Rating action

The transaction comprises the following instruments:

Class A1 (ISIN XS2134386031) Senior Fixed Rate Notes due 2057: GBP 225,000,000: new rating AAA_SF

Class A2 (ISIN XS2134388086) Senior Floating Rate Notes due 2057: GBP 1,125,000,000: new rating AAA_SF

Class B1 (ISIN XS2134388326) Mezzanine Fixed Rate Notes due 2057: GBP 100,000,000: new rating AA-_SF

Class B2 (ISIN XS2134388912) Mezzanine Floating Rate Notes due 2057: GBP 100,000,000: new rating AA-_SF

Transaction overview

North Dock No.1 is a true-sale cash securitisation of a portfolio comprised of residential mortgages originated to predominantly high net worth clients denominated in sterling (GBP). The mortgages were granted by Barclays Private Bank(PB), a private bank division of Barclays Bank PLC (Barclays).

The transaction features a replenishment period ending on 17 April 2022 and PB 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 PB’ loan book maintain or improve the credit quality of the portfolio.

The portfolio shared on 31 January 2020 is comprised of 826 loans to 639 obligors. The portfolio benefits from a moderate weighted average loan-to-value ratio of 59% based on a third-party property valuation. Borrower concentration is above that for standard mortgage portfolios. The properties are predominantly located in London (88%) and the top 10 borrowers account for 12.4% of the total portfolio.

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 iii) the ability and incentives of PB as loan originator and collateral manager of the loan portfolio.

The ratings account for the respective credit enhancement of the rated notes and liquidity supports. They also reflect the strictly sequential amortisation of the senior notes from a loan portfolio whose maximum weighted average maturity is 17 January 2028. The ratings further reflect the default risk, recovery upon default and cash flow features. Scope’s analysis incorporates the transaction’s mitigants against adverse portfolio migration during the replenishment period.

The ratings also reflect the counterparty risk exposure to Barclays as collections account bank and Elavon (a division of US Bancorp) as issuer account bank. This risk is mitigated by: i) the high credit quality of Barclays and Elavon; and ii) the replacement mechanism provided for the issuer account bank upon the loss of a BBB rating by Scope. Scope has analysed the credit quality of Barclays and Elavon using Scope’s ratings and publicly available ratings.

Key rating drivers

Credit enhancement (positive). The Class A and Class B notes benefit from 28.95% and 18.42% credit enhancement provided by subordination.

Moderate loan to value ratio (positive). Moderate loan-to-value results in relatively high recovery rate estimates, even though Scope applied severe market value and liquidation cost stresses. Scope estimated a base case recovery rate on defaulted assets of 80%, and a 42% recovery rate under a severely distressed scenario (i.e. a AAA stress).

Strong liquidity (positive). Liquidity shortfalls are extremely unlikely for Class A, as Class A is supported by a non-amortising liquidity facility, consisting of 2% of the initial total collateral balance. In addition, principal proceeds can be diverted to cover Class A interest shortfall risk, in accordance with the transaction’s waterfalls (principal-to-interest). However, liquidity support for Class B is weaker as it is heavily reliant on the liquidity facility, especially in the early life of the transaction. Class B does not benefit from the principal-to-interest mechanism until Class A is fully redeemed.

Simple and transparent structure (positive). The deal features a swapless, strictly sequential structure, and separate principal and interest waterfalls.
Adequate replenishment covenants (positive). The risk of credit quality deterioration during the replenishment period is partially mitigated through single-asset and portfolio-level covenants as well as performance-based triggers.

Lifetime default rate (negative). Scope’s lifetime portfolio default rate distribution captures relatively high expected defaults, which reflect the volatility of historical vintage data and underlying refinancing risks owing to the bullet nature of most underlying assets. Scope modelled an inverse Gaussian portfolio default rate distribution with a mean of 8% and a coefficient of variation of 60%.

Limited portfolio granularity (negative). Limited granularity may result in higher performance volatility and thicker default distribution tails. The top five borrowers represent 7.3% of the closing balance and the replenishment covenant allows a maximum of 11.5%. Scope addressed concentration risks through the coefficient of variation embedded in its lifetime portfolio default distribution.

Geographic concentration of properties (negative). Recovery assumptions are heavily exposed to London property values, where 88% of the properties are located. Scope draws comfort from the significant market value and liquidation stresses (i.e. firesale discounts) that the rating agency applied when deriving its recovery rate assumptions.

Limited excess spread (negative). Scope gave very limited credit to excess spread of 84bps at closing. This is because the post-replenishment portfolio may face a potential yield compression during the revolving period (minimum portfolio covenant of a 1.78% margin but subject to Bank of England rates) and the available asset yield is further decreased after applying about 50bps of stressed senior fees.

Interest rate mismatch (negative). Fixed rate assets represent 21.6% of the closing balance; a maximum of 30% is allowed during the replenishment period. In contrast, 17% of the liabilities are fixed rate. Class B is particularly exposed to negative carry in the context of limited excess spread. Scope tested several interest rate scenarios to capture the impact on the ratings.

Rating-change drivers

Positive. An improved excess spread at the end of the revolving period may positively impact the rating of the Class A and Class B notes due to a decreased risk of negative carry and faster deleveraging from excess spread (i.e. turbo items).

Negative. UK macroeconomic uncertainty in relation to Brexit and the slowdown in global growth (e.g. Covid-19 impacts) may weigh negatively on the performance of the collateral pool due to a retrieval of foreign investment in the UK property market and an increase in borrowers’ leverage.

Quantitative analysis and assumptions

Scope used a cash flow model to analyse the transaction and applied a large homogenous portfolio approximation approach when modelling the granular collateral pool. The key assumptions derived were then applied to the cash flow analysis of the transaction over its amortisation period.

A mean default rate of 8.0% and a coefficient of variation of 60.0% were applied over the portfolio’s maximum expected weighted average life of 8 years, including the two-year replenishment period. Scope derived an expected portfolio default rate distribution based on 2013-18 vintage data provided by PB. Scope gave no credit to the loans’ seasoning when calibrating defaults because the vintage data covered a relatively short time series compared to the overall loan terms. The default rate and coefficient of variation reflect high performance volatility in the historical data, high borrower concentrations in the portfolio, as well as a relationship driven business model.

Scope considered a rating-conditional recovery rate of 42% for Class A and 51% for Class B. Scope derived these rates based on its fundamental recovery framework, which applies line-by-line haircuts to indexed property appraisals. The haircuts mainly reflect market value losses und rating-specific stress scenarios, as well as a constant liquidation discount of 25% (i.e. a firesale discount) and foreclosure costs.

The recovery timing has a vectorized recovery schedule and a weighted average recovery lag of 2.9 years. Scope assumed that the work-out time will be longer than for a standard residential mortgage-backed security transaction because it would include a negotiation and consultation process with mortgage borrowers to find an adequate solution. Barclays will only enforce securities if all other possible solutions are ruled out.

Scope assumed a minimum portfolio margin of 1.35%, defined by the portfolio replenishment eligibility criteria with Scope’s stressed Bank of England base rate hike scenarios. In addition, Scope assumed that the fixed loan exposure will reach its maximum allowable limit (30%).

A cash flow analysis was performed considering the collateral portfolio’s characteristics and the transaction’s main structural features. Scope analysed the transaction under both a high (20%) and low (0%) prepayment assumption.

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, 0 notch; sensitivity to recovery rate, 0 notch;

Class A2: sensitivity to mean default rate, 0 notch; sensitivity to recovery rate, 0 notch;

Class B1: sensitivity to mean default rate, 0 notch; sensitivity to recovery rate, -1 notch;

Class B2: sensitivity to mean default rate, 0 notch; sensitivity to recovery rate, -1 notch

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

Cash flow analysis
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’. 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 Iris Sie, Senior Analyst.
Person responsible for approval of the ratings: David Bergman, Managing Director.
The rating was first released by Scope on 27 March 2020.

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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