction has a two-year replenishment period left, during which time Barclays can add new reference obligations or increase the notional amount of existing reference obligations. The replenishment period follows rules-based selection guidelines that are designed to ensure the new reference obligations are not adversely selected. In addition, the new reference obligations also need to comply with the eligibility criteria and portfolio profile tests which are established to ensure that the credit quality of new reference obligations proposed are similar or better than the reference obligations they replace.

The credit facilities under the reference portfolio can be drawn in various currencies but any negative impact from currency movements is neutralised. As such, movements in the foreign exchange rate should not have a negative impact on the rated tranches. DBRS also took comfort from the portfolio profile test that limits the guaranteed obligations that can be denominated in a currency other than the U.S. dollar, British pound sterling, Japanese yen, Canadian dollar, euro, Swedish krona, Norwegian krone, Danish krone and Australian dollar (other currencies are referred to as minority currencies) to 2%.

However, each reference obligation can reference a broad number of interest rate indices around the world. The interest rate index, spread and interest payment frequency will determine the amount of additional risk that the guarantee has to cover. To address this risk, DBRS has calculated stressed interest rates based on its “Interest Rate Stresses for European Structured Finance Transactions” methodology as well as the spread and weighted-average (WA) payment frequency covenants defined as part of the transaction’s portfolio profile tests.

DBRS assumed a stressed interest rate index of 7.6% for the obligations denominated in eligible currencies and a stressed interest rate index of 37.9% for the obligations denominated in a minority currency. The analysis above was used to haircut the standard recovery rate assumptions applied. For example, at the AAA (sf) stress level the unsecured recovery rate for an obligor in a DBRS recovery Tier 1 country was reduced to 24.2% from 28.5%. This adjustment was made to account for the additional risk posed by the accrual interest coverage of the guarantee.

For the recovery rate, DBRS applied the senior secured and senior unsecured recovery rates defined in its “Rating CLOs and CDOs of Large Corporate Credit” methodology. The portfolio can reference obligations from obligors based in Australia, Austria, Belgium, Brazil, Canada, the Cayman Islands, Chile, the Czech Republic, Denmark, Finland, France, Germany, Ireland, the Isle of Man, Italy, Japan, Jersey, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Romania, South Korea, Spain, Sweden, Switzerland or the United Kingdom. DBRS applies different recovery rates depending on the recovery tier and seniority. All the eligible borrowers will be based in countries with a DBRS recovery Tier 1 (higher recovery) to recovery Tier 5 (lower recovery).

For the recovery rate, DBRS assumed all reference obligations to be senior unsecured and applied the recovery rates defined in its “Rating CLOs and CDOs of Large Corporate Credit” methodology and adjusted as per the analysis mentioned above.

The portfolio WA recovery rate was calculated based on the worst-case concentration allowed under the portfolio profile tests and adjusted as per the analysis mentioned above.

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

The eligibility criteria exclude obligations that are either subordinated, defined as either project finance, structured finance or currently in credit watch with a value of “2” or worse. The maximum single borrower group concentration allowed is 2.7% for borrower groups with the better internal rating score, with lower single borrower concentration limits for borrower groups with lower internal rating scores.

Notes:
All figures are in United States dollars unless otherwise noted.

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

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

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

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 the Arranger and Beneficiary, Barclays Bank PLC.

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

At the time of the initial rating, DBRS was not 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.

The last rating action on this transaction took place on 5 September 2017 when DBRS assigned provisional ratings to the 11 tranches of the Issuer.

The lead analyst responsibilities for this transaction have been transferred to Francesco Amato.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available at 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”):

-- 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 (ranging between 20.4% and 33.2% at the AAA (sf) to BB (high) (sf) stress level), 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 concludes that a hypothetical increase of the base case correlation by 40% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, could each lead to a downgrade of the rated tranches by up to two notches. A scenario combining both an increase in the correlation by 20% and a decrease in the recovery rate by 10% could lead to a downgrade of the rated tranches by up to two notches.

For further information on DBRS historic 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: Francesco Amato, Financial Analyst
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 5 September 2017

DBRS Ratings Limited
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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
-- Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit
-- Interest Rate Stresses for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators

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.