Rating Action

The assigned ratings are as follows:

Class A1 Senior Secured Floating Rate Notes due 2039: EUR 1,265,625,000: assigned new AAA_SF
(ISIN XS1846706585)

Class A2 Senior Secured Floating Rate Notes due 2039: USD 1,527,525,000: assigned new AAA_SF
(ISIN XS1846709175)

Class A3 Senior Secured Floating Rate Notes due 2039: GBP 1,125,000,000: assigned new AAA_SF
(ISIN XS1846709258)

Subordinated Notes due 2039: GBP 1,125,000,000: not rated

The transaction closed on 28 June 2018 and the legal maturity is 14 July 2039.

Download the rating report here.

Sirius Funding plc is a true-sale cash securitisation of a portfolio comprised of corporate loans denominated in Sterling (GBP), US-Dollar (USD) and Euro (EUR). The loans have been granted by Barclays Bank plc (Barclays) to its United Kingdom and European corporate borrowers. Measured in the transaction’s base currency, GBP, the portfolios are of equal size and collateralise three pari-passu senior notes. These three classes of notes are denominated in EUR, GBP and USD and each represent 75% of the respective currency’s portfolio balance. Upon interest or principal shortfalls for one senior notes in its respective portfolio currency, available excess interest from other currency portfolios is used to reduce such shortfall. Following the full repayment of the senior notes in one given currency, remaining principal amounts will be available to other currency senior note.

The transaction features a two-year revolving period and prepayments will be reinvested throughout the entire life of the transaction and Barclays may exchange assets at its own discretion. Rules-based reinvestment criteria protect the transaction from adverse portfolio migration and provide for selecting eligible loans available in Barclays loan-book that maintain or improve the credit quality of the portfolio.

Currently, the portfolio is comprised of 706 loans to 325 obligors. The portfolio has an average default risk commensurate with a BB+ rating, based on a mapping of the default grades that Barclays assigned to each loan in the portfolio to Scope’s ratings. The initial portfolio is representative of Barclays corporate loan book and illustrates the bank’s lending focus on UK corporates. Currently 70.5% (measured in GBP) of the portfolio is comprised of obligors incorporated in the UK. The remainder consists of exposures to obligors across continental Europe. Barclays consistent lending strategy, the bank’s lending focus and the portfolio management criteria will help to maintain the current credit profile.

The transaction at closing provides for a notes overcollateralisation (OC) of 133.3% respectively per currency. Upon breach of a minimum overcollateralisation of 118%, set on an individual currency basis for each notes, all available excess interest proceeds are diverted to amortise the respective currency’s senior notes until the test is cured. Principal collections in the respective currency will also be used to cure test before any reinvestment.

Rating Rationale

The ratings reflect the legal and financial structure of the transaction; the credit quality of the underlying portfolio and its management criteria in the context of the macroeconomic conditions in the United Kingdom and continental Europe; the ability and incentives of Barclays as loan originator and collateral manager of the loan portfolios.

Scope believes that a post-Brexit slowdown of the UK economy is well mitigated by Barclays focus of lending to large corporates, whose businesses do not necessarily only depend on the UK markets. Moreover, the uncertainties spurred by Brexit may adversely impact the short-term economic environment, but over a mid-to-long-term, the UK will achieve an access to the European markets similar to the Pre-Brexit conditions. Regulatory requirements that force a relocation to continental Europe mainly impact the banking sector, which is excluded by the eligibility criteria. The exposure to continental Europe is well diversified.

The ratings account for the respective credit enhancement of the rated notes and the strictly sequential amortisation of the senior notes from a loan portfolio whose maximum weighted average life must remain below five years from closing. The ratings also reflect the default risk, recovery upon defaults and dependency structure of the three revolving sub-portfolios, which are denominated in EUR, GBP and USD and jointly collateralise the three senior notes. Our analysis incorporates the transaction’s mitigants against adverse portfolio migration during the two-year reinvestment period. In addition, the ratings account for the transaction’s partial risk exposure to fluctuations in i) the three reference rates, 3-months EURIBOR, USD-LIBOR and GBP-LIBOR, and ii) the three currency pairs involved, i.e. USD/GBP, EUR/GBP and USD/EUR.

The ratings also reflect the counterparty risk exposure to Barclays as collections account bank and Elavon as issuer account bank. This risk is mitigated by: i) the high credit quality of Barclays and Elavon (a division of US Bancorp); and ii) the replacement mechanism attached to each role upon loss of a BBB rating. Scope has a public rating on Barclays (A+/ Stable Outlook) and has analysed the credit quality of Elavon based on publicly available information for US Bancorp.

Key rating drivers

Credit enhancement (positive). The three tranches benefit from 25% subordination individually and cross-collateralisation upon shortfalls and note pay-offs. In addition, there is approx. 0.48% of excess spread available during the revolving period, subject to portfolio losses.

Portfolio management criteria (positive). The portfolio management criteria essentially result in a maintenance of the portfolio’s current credit profile, i.e. a BB+ (probability of default measure) commensurate, senior unsecured loan portfolio with a maximum weighted average life of five years and limited concentrations.

Overcollateralisation test (positive). The OC test helps to maintain the proper collateralisation of the notes with performing collateral. Upon breaching the test, principal and interest proceeds from the portfolios are captured to repay the senior notes.

Experienced corporate lender (positive). The loans are part of the core origination activity of Barclays, which has a significant track record in domestic and international corporate lending dating back to 1920, with a focus on lending to large corporates.

Market risk exposure (negative). The transaction is exposed to fluctuations in foreign exchange rates and interest rates, which are partially mitigated by the natural hedge provided by the senior notes.

Low recovery rates (negative). The portfolio will generally comprise senior unsecured exposures, which results in low expected recoveries upon default.

UK macroeconomic uncertainty (negative). Brexit may lead to an adverse economic development in the UK, impacting the general credit performance of corporates in the UK over the medium term. Barclays’ lending focus on large corporates partially mitigates this effect, as this type of corporate is generally internationally diversified. In addition, Scope does not expect a long-term impact on the UK economy from Brexit, as the negotiations aim to achieve largely unchanged access to trade with the European Union.

Rating Change Driver

Positive. Increased credit enhancement from deleveraging accompanied by good performance may result in a further stabilisation of the ratings at the current level.
A stable maintenance of the portfolio margin beyond the revolving period may also lead to a stabilisation.

Negative. Worse-than-expected default and recovery performance of the assets may result in downgrades of the rated notes.

Stress Testing

Stress testing was performed by applying rating-adjusted recovery rate assumptions.

Rating sensitivity

Scope tested the resilience of the ratings against deviations of the main input parameters: mean default rate 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 ratings for each rated tranche change when the mean-default rate increases by 50%, or the portfolio’s expected recovery rate reduces by 50%, respectively:

• Class A1: sensitivity to mean default rate, zero notches; sensitivity to recovery rates, zero notches;
   
• Class A2: sensitivity to mean default rate, zero notches; sensitivity to recovery rates, zero notches;
   
• Class A3: sensitivity to mean default rate, zero notches; sensitivity to recovery rates, zero notches.

Quantitative and Cash Flow Analysis

Scope has analysed the reference portfolios loan-by-loan using a Monte Carlo simulation. For each loan, Scope has assumed a specific default probability, ii) a specific recovery upon default; and iii) asset correlations between the loans.

The resulting default distribution for the three sub-portfolios altogether exhibits a mean default rate of 6.6% and an implicit coefficient of variation of 63.5% over a weighted average portfolio life of 5.5 years. This assumption represents a long-term view on the portfolio credit performance and incorporates the credit quality presented in the preliminary portfolio, the management criteria and the potential life extension by means of the revolving period. Scope assumed a reinvestment of all principal collected during the reinvestment period with a maturity of five years, resulting in a portfolio weighted average maturity marginally beyond July 2023.

Scope has assumed a base case portfolio recovery rate of 57.8%, derived from Barclays recovery performance following the financial crisis in 2008 for similar types of loans. The AAA-rating-conditional portfolio recovery rate is 34.8%, which reflects a 40% haircut covering the fluctuation of the recovery rate found in Barclays historical data. In addition, Scope applied a 10% recovery rate haircut to exposures representing either 5% or more of the portfolio exposure or which contribute more than 1% to the portfolio’s expected loss. Recovery proceeds flow over a two-year period after a loan default and spread equally on a per-quarter basis.

Scope has inferred each loan’s default probability from a mapping of Scope ratings to Barclays’ through-the-cycle default grade, specific to the transaction. The mapping was based on rating migration data covering a period from 2008 to 2016. The recovery rate for each loan reflects the recovery rate implied by the loss-given-default (LGD) rate that Barclays assigns to each exposure.

Scope has assumed pairwise asset correlations ranging from 2% to 47%, composed of additive factors including a general factor of 2%, a location factor of 5% and an industry factor of 20%. The asset correlation reflects the loans exposure to common factors such as the general economic environment, the jurisdiction and the respective industry sector. Scope considered a top-obligor additional factor of 20% for obligors representing more than 5% of the portfolio or contributing more than 1%. expected loss to the portfolio.

Scope used the resulting default rate distribution and default timing to project cash flows from the three sub-portfolios and to determine the expected life and expected loss for each class of senior notes. The results reflect the transaction’s amortisation and cross-collateralisation mechanisms as well as the credit enhancement of the respective tranche. Scope analysed the transaction over a weighted average life of 5.5 which includes the two year the reinvestment period. Scope’s cash-flow analysis considers the three sub-portfolios individually, giving credit to the specific amortisation profiles, default timings, expected recovery rates, interest references and margin stability.

Scope has applied a 0.50% margin discount to three sub-portfolios to reflect margin compression below the 1.5% minimum that only applies during the revolving period.

Scope assumed foreign exchange (FX) and interest rate fluctuations reflecting significant deviations from current levels based on historical observations dating back to 1953 for the FX rates and 1980 for interest rates. The cash-flow analysis incorporates fluctuations in the range of 0.48 to 0.85 for GBP/USD and 0.66 to 1.06 for GBP/EUR, and in the range of -1% to +20% for interest rates.

Methodology

The methodologies used for these ratings is the General Structured Finance Methodology, dated August 2017. Scope also applied the principles contained in the SME ABS Rating Methodology, date June 2017 and the Methodology for Counterparty Risk in Structured Finance, dated August 2017 iare 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.

Solicitation, key sources and quality of information

The rated entity 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, the rated entities’ agents, third parties and Scope internal sources.

Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.

Scope Ratings GmbH has relied on a third-party asset due diligence/asset audit. The external due diligence/ asset audit has no impact on the credit rating.

Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the ratings and the principal grounds on which the credit ratings are based. Following that review, the ratings were not amended before being issued.

Regulatory Disclosures

This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Sebastian Dietzsch, Associate Director
Person responsible for approval of the rating: Guillaume Jolivet, Managing Director
The ratings were first released by Scope on 28.06.2018.
The ratings concern financial instruments, which have been rated by Scope for the first time.

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
© 2018 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstrasse 5 D-10785 Berlin.

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