DBRS Morningstar Confirms and Upgrades Provisional Ratings of Three Colonnade 2016 Transactions

DBRS Ratings Limited (DBRS Morningstar) took the following rating actions on 32 tranches of three unexecuted, unfunded financial guarantees regarding the Colonnade Global 2016-1, Colonnade UK 2016-1 and Colonnade UK 2016-2 portfolios:

Colonnade Global 2016-1:
--USD 4,707,777,778 Tranche A confirmed at AAA (sf)
--USD 68,333,333 Tranche B confirmed at AA (high) (sf)
--USD 28,333,333 Tranche C confirmed at AA (high) (sf)
--USD 31,111,111 Tranche D upgraded to AA (high) (sf) from AA (sf)
--USD 58,333,333 Tranche E confirmed at AA (low) (sf)
--USD 15,555,556 Tranche F confirmed at A (high) (sf)
--USD 43,333,333 Tranche G confirmed at A (sf)
--USD 63,888,889 Tranche H confirmed at BBB (high) (sf)
--USD 17,777,778 Tranche I confirmed at BBB (high) (sf)
--USD 21,111,111 Tranche J confirmed at BBB (sf)

Colonnade UK 2016-1:
--GBP 2,883,300,000 Tranche A confirmed at AAA (sf)
--GBP 50,750,000 Tranche B upgraded to AAA (sf) from AA (high) (sf)
--GBP 21,350,000 Tranche C upgraded to AA (high) (sf) from AA (sf)
--GBP 21,350,000 Tranche D upgraded to AA (sf) from AA (low) (sf)
--GBP 35,000,000 Tranche E confirmed at A (high) (sf)
--GBP 13,300,000 Tranche F upgraded at A (high) (sf) from A (sf)
--GBP 31,150,000 Tranche G confirmed at A (low) (sf)
--GBP 44,800,000 Tranche H confirmed at BBB (high) (sf)
--GBP 12,950,000 Tranche I confirmed at BBB (sf)
--GBP 20,300,000 Tranche J confirmed at BBB (low) (sf)
--GBP 15,750,000 Tranche K confirmed at BB (high) (sf)

Colonnade UK 2016-2:
--GBP 543,708,000 Tranche A confirmed at AAA (sf)
--GBP 9,108,000 Tranche B confirmed at AA (high) (sf)
--GBP 4,026,000 Tranche C upgraded to AA (high) (sf) from AA (sf)
--GBP 4,488,000 Tranche D upgraded to AA (sf) from AA (low) (sf)
--GBP 6,600,000 Tranche E confirmed at A (high) (sf)
--GBP 2,508,000 Tranche F confirmed at A (sf)
--GBP 6,336,000 Tranche G confirmed at A (low) (sf)
--GBP 7,986,000 Tranche H confirmed at BBB (high) (sf)
--GBP 2,442,000 Tranche I confirmed at BBB (sf)
--GBP 3,828,000 Tranche J confirmed at BBB (low) (sf)
--GBP 2,970,000 Tranche K confirmed 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 16 November 2024 for the three transactions. Borrower default events are limited to failure to pay, bankruptcy and restructuring events. The ratings assigned by DBRS Morningstar 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 rating actions 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 September 2019;
-- Updated default rate, recovery rate and expected loss assumptions for the reference portfolios; and
-- The current available credit enhancement 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 replenishment period for the three transactions ends soon, on 29 December 2019.

The Guaranteed Portfolio of Colonnade Global 2016-1 currently stands at USD 5,496 million, below the maximum Guaranteed Portfolio notional amount of USD 5,555 million. The Guaranteed Portfolios of Colonnade UK 2016-1 currently stands at GBP 3,251 million, below the maximum Guaranteed Portfolio notional amount of GBP 3,500 million. The Guaranteed Portfolios of Colonnade UK 2016-2 currently stands at GBP 625 million, below the maximum Guaranteed Portfolio notional amount of GBP 660 million. For the three 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 Colonnade Global 2016-1 and British pound sterling for Colonnade UK 2016-1 and Colonnade UK 2016-2.

The composition of the Guaranteed Portfolio of Colonnade Global 2016-1 collateral has improved in terms of DBRS ratings with an increased concentration in the AA (low) - BBB (high) rating range since closing. In terms of DBRS Country Tiers, the composition of the Guaranteed Portfolio is overall worse than at closing; however, it shows a consistent improvement in the last three years. In addition, the weighted-average remaining term of the Guaranteed Portfolio has been increasing consistently and, although not preventing replenishment, is currently above the prescribed limit defined in the Portfolio Tests.

The composition of the Guaranteed Portfolio of Colonnade UK 2016-1 collateral has improved in terms of DBRS ratings with an increased concentration in the “A” rating range and in the BBB rating range since closing. The composition of the Guaranteed Portfolio of Colonnade UK 2016-2 collateral has deteriorated in terms of DBRS ratings with an increased concentration in the BBB rating range since closing. Nevertheless, the performance observed in terms of DBRS ratings is compensated by the decrease in the weighted-average remaining term of the portfolio, which is the main driver of the ratings upgrades for the three transactions. Both Colonnade UK 2016-1 and Colonnade UK 2016-2 of the Guaranteed Portfolios are concentrated in DBRS Country Tier 1 by design.

As of September 2019, the three transactions have recorded defaults leading to a reduction of the guarantee amount to USD 500.00 million from USD 499.85 million for Colonnade Global 2016-1, to GBP 293 million from GBP 350 million for Colonnade UK 2016-1 and to GBP 56 million from GBP 66 million for Colonnade UK 2016-2. The cumulative defaulted amount represents 0.1%, 2.6% and 2.5% of the maximum Guaranteed Portfolio notional amount for Colonnade Global 2016-1, Colonnade UK 2016-1 and Colonnade UK 2016-2, respectively.

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, euro, Canadian dollar, Swedish krona, Norwegian krone, Danish krone and Australian dollar (Minority Currencies). 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 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, for the three transactions, the stressed interest rate index for the obligations denominated in Eligible Currencies is 5.1% and the stressed interest rate index for the obligations denominated in Minority Currencies is 25.6%

DBRS Morningstar calculated the weighted-average recovery rate at each rating level based on the worst-case concentrations in terms of DBRS Country Tier or security levels 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 21.1% from 24.3% for Colonnade Global 2016-1 and to 25.0% from 28.5% for Colonnade UK 2016-1 and Colonnade UK 2016-2.

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 ratings. The mapping was completed in accordance with DBRS Morningstar’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 has decreased since closing, given that losses have been recorded for each transaction. 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 or British pound sterling unless otherwise noted.

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

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

An asset analysis was conducted. 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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include information 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 actions on these transactions took place on 28 December 2018, when DBRS Morningstar confirmed and upgraded the provisional ratings of Colonnade Global 2016-1 and confirmed the provisional ratings of Colonnade UK 2016-1 and Colonnade UK 2016-2.

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

Information regarding DBRS Morningstar 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 Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings (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 2016-1, 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 each lead to a downgrade of the transaction to by up to three notches and a downgrade of the transaction by up to two notches. A scenario combining both an increase in the Correlation by 20% and a decrease in the Base Case Recovery Rate by 10% would lead to a downgrade of the transaction to by up to two notches.

For Colonnade UK 2016-1, 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 each lead to a downgrade of the transaction to by up to four notches and a downgrade of the transaction by up to two notches. A scenario combining both an increase in the Correlation by 20% and a decrease in the Base Case Recovery Rate by 10% would lead to a downgrade of the transaction to by up to three notches.

For Colonnade UK 2016-2, 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 both lead to a downgrade of the transaction to by up to two notches. A scenario combining both an increase in the Correlation by 20% and a decrease in the Base Case Recovery Rate by 10% would lead to a downgrade of the transaction to by up to two notches.

For further information on DBRS Morningstar 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 Date: 29 December 2016 for the three transactions

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
--Master European Structured Finance Surveillance Methodology
--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 Originators
--Operational Risk Assessment for European Structured Finance Servicers

A description of how DBRS Morningstar 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 [email protected].