Rating action

The transaction comprises the following instruments:

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

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

Class A3 Senior Secured Floating Rate Notes due 2039: GBP 2,900,000,000: affirmed AAA_SF
(ISIN XS1846709258)

Subordinated Notes due 2039: GBP 1,850,000,000: not rated

The affirmation of the class A1, A2 and A3 notes’ ratings incorporates the transaction amendments made effective on 5 December 2019. The main changes are: i) the upsizing of the GBP-denominated sub-portfolio and of the class A3 notes’ principal amounts to GBP 4,000m and GBP 2,900m, respectively; ii) an increase in the subordinated notes’ principal amount to GBP 1,850m; iii) the extension of the reinvestment period to January 2022; iv) the updating of portfolio profile tests allowing the single largest industry exposure to be up to 30.0% of the portfolio balance and the second largest industry exposure to be up to 15.0% of the portfolio balance; v) an update of the portfolio weighted average maturity definition and extension of the limit to January 2025; and vi) changes related to EU risk retention, due diligence and disclosures requirements.

Transaction overview

Sirius Funding plc is a true-sale cash securitisation of a portfolio comprised of corporate loans denominated in sterling (GBP), US dollars (USD) and euros (EUR). The loans were granted by Barclays Bank plc (Barclays), predominantly to its United Kingdom and European corporate borrowers. The currency portfolios collateralise three pari-passu senior notes. These three classes of notes are denominated in EUR, USD and GBP and represent 75%, 75% and 72.5% of the respective currency’s portfolio balance. Upon interest or principal shortfalls for one of the senior notes in its respective portfolio currency, available excess interest from the other currency portfolios will be used to reduce the shortfall. Following the full repayment of the senior notes in one given currency, the remaining principal amounts will be available to the senior notes in the other currencies.

The transaction features a revolving period ending in January 2022. 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 ensure that eligible loans selected from Barclays’ loan book will maintain or improve the credit quality of the portfolio.

The portfolio shared on 22 November 2019 is comprised of 981 loans to 481 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 to UK corporates. Currently 66.9% (measured in GBP) of the portfolio is comprised of obligors incorporated in the UK. The remainder mainly consists of exposures to obligors across continental Europe. Barclays’ consistent lending strategy, along with its lending focus and the portfolio management criteria, will help to maintain the current credit profile.

The notes’ overcollateralisation is 133.3%, 133.3% and 137.9% for the class A1, A2 and A3 notes, respectively. Upon a breach of a minimum overcollateralisation of 118.0%, set on an individual currency basis for each note, all available excess interest proceeds will be 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 the test before any reinvestment.

Rating rationale

The ratings reflect: i) the legal and financial structure of the transaction; ii) 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; and iii) the ability and incentives of Barclays as loan originator and collateral manager of the loan portfolios.
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 maturity is January 2025. The ratings also reflect the default risk, recovery upon default and dependency structure of the three revolving sub-portfolios, which jointly collateralise the three senior notes. Scope’s analysis incorporates the transaction’s mitigants against adverse portfolio migration during the reinvestment period. In addition, the ratings account for the transaction’s partial risk exposure to fluctuations in: i) the three reference rates, 3-month EURIBOR, USD LIBOR and GBP LIBOR; and ii) the three currency pairs involved, 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 provided for each role upon the loss of a BBB rating. Scope has analysed the credit quality of Barclays and Elavon using Scope’s ratings on Barclays and publicly available ratings for US Bancorp.

Key rating drivers

Credit enhancement (positive). The class A1, A2 and A3 notes benefit from 25%, 25% and 27.5% subordination, respectively, and cross-collateralisation upon shortfalls.

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 overcollateralisation test helps to maintain the proper collateralisation of the notes with performing collateral. Upon a test breach, principal and interest proceeds from the portfolios are diverted to repay the senior notes.

Experienced corporate lender (positive). The loans are part of Barclays’ core origination activity. The bank 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 SME obligors (negative). About 24.1% of the portfolio consists of obligors whose Barclays’ default grade was derived using Barclays’ rating models which are specific to UK small and medium enterprises. These obligors are usually more sensitive to economic downturns and show lower recoveries upon default.

Rating-change drivers

Positive. Increased credit enhancement from deleveraging accompanied by good underlying portfolio performance may result in a further stabilisation of the ratings at the current level.

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

Negative. A no-deal exit from the European Union, with significant contingent implications for the United Kingdom’s economic outlook, could weigh negatively on the performance of the underlying portfolio.

Quantitative analysis and assumptions

Scope analysed the reference portfolios on a loan-by-loan basis 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 three sub-portfolios altogether has a mean default rate of 7.4% and an implicit coefficient of variation of 63.5% over a weighted average portfolio life of 5.3 years. This assumption represents a long-term view of the portfolio’s credit performance and incorporates the credit quality presented in the portfolio as of 22 November 2019, the management criteria and the potential life extension afforded by the revolving period.

Scope has assumed a base-case portfolio recovery rate of 62.3%, based on Barclays’ recovery performance following the financial crisis in 2008 for similar types of loans. The AAA-rating-conditional portfolio recovery rate is 37.4%, which reflects a 40% haircut accounting for the recovery rate fluctuation found in Barclays’ historical data. In addition, Scope applied a 10% recovery rate haircut to loans from the five largest obligors and from any obligors representing 5% or more of the portfolio balance, as per Scope’s SME ABS Rating Methodology. Scope also assumed that recovery proceeds will be fully realised 12 months after a default.

Scope inferred each loan’s default probability by mapping its ratings to Barclays’ through-the-cycle default grades, specific to the transaction. 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 stress to the mapping commensurate with a two-notch downgrade.

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 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.

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 pp for the five largest obligors and any obligors representing 5% or more of the portfolio balance, as per the agency’s SME ABS Rating Methodology.

Scope used the resulting default rate distribution and default timings to project cash flows from the three sub-portfolios and to determine the expected life and expected loss for each class of rated notes. The results reflect the transaction’s amortisation and cross-collateralisation mechanisms as well as the credit enhancement of the respective tranches.

Scope assumed a portfolio margin of 1.50% during the reinvestment period, aligned with the minimum weighted average spread limit. Scope also applied a margin discount to reflect possible margin compression after the reinvestment period. The margin discount is set at 0.25% just after the reinvestment period and increases with time to reach 0.75%.

Scope performed a cash-flow analysis that assumed foreign exchange and interest rate fluctuations, reflecting significant deviations from current levels. This was based on historical observations dating back to 1953 for foreign exchange rates and 1980 for interest rates.

Sensitivity analysis

Scope tested the resilience of the ratings to deviations in the main input parameters: the 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 results for each rated tranche change compared to the assigned ratings when the assumed mean default rate increases by 50%, or the portfolio’s expected recovery rate decreases by 50%, respectively:

Class A1: sensitivity to mean default rate, zero notches; sensitivity to recovery rate, zero notches;

Class A2: sensitivity to mean default rate, zero notches; sensitivity to recovery rate, zero notches;

Class A3: sensitivity to mean default rate, zero notches; sensitivity to recovery rate, zero notches.

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

Cash flow analysis
Scope primarily analysed the distribution of portfolio defaults and its impact on the rated instruments using the Scope Portfolio Model (Model) Version 1.0.2.
Scope performed a cash flow analysis of the transaction using the Scope Cash Flow SF/EL Model Version 1.1.1. The analysis incorporated default and recovery rate assumptions over the portfolio’s amortisation period. It also took into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The analysis provided an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for these ratings were Scope’s ‘General Structured Finance Rating Methodology’ and its ‘Methodology for Counterparty Risk in Structured Finance’. The analysis also considered the principles of the ‘SME ABS Rating Methodology’. 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
Scope analysts are available to discuss all the details of the rating analysis and the risks to which this transaction is exposed.

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 received a third-party asset due diligence assessment/asset audit. The external agreed-upon-performance audit was considered when preparing the rating and it has no impact on the credit rating.
Prior to the issuance of the rating action, the rated entity was 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.

Regulatory disclosures
This credit rating is issued by Scope Ratings GmbH.
Lead analyst Benoit Vasseur, Director.
Person responsible for approval of the ratings: David Bergman, Managing Director.
The rating was first released by Scope on 28 June 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
© 2019 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 Directors: Torsten Hinrichs and Guillaume Jolivet.