Scope completed a monitoring review of the following credit-linked notes issued by FITZROY 2018-1 CLO DAC:

Class A: GBP 836.3m: AA-_SF

The Class A credit-linked notes reference Tranche A of the credit protection deed (CPD) between FITZROY 2018-1 CLO DAC and Banco Santander London Branch S.A (Santander). The synthetic risk transfer agreement is backed by a revolving pool of project finance loans primarily originated in the United Kingdom (UK) by Santander.

The review took place on 28 September 2020 using transaction data through September 2020, resulting in no action on the assigned rating. This monitoring note does not constitute a rating action nor does it indicate the likelihood of a credit rating action in the short term. The latest information on the credit ratings in this monitoring note along with the associated rating history can be found at www.scoperatings.com.

Key rating factors

The reference portfolio has performed well and is still in its revolving period, which is expected to conclude 1 October 2021. No credit events have occurred to date on any of the underlying loans and Santander has been consistent in maintaining the integrity of the underlying portfolio during the revolving period. The Class A notes currently benefit from the reference portfolio’s strong BBB+ weighted average credit quality and 25.0% credit enhancement from subordination.

The credit quality of Santander as holder of the Class A note holders’ cash collateral continues to support the outstanding rating of the Class A credit-linked notes.

CREDIT-POSITIVE (+)

Performance. No credit events have occurred to date and the share of loans on active watchlist status has improved year-over-year to 4.1% from 7.4% of the outstanding portfolio balance.

Portfolio credit quality. The underlying portfolio’s credit quality has migrated to BBB+ from A- since closing; however, the current level still provides robust support for the Class A notes.

Experienced originator. Santander’s risk appetite is low. The originator generally targets senior exposures to projects with strong counterparties known to the bank. Santander is an experienced project finance lender in Europe with a longstanding track record and well-tested processes and models.

Credit enhancement. The credit-linked notes’ Tranche A reference continues to benefit from 25.0% credit enhancement via subordination.

CREDIT-NEGATIVE (-)

Counterparty risk. All funds available for payment to the Class A note holders are exposed to the credit quality of bank. The bank holds the cash collateral paid in by the Class A note investors, which is the only source of Class A principal repayment. The bank is also the payer of the guarantee premium and collateral account interest, which fund the interest on these notes. The bank is of high credit quality, but there is no risk mitigant to limit the excessive counterparty exposure.

Country and sector concentration. The transaction is mainly exposed to the UK (95.5%) and highly exposed to renewables (49.9%). The other sectors include PFI (25.9%), Infrastructure (16.3%) and Utilities (7.9%). Concerns about the UK economy in the context of Brexit are offset by the domestic locale of the underlying assets, the strength of the UK’s finances and the dynamic nature of UK markets, supported by excellent property rights and the rule of law. Renewables exposure is somewhat diversified across offshore wind, onshore wind and photo-voltaic solar. The reference portfolio’s underlying assets benefit from higher recovery rates due to their mainly operational (93.8%) status, which helps mitigate concentration risk.

The methodologies applicable for the reviewed ratings (General Structured Finance Rating Methodology, published 19 December 2019; Methodology for Counterparty Risk in Structured Finance, published 8 July 2020; and analytical principles of the General Project Finance Rating Methodology, published 18 November 2019) are available on https://www.scoperatings.com/#!methodology/list.

This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Dmitriy Platonov, Associate Director

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