DBRS Morningstar Confirms and Downgrades Provisional Ratings on Colonnade Programme - Series Global 2018-5

DBRS Ratings Limited (DBRS Morningstar) took the following rating actions on the 11 tranches of the unexecuted, unfunded financial guarantee in the Colonnade Programme – Series Global 2018-5 (Colonnade Global 2018-5) portfolio:

--USD 514,740,000 Tranche A confirmed at AAA (sf)
--USD 9,240,000 Tranche B confirmed at AA (high) (sf)
--USD 3,180,000 Tranche C confirmed at AA (sf)
--USD 3,620,000 Tranche D confirmed at AA (low) (sf)
--USD 9,120,000 Tranche E downgraded to A (sf) from A (high) (sf)
--USD 1,810,000 Tranche F confirmed at A (sf)
--USD 4,990,000 Tranche G confirmed at A (low) (sf)
--USD 9,310,000 Tranche H downgraded to BBB (sf) from BBB (high) (sf)
--USD 2,120,000 Tranche I downgraded to BBB (low) (sf) from BBB (sf)
--USD 3,060,000 Tranche J confirmed at BBB (low) (sf)
--USD 8,809,997 Tranche K confirmed at BB (high) (sf)

The 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 junior guarantee was executed in December 2018 with an initial balance of USD 55 million and has a duration of eight years.

The ratings address the likelihood of a loss under the guarantee on the respective tranche resulting from borrower defaults at the legal final maturity date in December 2026. Borrower default events are limited to failure to pay, bankruptcy, and restructuring. 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 or the likelihood of any event of default or termination events under the agreement occurring.

The rating actions resolve the Under Review with Negative Implications (UR-Neg.) status of the ratings assigned on 2 July 2020. Please refer to https://www.dbrsmorningstar.com/research/363384/dbrs-morningstar-places-ratings-on-colonnade-global-2018-5-under-review-with-negative-implications.

DBRS Morningstar has assessed the potential impact of the Coronavirus Disease (COVID-19) pandemic on the transaction by adjusting its collateral assumptions in line with the risk factors in its commentary published on 18 May 2020 outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated structured credit transactions in Europe. For more details, please see the following commentaries:
https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

The rating actions follow a review of the transaction 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 2020;
-- Updated default rate, recovery rate, and expected loss assumptions for the reference portfolio; and
-- Current available credit enhancement to the rated tranches and capacity to withstand losses under stressed interest scenarios.
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

PORTFOLIO PERFORMANCE
The transaction is currently within its three-year replenishment period 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 ends in December 2021.

The Guaranteed Portfolios of Colonnade Global 2018-5 currently stands at USD 623 million, below the maximum Guaranteed Portfolio notional amount of USD 624 million. The Guaranteed Portfolio is fairly granular, composed mainly of revolving credit facilities, bears a floating interest rate and is mainly unsecured. The facilities are mainly drawn in the protection currency of the Guarantee, which is U.S. dollars.

The composition of the Guaranteed Portfolio of Colonnade Global 2018-5 has deteriorated in terms of DBRS Morningstar Ratings with an increased concentration in the BB rating range from the BBB rating range a year ago, while it has remained stable in terms of DBRS Morningstar Country Tiers since closing.

In terms of the DBRS Morningstar Industry concentrations and of borrower group concentrations that are both prescribed by the portfolio profile tests, the Guaranteed Portfolio is at the limits prescribed by the Portfolio Profile Tests.

As of September 2020, there have been four loan defaults, which occurred in July and August 2020. The cumulative outstanding balance of the defaulted loans at the time of default represents EUR 2.9 million or 5.2% of the Guarantee initial balance. The cumulative loss to date is EUR 0.8 million or 1.4% of the Guarantee initial balance. As of September 2020, the portfolio profile tests allowing further replenishment of the Guaranteed Portfolio have all been met.

PORTFOLIO ASSUMPTIONS AND KEY RATING DRIVERS
The transaction is subject to interest rate risk as the loans in the Guaranteed Portfolio bear floating interest rates, which could lead to higher losses under the Guarantee in an upward interest scenario. In addition, up to 2% of the Guaranteed Portfolio amount can be drawn in currencies (Minority Currencies) other than the U.S. dollar, British pound sterling, euro, Canadian dollar, Swedish krona, Norwegian krone, Danish krone, Australian dollar, Japanese yen, and Swiss franc (Eligible 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, the stressed interest rate index for the obligations denominated in Eligible Currencies is 4.6% down from 7.1% a year ago and the stressed interest rate index for the obligations denominated in Minority Currencies is 22.9% down from 35.6% a year ago. The decrease is due to the general lowering interest environment but as well as the decrease in the remaining years of the Guarantee coverage time since closing.

DBRS Morningstar calculated the weighted-average recovery rate at each rating level based on the worst-case concentrations in terms of DBRS Morningstar Country Tier, security levels permissible under the portfolio profile tests, borrower group, and DBRS Morningstar Industry classification and adjusted its assumptions with the projected loss on the guarantee under stressed interest rate scenarios.

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 Morningstar ratings. The mapping was completed in accordance with DBRS Morningstar’s “Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions” methodology.

DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and has increased its base case PD assumption and recovery rate assumptions to 13.0% and 55.2%, from 9.8% and 45.8% a year ago. The increase in the base case PD captures the adjustments resulting from the coronavirus pandemic and DBRS Morningstar’s assessment that 2.0% and 24.3% of the outstanding portfolio balance as of September 2020 belonged to industries classified in mid-high and high-risk economic sectors, respectively, which leads to a one- and two-notch-downgrade of the borrower’s DBRS Morningstar rating, respectively, as per the commentaries mentioned above. The increase in the base case recovery rate assumption results from the lower borrower’s rating assigned following the assessment of the economic sector’s risk.

CREDIT ENHANCEMENT
The credit enhancement to each tranche consists of the subordination of the junior tranches. Given that losses have been recorded, the credit enhancement levels for each of the tranches decreased since a year ago, as follows:
--to 17.5% from 17.6% for the Tranche A
--to 16.1% from 16.2% for the Tranche B
--to 15.6% from 15.7% for the Tranche C
--to 15.0% from 15.1% for the Tranche D
--to 13.5% from 13.6% for the Tranche E
--to 13.2% from 13.3% for the Tranche F
--to 12.4% from 12.5% for the Tranche G
--to 10.9% from 11.0% for the Tranche H
--to 10.6% from 10.7% for the Tranche I
--to 10.1% from 10.2% for the Tranche J
--to 8.7% from 8.8% for the Tranche K

Currency risk is mitigated in this 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.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many Structured Credit transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For this transaction, DBRS Morningstar downgraded by one or two notches the internal credit estimate or the DBRS Morningstar rating of obligors in mid-high or high-risk industries based on their perceived exposure to the adverse disruptions of the coronavirus.

Should collateral performance deteriorate beyond the levels contemplated under DBRS Morningstar’s revised base case assumptions, or in the event of a material change in DBRS Morningstar’s macroeconomic forecasts, these transactions may be placed UR-Neg. once again.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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” (21 July 2020).

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 these transactions are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include reference registries and portfolio reports 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 rating, 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 action on this transaction took place on 2 July 2020 when DBRS Morningstar placed the ratings on the 11 tranches UR-Neg.

Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies, is available on www.dbrsmorningstar.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 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.

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 all the tranches of the transaction by up to three 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 a downgrade of the transaction by up to five 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 U.S. regulations only.

Lead Analyst: Natalia Coman, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 21 December 2018

DBRS Ratings Limited
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Tel. +44 (0) 20 7855 6600

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.dbrsmorningstar.com/about/methodologies.

-- Rating Methodology for CLOs and CDOs of Large Corporate Credit (21 July 2020) and the CLO Asset Model version 2.2.3 https://www.dbrsmorningstar.com/research/364310/rating-clos-and-cdos-of-large-corporate-credit
-- Master European Structured Finance Surveillance Methodology (22 April 2020) https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology
-- Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions (11 March 2020), https://www.dbrsmorningstar.com/research/357853/mapping-financial-institution-internal-ratings-to-dbrs-morningstar-ratings-for-global-structured-credit-transactions
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020)
https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions
-- Legal Criteria for European Structured Finance Transactions (11 September 2019) https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020) https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers
-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020) https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at http://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].