The agency has reviewed the performance of Griffon Funding Ltd (Griffon) and taken the following credit rating actions on the issued instruments:

A1 loan debenture: EUR 814.0m (70.61%): affirmed at AAA_SF
A2 loan debenture: EUR 183.0m (15.87%): upgraded to AA+_SF from AA_SF
A3 loan debenture: EUR 74.6m (6.47%): upgraded to A+_SF from A_SF
B1 loan note: EUR 47.4m (4.12%): affirmed at BBB_SF
B2 loan note: EUR 33.9m (2.94%): affirmed at B+_SF

The rating actions incorporate deal reporting as of 30 November 2017 provided by Barclays Bank PLC.

Rating rationale

The rating actions are driven by the solid performance of the collateral pool, illustrated by an absence of defaults to date and the continued deleveraging of the remaining assets. The rated instruments switched to sequential amortisation when the portfolio reduced to less than 50% of its original balance; until 30 November 2017, amortisation was pro-rata. Credit enhancement since closing has increased for both the A2 loan debenture (14.04% from 11.75%) and the A3 loan debenture (7.58% from 6.25%). Country risk has not increased materially since closing.

Key rating drivers

Asset performance (positive). The portfolio is static and has not had any defaults to date. Loan-level covenants have also been met. Average loan-to-value ratios have decreased and the average property quality appears stable.

Increased portfolio concentration (negative). The top five obligors now account for 48.05% of the portfolio, with seven loans each being greater than 5% of the current outstanding balance. This raises refinancing risk for the rated tranches at maturity.

UK macroeconomic uncertainty (negative). Macroeconomic uncertainties primarily associated with Brexit may lead to lower demand for UK commercial properties, a significant segment for the reference portfolio.

Extension risk (negative). The restructuring of loans allows higher asset exposures under certain circumstances.

Sequential amortisation (positive). The switch to sequential from pro-rata amortisation will benefit the more senior instruments of the transaction going forward and should result in their faster deleveraging.

Quantitative assumptions

Scope derived the portfolio’s default rate probability distribution using a Monte Carlo simulation. The agency then projected the cash flow for the transaction, taking account of structural mechanisms including the priorities of payment and ancillary support such as coupon step-down mechanisms for the different tranches. In this way, Scope has produced a measure of the expected loss and expected weighted average life of each rated tranche.

Scope expects an average default rate of 4.9%, based on a loan-by-loan analysis of the portfolio.

Scope has assumed a maximum pair-wise asset correlation of 50%, divided into a minimum of 15% for all loans, with 15% assigned to a regional factor incorporating one of two factors (e.g. Greater London and other regions), and 20% assigned to each of the five property sectors (industrial, office, residential, retail and other). Scope also added a 20% correlation stress to the seven loans representing more than 5% of the portfolio each. The simulated distribution exhibits a coefficient of variation of 113.8%, reflecting the portfolio’s loan concentration, the correlated nature of the UK commercial real estate market, and the risk of extreme events.

Scope used loan-by-loan recovery assumptions to derive the portfolio-level assumptions ranging from 77.8% to 97.8%, which depend on rating-conditional stresses from AAA to B respectively. The loan-specific recovery assumptions were based on a fundamental analysis of the underlying properties.

Rating sensitivity

Scope tested the resilience of the ratings against deviations in the main input parameters, i.e. portfolio defaults and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios. The following shows how the quantitative analysis for each rated tranche change when loans default rates are increased by 50%, or an individual loan’s expected recovery rate is reduced by 10%, respectively:

• A1 loan debenture: sensitivity to default rate, 0 notches; sensitivity to recovery rate, 0 notches;
• A2 loan debenture: sensitivity to default rate, 0 notch; sensitivity to recovery rate, 0 notch;
• A3 loan debenture: sensitivity to default rate, 0 notches; sensitivity to recovery rate, 1 notch;
• B1 loan note: sensitivity to default rate, 0 notches; sensitivity to recovery rate, 2 notches;
• B2 loan note: sensitivity to default rate, 1 notch; sensitivity to recovery rate, 3 notches.

About the transaction

The loan portfolio is static and comprises 32 commercial real estate loans secured by 739 underlying properties. Approximately 4,500 tenants support the cash flows used to service the loans. The portfolio benefits from a very high interest coverage of 4.8x and a low weighted average loan-to-value ratio of 41.8%. Barclays is an experienced originator in the UK market with a prudent strategy and moderate to low risk appetite which is reflected in the quality of the portfolio.

Methodology
The methodology used for this ratings are General Structured Finance Rating Methodology and Methodology for Counterparty Risk in Structured Finance, are available on www.scoperatings.com.

Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com. The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated instruments' issuer and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Prior to publication, the issuer and/or its agents were given the opportunity to review the rating and the principal grounds on which the credit rating is based. Following that review, the rating was not amended before being issued.

Scope Ratings GmbH has not relied on a third-party asset due diligence/asset audit. Scope has performed its own analysis of the asset, based on information received from the rated entity or related third parties, which is not and should be not deemed equivalent to a due diligence or an audit. The external internal analysis has no negative impact on the credit rating.

Regulatory disclosures
This credit rating is issued by Scope Ratings GmbH.
Lead analyst Thomas Miller-Jones, Associate Director
Person responsible for approval of the rating: Guillaume Jolivet, Managing Director
The ratings were first released by Scope on 27.09.2016. The ratings were last updated on 31.01.2017.

Potential conflicts
Please see www.scoperatings.com. for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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