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

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

-- USD 422,821,491 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 (high) (sf)
-- USD 3,620,000 Tranche D confirmed at AA (sf)
-- USD 9,120,000 Tranche E upgraded to AA (sf) from A (high) (sf)
-- USD 1,810,000 Tranche F upgraded to AA (sf) from A (sf)
-- USD 4,990,000 Tranche G upgraded to AA (sf) from A (sf)
-- USD 9,310,000 Tranche H upgraded to AA (sf) from BBB (sf)
-- USD 2,120,000 Tranche I upgraded to AA (sf) from BBB (sf)
-- USD 3,060,000 Tranche J upgraded to AA (low) (sf) from BBB (sf)
-- USD 8,809,997 Tranche K upgraded to A (low) (sf) from BB (high) (sf)

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. Borrower default events are limited to failure to pay, bankruptcy, and restructuring. The ratings that DBRS Morningstar assigned 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.

Additionally, DBRS Morningstar removed the Under Review with Positive Implications (UR-Pos.) status on the Tranche B, Tranche C, Tranche D, Tranche E, Tranche F, Tranche G, Tranche H, Tranche I, Tranche J, and Tranche K ratings.

These rating actions are the result of an entire review of the transaction following DBRS Morningstar’s re-evaluation of the economic sectors it considers to be most sensitive to the ongoing coronavirus pandemic, summarised in its associated commentary titled “Two Years into COVID-19: Risks to European Structured Credit Transactions”, published on 10 February 2022. Please refer to https://www.dbrsmorningstar.com/research/392167/two-years-into-covid-19-risks-to-european-structured-credit-transactions for more information. As a consequence, DBRS Morningstar previously placed the aforementioned tranches UR-Pos. on 11 February 2022.

The rating actions follow an annual 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 March 2022;
-- Updated default rate, recovery rate, and expected loss assumptions for the reference portfolio;
-- Current available credit enhancement (CE) to the rated tranches and capacity to withstand losses under stressed interest scenarios; and
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The transaction is a synthetic balance-sheet collateralised loan obligation (CLO) structured in the form of a Guarantee. The tranches are exposed to the credit risk of 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, has a duration of eight years and a replenishment period of three years, which ended in December 2021. The legal final maturity date is in December 2026.

PORTFOLIO PERFORMANCE
The Guaranteed Portfolio currently stands at USD 532 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 has slightly deteriorated in terms of DBRS Morningstar’s ratings with increased concentration in the B (sf) and CCC (sf) rating ranges compared with the last annual review, while it has remained stable in terms of DBRS Morningstar’s Country Tiers since closing.

As of March 2022, the cumulative outstanding balance of the defaulted loans at the time of default represented USD 4.0 million or 7.2% of the Guarantee initial balance, stable since the last annual review. Barclays estimates the cumulative loss to date to be USD 1.4 million or 2.6% of the Guarantee initial balance.

PORTFOLIO ASSUMPTIONS AND KEY 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. As of March 2022, 0.1% of the Guaranteed Portfolio amount was 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).

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 4.3%, down from 5.2% at the last annual review, and the stressed interest rate index for the obligations denominated in Minority Currencies is 21.6%, down from 26.2% at the last annual review.

DBRS Morningstar calculated the weighted-average recovery rate at each rating level based on the current concentrations in terms of DBRS Morningstar Country Tier, security levels, 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. DBRS Morningstar completed the mapping in accordance with its “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 decreased its base case probability of default (PD) assumption to 9.1% from 10.6% at the last annual review and increased its base recovery rate assumption to 63.2% from 54.9%, at last annual review, respectively. The improvement in the base case assumptions is due to use of the current pool instead of a worst-case pool during the replenishment period, as well as the removal of some of the adjustments made in the context of the coronavirus pandemic. DBRS Morningstar estimated that, as of March 2022, 11.1% of the outstanding portfolio balance belonged to industries classified in high-risk economic sectors, down from 23.5% at the last annual review. A one-notch downgrade was applied to the borrower’s DBRS Morningstar rating in these sectors.

CREDIT ENHANCEMENT
The CE to each tranche consists of the subordination of the junior tranches. Given the end of the replenishment period, the CE level for each of the tranches increased since the last annual review as follows:
-- CE for Tranche A to 20.5% from 17.5%
-- CE for Tranche B to 18.7% from 16.0%
-- CE for Tranche C to 18.1% from 15.5%
-- CE for Tranche D to 17.4% from 14.9%
-- CE for Tranche E to 15.7% from 13.4%
-- CE for Tranche F to 15.4% from 13.1%
-- CE for Tranche G to 14.5% from 12.3%
-- CE for Tranche H to 12.7% from 10.8%
-- CE for Tranche I to 12.3% from 10.5%
-- CE for Tranche J to 11.7% from 10.0%
-- CE for Tranche K to 10.1% from 8.6%

Currency risk is mitigated in this transaction. 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.

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

For this transaction DBRS Morningstar downgraded the ratings of borrowers in high risk industries by one notch, based on their perceived exposure to the adverse disruptions of the coronavirus. As per DBRS Morningstar’s assessment, 11.1% of the outstanding portfolio balance represented industries classified in the high-risk economic sectors.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 24 March 2022. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/394150/baseline-macroeconomic-scenarios-for-rated-sovereigns-march-2022-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 10 February 2022, DBRS Morningstar updated its 18 May 2020 commentary outlining the impact of the coronavirus crisis on performance of DBRS Morningstar-rated structured credit transactions in Europe two years on. For more details, please see: https://www.dbrsmorningstar.com/research/392167/two-years-into-covid-19-risks-to-european-structured-credit-transactions and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology applicable to the ratings is “Rating CLOs and CDOs of Large Corporate Credit” (26 January 2022).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

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

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

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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 11 February 2022, when DBRS Morningstar placed its ratings on Tranche B, C, D, E, F, G, H, I, J and K UR-Pos. Prior to that, on 1 October 2021, DBRS Morningstar confirmed its ratings on the Tranche A, Tranche B, Tranche F, Tranche H, and Tranche K at AAA (sf), AA (high) (sf), A (sf), BBB (sf), and BB (high) (sf), respectively and upgraded its ratings on the Tranche, C, Tranche, D, Tranche E, Tranche G, Tranche I, and Tranche J to AA (high) (sf), AA (sf), A (high) (sf), A (sf), BBB (sf), and BBB (sf), respectively, from AA (sf), AA (low) (sf), A (sf), A (low) (sf), BBB (low) (sf), and BBB (low) (sf), respectively.

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 ratings, 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 lead to a confirmation of all the tranches of the transaction at their current ratings or to a downgrade of all the tranches 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 to downgrade of all the tranches of the transaction by up to one notch.

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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

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

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
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 CLOs and CDOs of Large Corporate Credit (26 January 2022) and the CLO Asset Model v2.2.3.1,
https://www.dbrsmorningstar.com/research/391226/rating-clos-and-cdos-of-large-corporate-credit
-- Master European Structured Finance Surveillance Methodology (8 February 2022),
https://www.dbrsmorningstar.com/research/392000/master-european-structured-finance-surveillance-methodology
-- Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions (24 February 2022),
https://www.dbrsmorningstar.com/research/392873/mapping-financial-institution-internal-ratings-to-dbrs-morningstar-ratings-for-global-structured-credit-transactions
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021),
https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions
-- Legal Criteria for European Structured Finance Transactions (29 July 2021) ,
https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021),
https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021)
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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].