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

A1 loan debenture: EUR 408.1.0m (54.6%): affirmed at AAA_SF

A2 loan debenture: EUR 183.0m (24.5%): affirmed at AA+_SF

A3 loan debenture: EUR 74.6m (10.0%): downgraded to A_SF from A+_SF

B1 loan note: EUR 47.4m (6.4%): affirmed at BBB_SF

B2 loan note: EUR 33.9m (4.5%): affirmed at B+_SF

The rating actions incorporate the transaction reporting as of 30 September 2018 provided by Barclays Bank PLC.

Rating rationale

Today’s rating actions address the correction of an analytical error affecting the rating actions taken at the last monitoring 31 January 2018. Last rating considered incorrect loan-by-loan default rates for the portfolio.

The rating actions today also account for the solid performance of the collateral pool to date, illustrated by an absence of defaults and continued deleveraging of the remaining assets. As a result, credit enhancement since closing has increased for all tranches, which mitigates the risk from increasing portfolio concentrations. The rated instruments amortise sequentially since 30 November 2017.

Country risk remains low for the short remaining transaction life. The ratings reflect Scope’s view on the commercial real estate price risk associated with the uncertainty of the still pending Brexit negotiations.

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.

Sequential amortisation (positive). The sequential amortisation benefits the more senior instruments of the transaction going forward and results in their fast deleveraging.

Increased portfolio concentration (negative). The top exposures now account for 71.7% of the portfolio, with nine loans each being greater than 5% of the current outstanding balance.

UK macroeconomic uncertainty (negative). Macroeconomic uncertainties primarily associated with Brexit may still 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.

Quantitative assumptions and cash-flow analysis

Taking the loan-by-loan amortisation since January 2018 into account, Scope has derived a portfolio mean default rate of 6.4% over the remaining 2.4 years portfolio life. Scope has considered rating-conditional recovery rates of 68.1% for AAA, 74.4% for AA, 81.5% for A, 87.8% for BBB, 91.0% for BB, and 94.0% for the base case.

Scope applied a top exposure stress of 10% recovery haircut and 20 percentage points add-on to each loan that accounts for more than 5% of the portfolio.

At last rating action in January 2018, Scope considered a portfolio mean default rate of 5.0% instead of 7.5%. The correction of the loan-by-loan default rates also impacted the loan-individual expected loss contribution. As a result, Scope should have considered a default risk-weighted average base case recovery rate for the portfolio of 95.8%, instead of 96.8%.

Other analytical assumptions disclosed at last rating action remain unchanged.

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.

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: the portfolio 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 results for each rated instrument change compared to the assigned ratings when the loans’ default rates increase by 50%, or the portfolio’s expected recovery rate reduces by 10%, respectively:

• A1 loan debenture: sensitivity to default rate, zero notches; sensitivity to recovery rates, zero notches;
• A2 loan debenture: sensitivity to default rate, zero notches; sensitivity to recovery rates, one notch;
• A3 loan debenture: sensitivity to default rate, zero notches; sensitivity to recovery rates, two notches;
• B1 note: sensitivity to default rate, zero notches; sensitivity to recovery rates, two notches; and
• B2 note: sensitivity to default rate, two notches; sensitivity to recovery rates, two notches.

About the transaction

Griffon Funding Ltd. is now a securitization of a static GBP 747.0m commercial real estate loan portfolio, comprising 26 loans granted by Barclays in its normal course of business. 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 methodologies used for these ratings are the General Structured Finance Rating Methodology and the Methodology for Counterparty Risk in Structured Finance, both 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.

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, the rated entities’ agents, 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 analysis has no negative impact on the credit rating.

Regulatory disclosures

This credit rating 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 27.09.2016. The ratings were last updated on 31.01.2018

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.

Scope Ratings GmbH, Lennéstrasse 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Torsten Hinrichs.