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

DBRS Ratings Limited (Morningstar DBRS) confirmed its provisional ratings of AAA (sf) on all 11 tranches of the unexecuted, unfunded financial guarantee (the Guarantee) in the Colonnade Programme - Series Global 2018-5 (Colonnade Global 2018-5) portfolio. The tranches' outstanding balances are as follows:

-- Tranche A: USD 8,297,599
-- Tranche B: USD 9,240,000
-- Tranche C: USD 3,180,000
-- Tranche D: USD 3,620,000
-- Tranche E: USD 9,120,000
-- Tranche F: USD 1,810,000
-- Tranche G: USD 4,990,000
-- Tranche H: USD 9,310,000
-- Tranche I: USD 2,120,000
-- Tranche J: USD 3,060,000
-- Tranche K: USD 8,809,997

The credit 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 credit ratings on each tranche are expected to remain provisional until the senior guarantee is executed. The credit ratings do not address counterparty risk or the likelihood of any event of default or termination events under the agreement occurring.

The confirmations 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 2024;
-- Updated default rate, recovery rate, and expected loss assumptions for the reference portfolio; and
-- Current available credit enhancement (CE) to the rated tranches and capacity to withstand losses under stressed interest scenarios.

The transaction is a synthetic balance-sheet collateralised loan obligation structured in the form of a financial guarantee. The tranches are exposed to the credit risk of a portfolio of corporate loans and credit facilities (the Reference Portfolio) originated by Barclays Bank PLC (Barclays).

Barclays bought protection under a credit-linked note (CLN) issued under Colonnade Global 2081-5 that will cover the first USD 55 million of losses under the Reference Portfolio (equivalent to 8.8% of the initial reference portfolio notional of USD 650 million) during the eight-year protection period ending in December 2026. At closing, the transaction benefitted from a three-year revolving period that ended in December 2021. The CLN is issued directly by Barclays, and the investor is exposed to Barclays' default risk as well as the loss of the Reference Portfolio.

PORTFOLIO PERFORMANCE
As of March 2024, the Reference Portfolio stood at USD 116 million, down from USD 276 million at the last annual review. The Reference Portfolio is 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.

As of March 2024, the cumulative outstanding balance of the defaulted loans at the time of default represented USD 10.3 million or 18.7% of the CLN initial balance, up from 12.9% at the last annual review. Barclays estimates the cumulative loss to date to be USD 3.6 million or 6.5% of the CLN initial balance, up from 6.3% at the last annual review.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
The transaction is subject to interest rate risk as the loans in the Reference Portfolio bear floating interest rates, which could lead to higher losses under the Guarantee in an upward interest scenario. As of March 2024, 0.5% of the Reference 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, Morningstar DBRS calculated a stressed interest rate index at each credit 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 7.6% compared with 7.9% at the last annual review and the stressed interest rate index for the obligations denominated in Minority Currencies is 38.4% compared with 39.4% at the last annual review.

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

Morningstar DBRS used its CLO Insight Model to update its expected default rates for the portfolio at each credit rating level.

To determine the credit risk of each underlying reference obligation, Morningstar DBRS relied on either public credit ratings or a mapping from Barclays' internal ratings models to Morningstar DBRS credit ratings, as per the Appendix II "Mapping Financial Institution Internal Ratings to Morningstar DBRS Credit Ratings for Global Structured Credit Transactions" of Morningstar DBRS' "Global Methodology for Rating CLOs and Corporate CDOs".

The weighted-average Morningstar DBRS Risk Score (Morningstar DBRS WARS) increased to 14.2% from 11.9% at the last annual review. Morningstar DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and increased its base recovery rate assumption at the B (sf) credit rating level to 68.9% from 61.9% at the last annual review. The increase in the Morningstar DBRS WARS is due to continued deterioration of the credit ratings below B on the underlying borrowers. The increase in the recovery rate comes from the higher portion of secured loans outstanding; following portfolio amortisation, the secured portion of the portfolio increased to 43.8% from 39.5% at the last annual review.

CREDIT ENHANCEMENT
The CE to each tranche consists of the subordination of the junior tranches. As of March 2024, the CE for each of the tranches increased since the last annual review was as follows:
-- CE for Tranche A to 92.8% from 38.9%
-- CE for Tranche B to 84.8% from 35.6%
-- CE for Tranche C to 82.0% from 34.4%
-- CE for Tranche D to 78.8% from 33.1%
-- CE for Tranche E to 70.9% from 29.8%
-- CE for Tranche F to 69.3% from 29.1%
-- CE for Tranche G to 65.0% from 27.3%
-- CE for Tranche H to 56.9% from 23.8%
-- CE for Tranche I to 55.1% from 23.1%
-- CE for Tranche J to 52.4% from 22.0%
-- CE for Tranche K to 44.7% from 18.8%

The substantial increases in CE for all tranches continued since the end of the replenishment period and led to the confirmation of the credit ratings on all tranches.

Currency risk is limited in this transaction. Although the obligations in the Reference 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.

Morningstar DBRS' credit ratings on the rated tranches addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030.

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

The principal methodology applicable to the credit ratings is: "Global Methodology for Rating CLOs and Corporate CDOs" (23 February 2024), https://dbrs.morningstar.com/research/428544.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS 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 credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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://dbrs.morningstar.com/research/421590.

The sources of data and information used for these credit ratings include reference registries and portfolio reports provided by Barclays.

Morningstar DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial credit ratings, Morningstar DBRS was not supplied with third-party assessments. However, this did not affect the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing this credit rating to be of satisfactory quality.

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

The last credit rating action on this transaction took place on 4 May 2023, when Morningstar DBRS confirmed its provisional credit rating on Tranche A at AAA (sf) and upgraded its provisional credit ratings on Tranche B, Tranche C, Tranche D, Tranche E, Tranche F, Tranche G, Tranche H, Tranche I, Tranche J, and Tranche K to AAA (sf) from AA (high) (sf), AA (high) (sf), AA (sf), AA (sf), AA (sf), AA (sf), AA (sf), AA (sf), AA (low) (sf), and A (low) (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Clare Wootton.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit 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.

Morningstar 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 lead to a confirmation of the credit ratings on all the tranches in the transaction. A scenario combining both an increase in the base case correlation by 20% and a decrease in the base case recovery rate by 10% would lead to a confirmation of the credit ratings on all the tranches in the transaction.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Clare Wootton, Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 21 December 2018

DBRS Ratings Limited
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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Global Methodology for Rating CLOs and Corporate CDOs (23 February 2024) and CLO Insight Model v1.0.1.0, https://dbrs.morningstar.com/research/428544
-- Master European Structured Finance Surveillance Methodology (7 March 2024),
https://dbrs.morningstar.com/research/429051
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030

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

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