Press Release

DBRS Confirms Provisional Ratings of Colonnade Global 2017-4

Structured Credit
December 21, 2018

DBRS Ratings Limited (DBRS) confirmed its provisional ratings of 11 tranches of an unexecuted unfunded financial guarantee (the senior guarantee) regarding a portfolio of corporate loans and credit facilities (the Colonnade Global 2017-4 portfolio) originated or managed by Barclays Bank PLC (Barclays) and its affiliates as follows:

--USD 1,030,375,005 Tranche A rated at AAA (sf)
--USD 18,625,000 Tranche B rated at AA (high) (sf)
--USD 5,875,000 Tranche C rated at AA (sf)
--USD 7,250,000 Tranche D rated at AA (low) (sf)
--USD 21,000,000 Tranche E rated at A (high) (sf)
--USD 3,250,000 Tranche F rated at A (sf)
--USD 11,375,000 Tranche G rated at A (low) (sf)
--USD 19,875,000 Tranche H rated at BBB (high) (sf)
--USD 4,250,000 Tranche I rated at BBB (sf)
--USD 6,500,000 Tranche J rated at BBB (low) (sf)
--USD 21,625,000 Tranche K rated 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 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 within the seven-year credit protection period. The borrower default events are limited to failure to pay, bankruptcy and restructuring.

The ratings take into consideration only the creditworthiness of the reference portfolio. The ratings do not address either 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. Under the senior guarantee, Barclays will buy protection against principal losses as well as interest accrued prior to the occurrence of a credit event and unpaid interest on the reference portfolio for a period of seven years.

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 (from 8% to 100%) of the same USD 1,250 million portfolio.

The rating actions follow an annual review of the transaction. As at November 2018, there were no cumulative defaults and the credit enhancement levels remain the same as at closing.

The transaction has a one-year replenishment period left, during which time Barclays can add new reference obligations or increase the notional amount of existing reference obligations. Barclays has implemented rules-based selection guidelines that are designed to minimise the chances that new reference obligations are adversely selected. In addition, the new reference obligations also need to comply with the eligibility criteria and portfolio profile tests that are established to ensure that the credit quality of new reference obligations proposed are similar or better than that of 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 and therefore movements in the foreign exchange rate should not have a negative impact on the rated tranches.

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 took into account the portfolio profile test that limits to only 2% 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 (such other currency a Minority Currency). DBRS assumed a stressed interest rate index of 8.8% for the obligations denominated in eligible currencies and 44.0% for obligations denominated in minority currencies. The analysis 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 24.0% 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 only reference obligations from obligors that conduct their primary operations in the United States. DBRS applies different recovery rates depending on the recovery tier and seniority.

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 Collateralised Loan Obligation 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 excludes obligations that are either (1) subordinated, (2) defined as either project finance, structured finance or (3) currently in credit watch with a value of two or worse. The maximum single borrower group concentration allowed will be 1.25%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology applicable to the rating 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.

Due to the inclusion of a revolving period in the transaction, the analysis continues to be based on the worst-case 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.

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: https://www.dbrs.com/research/333487/rating-sovereign-governments

The sources of data and information used for this rating include the Beneficiary, Barclays.

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 this rating to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

This is the first rating action since the Initial Rating Date.

The lead analyst responsibilities for this transaction have been transferred to Joana Seara da Costa.

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”):

-- 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 37.6% and 59.3% 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 three 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 three notches.

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: Joana Seara da Costa, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 21 December 2017

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, 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

-- Rating CLOs and CDOs of Large Corporate Credit
-- Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit Transactions
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers

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.

Ratings

  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

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