DBRS Confirms Provisional Ratings of Colonnade Global 2017-1 and 2017-3

DBRS Ratings Limited (DBRS) confirmed its provisional ratings on 22 tranches of two unexecuted, unfunded financial guarantees regarding the Colonnade Global 2017-1 and Colonnade Global 2017-3 portfolios as follows:

Colonnade Global 2017-1:
--USD 2,420,563,380 Tranche A at AAA (sf)
--USD 30,422,535 Tranche B at AA (high) (sf)
--USD 15,774,648 Tranche C at AA (sf)
--USD 17,746,479 Tranche D at AA (low) (sf)
--USD 27,887,324 Tranche E at A (high) (sf)
--USD 8,169,014 Tranche F at A (sf)
--USD 22,816,901 Tranche G at A (low) (sf)
--USD 30,985,915 Tranche H at BBB (high) (sf)
--USD 9,577,465 Tranche I at BBB (sf)
--USD 13,521,127 Tranche J at BBB (low) (sf)
--USD 19,436,620 Tranche K at BB (high) (sf)

Colonnade Global 2017-3:
--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)

Each transaction is a synthetic balance-sheet collateralised loan obligation structured in the form of a financial guarantee (the Guarantee). The tranches are collateralised by 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 ratings address the likelihood of a loss under the guarantee on the respective tranche resulting from borrower defaults at the legal final maturity dates of 20 September 2025 for Colonnade Global 2017-1 and 5 December 2025 for Colonnade Global 2017-3. Borrower default events are limited to failure to pay, bankruptcy and restructuring events. The ratings assigned by DBRS to each tranche are expected to remain provisional until the senior guarantee is executed. The ratings do not address counterparty risk nor the likelihood of any event of default or termination events under the agreement occurring.

The confirmations follow an annual review of the transactions 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 2019;
-- Updated default rate, recovery rate and expected loss assumptions for the reference portfolios; and
-- The current available credit enhancement (CE) to the rated tranches and capacity to withstand losses under stressed interest scenarios.

PORTFOLIO PERFORMANCE
The transactions are currently within their three-year replenishment periods 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, portfolio profile tests and are made according to replenishment guidelines. The Guaranteed Portfolio of Colonnade Global 2017-1 currently stands at USD 2,684 million, below the maximum Guaranteed Portfolio notional amount of USD 2,817 million. The Guaranteed Portfolios of Colonnade Global 2017-3 currently stands at its maximum guaranteed amounts of USD 1,647 million. For the two transactions, the Guaranteed Portfolios are non-granular, composed mainly of revolving credit facilities, bear a floating interest rate and are mainly unsecured. The facilities in each Guaranteed Portfolio are mainly drawn in the Protection Currency, which is U.S. dollars for both transactions. The composition of the Guaranteed Portfolio in terms of DBRS ratings and DBRS Country Tiers has remained stable since closing.

As of August 2019, there have not been any borrower defaults and the portfolio profile tests allowing further replenishment of the Guaranteed Portfolio have all been met.

PORTFOLIO ASSUMPTIONS
The transactions are subject to interest rate risk as the loans in the Guaranteed Portfolios bear floating interest rates which could lead to higher losses under the Guarantee in an upward interest scenario. In addition, up to 2% of each Guaranteed Portfolio amount can be drawn in currencies other than the U.S. dollar, British pound sterling, Japanese yen, Canadian dollar, euro, Swedish krona, Norwegian krone, Danish krone and Australian dollar (Minority Currencies). Furthermore, up to 2% of each Guaranteed Portfolio can be drawn in Japanese yen. 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 calculated a stressed interest rate index at each rating level for the obligations denominated in Eligible Currencies, Minority Currencies and Japanese yen. For example, at the AAA (sf) stress level, for both transactions, the stressed interest rate index for the obligations denominated in Eligible Currencies is 6.1%, the stressed interest rate index for the obligations denominated in Minority Currencies is 30.4% and the stressed interest rate index for the obligations denominated in Japanese yen is 4.7%.

DBRS calculated the weighted-average recovery rate at each rating level based on the worst-case concentrations in terms of DBRS Country Tier and blend of secured and unsecured obligations permissible under the portfolio profile tests and adjusted its assumptions with the projected loss on the guarantee under stressed interest rate scenarios. For example, at the AAA (sf) stress level, the recovery rate was reduced to 19.8% from 23.3% for Colonnade Global 2017-1 and to 21.1% from 24.6% for Colonnade Global 2017-3.

DBRS 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 relied on either public ratings or a mapping from Barclays’ internal ratings models to DBRS ratings. The mapping was completed in accordance with DBRS’s “Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit Transactions” methodology.

CREDIT ENHANCEMENT
The credit enhancement levels for each of the tranches remains the same as at closing, given that no loss has been recorded to date. Currency risk is mitigated in these transactions. 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.

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

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

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

An asset analysis was conducted. Due to the inclusion of a revolving period in each 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 these transactions 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 these ratings include information provided by 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 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 these transactions took place on 5 September 2019 when DBRS confirmed the provisional ratings of Colonnade Global 2017-1 and Colonnade Global 2017-3.

The lead analyst responsibilities for these transactions have been transferred to Natalia Coman.

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, 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.

For Colonnade Global 2017-1, DBRS 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 the transaction to by up to two notches and a downgrade of the transaction by up to one notch. 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 the transaction to by up to two notches.

For Colonnade Global 2017-3, DBRS 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 the transaction to by up to two notches and a confirmation of the transaction. 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 the transaction to by up to one notch.

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: Natalia Coman, Senior Financial Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Dates: 29 September 2017 for Colonnade Global 2017-1 and 5 September 2017 for Colonnade Global 2017-3

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 these transactions can be found at: http://www.dbrs.com/about/methodologies.

--Master European Structured Finance Surveillance Methodology
--Rating Methodology for CLOs and CDOs of Large Corporate Credit
--Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit Transactions
--Interest Rate Stresses for European Structured Finance Transactions
--Legal 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.