Rating action

Scope Ratings has today placed the rated instruments on Griffon Funding Ltd. – UK CRE under review for developing outcome.
The transaction comprises the following rated instruments:
A1 Loan debenture, GBP 1,385.8m outstanding amount: AAA_SF under review for developing outcome
A2 Loan debenture, GBP 364.7m outstanding amount: AA+_SF under review for developing outcome
A3 Loan debenture, EUR 57.6m outstanding amount: A+_SF under review for developing outcome

Transaction overview

Griffon Funding Ltd. is a securitisation of a static commercial real estate loan portfolio, comprising 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.

Rating rationale

On 17 August 2020 Scope Ratings has published its new CRE Security and CMBS Rating Methodology which may impact Griffon Funding Ltd. monitored ratings. The “under review” status will be resolved as soon as the analysis of the rated instruments will be performed under the CRE Security and CMBS Rating Methodology, but not later than 180 days from the day of this publication.

Key rating drivers¹

Available credit enhancement (positive). The A loan debenture benefits from the excess spread and credit enhancement from overcollateralisation (A1: 33.1%, A2: 15.4%, A3: 12.6%).

Sequential amortisation mechanism (positive). The senior notes benefit from increasing subordination protection, as amortisation of the notes switched to sequential from pro rata. The senior amortisation trigger has been hit, when the outstanding portfolio balance reduced to less than 75% of the original portfolio balance.

Low loan-to-value mortgages (positive). The commercial real estate loans have a low average loan-to-value ratio (LTV) of 52.7%, based on third-party valuations with an average of 19 months since the last valuation. This LTV level supports the recovery rates expectations and helps the probability of successful refinancing at maturity.

Property and tenant base granularity (positive). The loans finance more than 2,300 properties with more than 10,600 tenants, which reflects positively on the stability of the loans’ interest and debt service coverages.

Strong liquidity coverage (positive). The structure provides strong liquidity protection to the tranches via a fully interconnected set of rules on distributing interest, principal and recovery collections from the assets. Additionally, the structure features a GBP 78.3m liquidity facility, which would cover 1.9 years of interest on the A loan, including other more senior items.

Bullet loan amortisation (negative). All loans in the portfolio have bullet or semi-bullet amortisation. This decreases the likelihood of refinancing at maturity, while increasing the volatility of expected recovery upon default.

Macroeconomic uncertainties in the UK (negative)². The still ongoing Brexit-negotiations and the outbreak of Covid-19 may lead to lower viability of UK commercial real estate in general, especially if uncertainties result in adverse impacts on tenant’s business models.

Loan extensions (negative). The transaction allows for loan extensions up to three years, which increases uncertainty regarding refinancing and recovery conditions.

Rating-change drivers

Following an updated analysis on the rated instruments, the review status will be resolved with the ratings being upgraded, downgraded, confirmed, or remain under review.

Rating driver references
1. Confidential documents of the issuer, arranger and originators
2. Scope’s economic research on the UK

Stress testing
No stress testing was performed

Cash flow analysis
No cash flow analysis was performed

Methodology
The methodology used for these ratings (CRE Security and CMBS Rating Methodology, 17 August 2020) is available on 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 rating 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 received a third-party asset due diligence assessment/asset audit at closing of the transaction. The external due diligence assessment/asset audit was considered when preparing the rating and it had 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Sebastian Dietzsch, Director
Person responsible for approval of the rating: David Bergman, Managing Director
The rating was first released by Scope on 27 September 2016. The ratings were last updated on 6 August 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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