Rating action

The transaction comprises the following instruments:

Class A-1 Senior Secured Floating Rate Notes due 2039: USD 8,425,000,000: affirmed at AAA_SF
(ISIN XS0402206154 / US651343AB11)

Class A-2 Senior Secured Floating Rate Notes due 2039: USD 8,425,000,000: affirmed at AAA_SF
(ISIN XS0418594403 / US651343AC93)

Class B-1 Mezzanine Secured Floating Rate Notes due 2039: USD 1,125,000,000: affirmed at A+_SF
(ISIN XS1882681882 / US651343AE59)

Class B-2 Mezzanine Secured Floating Rate Notes due 2039: USD 1,125,000,000: affirmed at A+_SF
(ISIN XS1882681965 / US651343AF25)

Class C-1 Subordinated Notes due 2039: USD 1,450,000,000: not rated

Class C-2 Subordinated Notes due 2039: USD 1,450,000,000: not rated

The affirmation of the class A-1, A-2, B-1 and B-2 notes’ ratings incorporates the transaction amendments made effective on 3 April 2020. The main changes are: i) the upsizing of the portfolio to USD 22,000m and of the notes’ principal amounts to USD 8,425m for class A-1 and A-2 notes, to USD 1,125m for class B-1 and B-2 notes and to USD 1,450m for class C-1 and C-2 notes; ii) the extension of the reinvestment period to May 2022; iii) the updating of portfolio profile tests allowing the exposure to obligors with a rating below Ba3 to be up to 30.0% of the portfolio balance; iv) the updating of the collateral quality tests allowing the portfolio weighted average risk factor and maturity to be up to 1,350 and May 2025, respectively; v) an update of the transaction’s priority levels favouring the inclusion in the portfolio of obligors incorporated in North America; and vi) changes related to EU risk retention, due diligence and disclosure requirements.

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 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 revolving period ending in May 2022. Prepayments will be reinvested throughout the entire life of the transaction and Barclays may exchange assets at its own discretion. Following the changes in priority levels, the reinvestment criteria only partially protect the transaction from adverse portfolio migration. If no loan from the same obligor group is available, a replenished asset can be replaced by an eligible loan from an obligor incorporated in North America, and if no North American loans are available, by loans from obligors from other eligible jurisdictions, all subject to portfolio profile limits and collateral quality tests.

The portfolio shared as at 26 March 2020 is comprised of 1,764 loans to 647 obligors. The portfolio is representative of Barclays’ corporate loan book and illustrates Barclays’ investment bank’s focus on lending to large international corporates. At present, 69.6% of the portfolio is comprised of obligors incorporated in the US. The remainder mainly consists of exposures to obligors across the UK, continental Europe and Canada.

The multi-currency portfolio is fully hedged by a swap provided by Barclays. The mechanism can effectively be broken down into an interest rate swap and a series of cross-currency swaps. On a given payment date, Barclays pays the 3 month USD Libor rate + 2.8% to the issuer based on the notional balance of the portfolio, while 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 notes’ overcollateralisation is 130.5% for the class A-1 and A-2 notes, respectively. Upon a breach of a minimum overcollateralisation of 125%, 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. Upon a breach of a minimum overcollateralisation of 130.5% 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: 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 global macroeconomic environment, particularly in North America and Europe; and iii) the ability and incentives of Barclays as loan originator, collateral manager of the loan portfolio and swap provider.

The ratings account for the credit enhancement and the strictly sequential amortisation of the rated notes from a loan portfolio whose maximum weighted average maturity is May 2025. The ratings also reflect the default risk and recovery upon default of the revolving portfolio. Scope’s analysis incorporates the transaction’s mitigants against adverse portfolio migration during the reinvestment period, as well as the overcollateralisation tests.

The ratings also reflect the counterparty risk exposure to: i) Barclays as swap counterparty; ii) Elavon Financial Services DAC, UK Branch (Elavon) as account bank, calculation agent and principal paying agent; iii) Deutsche Bank AG, London Branch as collateral administrator; and iv) Deutsche Bank Trust Company Americas as registrar and transfer agent. 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 the roles of account bank, principal paying agent and swap counterparty upon the loss of a BBB rating. Scope 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 A-1, A-2 and B-1, B-2 notes benefit from 23.4% and 13.2% subordination, respectively, and excess spread, available subject to portfolio losses.

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

Swap (positive). A swap mitigates any 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 22.0bn, to be paid quarterly to the issuer.

Relaxed portfolio management criteria (negative). The portfolio management criteria no longer necessarily result in a maintenance of the portfolio’s current credit profile. If no loan from the same obligor group is available, a replenished asset can be replaced by an eligible loan from an obligor incorporated in North America, and if no North American loans are available, by loans from obligors from other eligible jurisdictions, all subject to portfolio profile limits and collateral quality tests.

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

Geography and industry portfolio concentration (negative). 69.6% of the portfolio consists of US obligors and 28.1% is classified under Moody’s Financial Services industry category. Such concentrations may further increase because: i) the transaction’s priority levels favour the inclusion in the portfolio of obligors incorporated in North America; and ii) the single largest industry exposure limit is set at 45%.

Rating-change drivers

Positive. Increased credit enhancement from deleveraging accompanied by good underlying portfolio performance may result in an upgrade of the class B-1 and B-2 notes’ ratings.

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

Quantitative analysis and assumptions

Scope analysed the reference portfolio 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. Scope accounted for the changes in priority levels by stressing the credit quality down to a level commensurate with a portfolio whose weighted average rating factor is close to the transaction’s limit of 1,350 and by increasing the concentration of US obligors by 10pp.

The resulting default distribution for the reference portfolio has a mean default rate of 8.7% and an implicit coefficient of variation of 50.8% over a weighted average portfolio life of 5.2 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 26 March 2020, the management criteria and the potential life extension afforded by the revolving period.

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 with a public Moody’s rating, Scope used the lower of the mapped rating and Moody’s rating.

Scope assumed a base-case portfolio recovery rate of 49.9%, based on 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-1, A-2 notes and the class B-1, B-2 notes are 29.9% and 37.9%, respectively, which reflects haircuts of 40% and 24% 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.

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 20pp 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 assumed a portfolio margin of 2.8%, aligned with the minimum weighted average spread limit and amount to be paid by the swap counterparty.

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

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 A-1: sensitivity to mean default rate, zero notches; sensitivity to recovery rate, zero notches;

Class A-2: sensitivity to mean default rate, zero notches; sensitivity to recovery rate, zero notches;

Class B-1: sensitivity to mean default rate, four notches; sensitivity to recovery rate, four notches;

Class B-2: sensitivity to mean default rate, four notches; sensitivity to recovery rate, four 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.
Scope performed a cash flow analysis of the transaction using the Scope Cash Flow SF/EL Model Version 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’ published on 18 December 2019 and its ‘Methodology for Counterparty Risk in Structured Finance’ published on 24 July 2019. The analysis also included principles set out in the ‘SME ABS Rating Methodology’ published on 9 April 2019. All documents are available on https://www.scoperatings.com/#!methodology/list.
The models used for this rating(s) and/or rating outlook(s) are available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list. Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

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 did not receive a third-party asset due diligence assessment/asset audit. Scope did not perform its own analysis of the data quality, but relied on the fact that the extraction of the data from the originator’s operational systems has been done in a similar way as in other transactions of the same originator, for which an external performance audit was performed. There is no negative impact on the credit ratings.
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
These credit ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Benoit Vasseur, Director
Person responsible for approval of the rating: David Bergman, Managing Director
The ratings were first released by Scope on 26 November 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
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