Rating action

Scope Ratings has assigned ratings to notes issued by Newfoundland CLO I Limited.

The assigned ratings are as follows:

Class A-1 Senior Secured Floating Rate Notes due 2039: USD 5,065,840,000: assigned new AAA_SF
(ISIN XS0402206154 / US651343AB11)

Class A-2 Senior Secured Floating Rate Notes due 2039: USD 2,136,000,000: assigned new AAA_SF
(ISIN XS0418594403 / US651343AC93)

Class B-1 Mezzanine Secured Floating Rate Notes due 2039: USD 483,750,000: assigned new A+_SF
(ISIN XS1882681882 / US651343AE59)

Class B-2 Mezzanine Secured Floating Rate Notes due 2039: USD 483,750,000: assigned new A+_SF
(ISIN XS1882681965 / US651343AF25)

Class C-1 Notes due 2039: USD 415,330,000: not rated

Class C-2 Notes due 2039: USD 417,630,000: not rated

To access the rating report, click here.

Transaction overview

Newfoundland CLO I Limited is a true-sale cash securitisation of a portfolio of corporate loans denominated in multiple currencies. The loans were granted by Barclays Bank PLC to corporate borrowers located primarily in North America and Europe. The portfolio collateralises two pari passu senior notes (class A-1 and A-2), two pari passu mezzanine notes (class B-1 and B-2) and two pari passu subordinated notes (class C-1 and C-2) that are denominated in U.S.-dollars (USD). The transaction originally closed on 26 November 2008 and was restructured on 26 November 2018. The legal maturity is 26 November 2039.The transaction features a two-year revolving period and prepayments will be reinvested throughout the entire life of the transaction. Barclays may also exchange assets. Rules-based reinvestment criteria protect the transaction from adverse portfolio migration by ensuring that eligible loans selected from Barclays’ loan book maintain or improve the credit quality of the portfolio.

As of month-end August 2018, the portfolio comprised 902 loans from 313 obligors. The portfolio has an average default risk commensurate with a BB+ rating, based on the mapping of Barclays’ default grades for the portfolio loans to Scope’s ratings. The portfolio is representative of Barclays’ corporate loan book and illustrates the bank’s lending focus on large corporates. Barclays’ consistent lending strategy coupled with the portfolio management criteria will help to maintain the current credit profile.

The multi-currency portfolio is fully hedged by a total return swap provided by Barclays. The mechanism is effectively broken out into an interest rate swap and a series of cross-currency swaps. On a given payment date, Barclays pays 3m USD-Libor + 2.8% to the issuer based on the notional balance of the portfolio, where the issuer pays to Barclays all interest accrued from the portfolio. Any principal proceeds received from the portfolio are converted into USD before each payment date and then distributed according to the priority of payments. The foreign exchange spot rate is determined at the asset level, one business day prior to the inclusion of a given asset into the portfolio, thereby removing any currency risk.

The transaction provides 125.0% overcollateralisation on the senior notes. If a minimum overcollateralisation of 113.5% is breached during the reinvestment period, all available excess interest proceeds will be diverted to amortise the senior notes until the test is cured. Principal collections will also be used to cure the test before any reinvestment. If minimum overcollateralisation of 125.0% is breached during the reinvestment period, all available excess interest proceeds will be diverted for reinvestment in eligible collateral until the test is cured.

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 global macroeconomic environment, particularly in North America and Europe; and the ability and incentives of Barclays as loan originator, collateral manager of the loan portfolio and total return swap provider.

The ratings account for the credit enhancement, the strictly sequential amortisation of the rated notes from a loan portfolio for which the covenanted weighted average maturity is 26 November 2023. The ratings also reflect the default risk and recoveries upon default of the revolving portfolio. Our analysis incorporates the transaction’s mitigants against adverse portfolio migration during the two-year reinvestment period, as well as overcollateralisation tests for the rated notes.

The ratings address exposures to the key transaction counterparties: Elavon Financial Services DAC, UK Branch (Elavon) as account bank, calculation agent and principal paying agent; Deutsche Bank AG, London Branch as collateral administrator; Deutsche Bank Trust Company Americas as registrar and transfer agent; Deutsche Trustee Company Limited as trustee; and Barclays Bank PLC as total return swap counterparty. Counterparty risks are mitigated by:the credit quality of Barclays and Elavon (a division of US Bancorp); and the replacement mechanism attached to the roles of account bank, principal paying agent and swap counterparty. Scope has a public rating on Barclays (A+/ Stable Outlook/S1+) and has analysed the credit quality of Elavon based on public publicly available ratings.   

Key rating drivers

Credit enhancement (positive). The class A and class B notes benefit from 20.0% and 9.3% subordination, respectively. In addition, approximately 0.37% of excess spread is available, which assumes a minimum weighted average portfolio spread of 2.8% and is subject to portfolio losses.

Portfolio management criteria (positive). These criteria will help to maintain the portfolio’s current credit profile comensurate with a BB+ default risk equivalent and a senior unsecured loan portfolio with a maximum weighted average maturity of November 2023 and limited concentrations.

Overcollateralisation tests (positive). The class A overcollateralisation and minimum excess spread reserve tests help to maintain the adequate collateralisation of the notes with performing collateral. Upon a breach of the class A overcollateralisation test, principal and interest proceeds are used to repay the class A notes. Upon a breach of the excess spread reserve test, interest proceeds are reinvested in eligible collateral.

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.

Swap (positive). A total return swap mitigates risk that may stem from mismatching currencies between certain portfolio assets and the issued notes. The swap also promises 3-month USD Libor plus 2.8% on a notional balance of USD 9.0bn, to be paid quarterly to the issuer.

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

Top industry exposure (negative). 15.7% of the current portfolio is exposed to banking and finance, an industry which can be more volatile in downward credit cycles given its reliance on debt-financing. Specifically, we view US-based exposures as a growing source of financial risk due to elevated asset prices.

Rating-change drivers

Positive. Increased credit enhancement from deleveraging accompanied by good underlying portfolio performance may further stabilise current class A ratings and result in an upgrade of the class B ratings.

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

Negative. An unexpected no-deal exit by the UK from the EU, with its significant contingent implications for the UK economic outlook, could weigh negatively on the 16.4% portfolio exposure to the UK.

Quantitative and cash flow analysis

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

The resulting default distribution for the reference portfolio exhibits a mean default rate of 5.5% and an implicit coefficient of variation of 65.5% over a weighted average portfolio life of 5.4 years. This assumption represents a long-term view on the portfolio’s credit performance and incorporates the credit quality displayed by the preliminary portfolio, the management criteria and the potential life extension afforded by the revolving period. Scope assumed a reinvestment of all principal collected during the reinvestment period, resulting in a portfolio weighted average maturity date marginally beyond November 2023.

Scope inferred each loan’s default probability by mapping its ratings to Barclays’ through-the-cycle default grades. The mapping was based on rating migration data covering the period from 2008 to 2016. For obligors whose default risk was derived using Barclays’ rating models specific to UK small and medium enterprises, Scope applied a two-notch downgrade stress to Barclay’s default grade scale when establishing the mapping to Scope’s rating scale.

Scope assumed a base case portfolio recovery rate of 51.4%, derived from Barclays’ recovery performance for similar types of loans following the financial crisis in 2008. The rating-conditional portfolio recovery rates applicable to the class A and the class B notes are 30.9% and 39.1%, respectively, which reflects a 40% and 24% haircuts accounting for the recovery rate fluctuation found in Barclays’ historical data. Scope also applied a 10% recovery rate haircut to exposures representing either 5% or more of the portfolio exposure or which contribute over 1% of the portfolio’s expected loss. Recovery proceeds are assumed to be fully realised 12 months after defaulting.

The recovery rate for each loan reflects the recovery rate implied by the loss-given-default rate that Barclays assigns to each exposure. Scope adjusted this recovery rate for each loan, except for education loans, to ensure that the weighted average recovery rate of the portfolio matches Barclays’ recovery performance for similar types of loans after the 2008 financial crisis. For loans granted to educational institutions, Scope used Barclays’ recovery rate assumptions stressed down by 5% as a base case assumption.

Scope 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 an additional top-obligor factor of 20% for obligors representing more than 5% of the portfolio or contributing over 1% of the expected loss to the portfolio.

Scope assumed a portfolio margin of 2.8% during the reinvestment period, aligned with the minimum weighted average spread limit and amount to paid by the total return swap counterparty.

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

Rating sensitivity
Scope tested the resilience of the ratings to deviations in the main input parameters: the portfolio mean default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the results for the rated notes change compared to the assigned rating when the portfolio’s expected default rate increases by 50% and the portfolio’s expected recovery rate reduces by 50%, respectively:

• Class A-1: sensitivity to mean default rate, zero notches; sensitivity to recovery rates, zero notches;
• Class A-2: sensitivity to mean default rate, zero notches; sensitivity to recovery rates, zero notches;
• Class B-1: sensitivity to mean default rate, three notches; sensitivity to recovery rates, three notches;
• Class B-2: sensitivity to mean default rate, three notches; sensitivity to recovery rates, three notches.

Methodology
The methodology applied for these ratings is the General Structured Finance Methodology, the SME ABS Rating Methodology and the Methodology for Counterparty Risk in Structured Finance. All documents are available on www.scoperatings.com.
Historical default rates of the entities rated by 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 not relied on a third-party asset due diligence/asset audit. Scope has performed its own analysis of the assets, 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 internal analysis has no negative 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
These credit ratings are 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 26 November 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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