Rating action

The transaction comprises the following instruments:

Class A-1 Senior Secured Floating Rate Notes due 2039: USD 5,864,000,000: affirmed at AAA_SF
(ISIN XS0402206154 / US651343AB11)

Class A-2 Senior Secured Floating Rate Notes due 2039: USD 2,136,000,000: affirmed at AAA_SF
(ISIN XS0418594403 / US651343AC93)

Class B-1 Mezzanine Secured Floating Rate Notes due 2039: USD 616,250,000: downgraded to A_SF from A+_SF
(ISIN XS1882681882 / US651343AE59)

Class B-2 Mezzanine Secured Floating Rate Notes due 2039: USD 483,750,000: downgraded to A_SF from A+_SF
(ISIN XS1882681965 / US651343AF25)

Class C-1 Subordinated Notes due 2039: USD 700,000,000: not rated

Class C-2 Subordinated Notes due 2039: USD 700,000,000: not rated

The affirmation of note classes A-1 and A-2 and downgrade of note classes B-1 and B-2 incorporate transaction amendments made effective on 17 February 2021. The changes include: i) the downsizing of the portfolio (to USD 10,500m) and the notes’ principal amounts (to USD 5,864m and USD 2,136m for classes A-1 and A-2; USD 616.25m and USD 483.75m for classes B-1 and B-2; and USD 700m for classes C-1 and C-2); ii) the extension of the reinvestment period to February 2023; and iii) the extension of the maximum weighted average maturity to February 2026.

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 (classes A-1 and A-2), two pari passu mezzanine notes (classes B-1 and B-2) and two pari passu subordinated notes (classes C-1 and C-2) that are denominated in US dollars. The transaction originally closed on 26 November 2008 and was last restructured on 3 April 2020. Legal maturity is on 26 November 2039.

The transaction features a revolving period ending in February 2023. Prepayments will be reinvested throughout the life of the transaction and Barclays may exchange assets at its own discretion.

The portfolio as at 22 January 2021 is composed of 1,050 loans to 446 obligors. The portfolio is representative of Barclays’ corporate loan book and illustrates the Barclays investment bank’s focus on lending to large international corporates. At present, 67.0% of the portfolio is composed 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 to the issuer the three-month USD Libor rate plus 2.8% based on the portfolio’s notional balance, while the issuer pays to Barclays all interest accrued from the portfolio. Any principal proceeds received from the portfolio are converted into US dollars 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.

Overcollateralisation is 131.3% for each of the classes A-1 and A-2. 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 in February 2026. 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 public ratings on US Bancorp.

Key rating drivers

Credit enhancement (positive). The notes benefit from subordination of 23.8% for classes A-1 and A-2 and 13.3% for classes B-1 and B-2, and from excess spread, available subject to portfolio losses.¹

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.²

Swap (positive). A swap mitigates any risk from currency mismatches between portfolio assets and the issued notes. The swap also promises three-month USD Libor plus 2.8% on a notional balance of USD 10.5bn, to be paid quarterly to the issuer.²

Low recovery rates (negative). The portfolio will generally comprise senior unsecured exposures, which results in low expected recoveries upon default.³

Geography and industry portfolio concentration (negative). 67.0% of the portfolio consists of US obligors and 36.2% has classifications under the Moody’s financial services industry categories. Such concentrations may further increase because: i) the transaction’s priority levels favour obligors incorporated in North America; and ii) the single largest industry exposure limit is 45%.^2,3

Rating-change drivers

Positive. Increased credit enhancement from deleveraging accompanied by good underlying portfolio performance may result in rating upgrades for note classes B-1 and B-2.

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 current priority levels by increasing the concentration of US obligors by about 10pp.

The resulting default distribution for the reference portfolio has a mean default rate of 8.2% and an implicit coefficient of variation of 56.8% 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 January 2021, 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, which are specific to the transaction. The mapping was based on rating migration data covering the 2008-16 period. For obligors with a public Moody’s rating, Scope used the lower of the mapped rating and the Moody’s rating.

Scope assumed a base-case portfolio recovery rate of 50.0%, based on Barclays’ recovery performance for similar types of loans following the financial crisis in 2008. The rating-conditional portfolio recovery rates are 30.0% for the class A-1 and A-2 notes and 38.0% for the class B-1 and B-2 notes, which reflect haircuts of 40% and 24%, respectively, and account for the recovery rate fluctuations 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 after the 2008 financial crisis for similar types of loans.

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, applying to 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 the 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, one notch; sensitivity to recovery rate, zero notches;

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

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

Class B-2: sensitivity to mean default rate, four notches; sensitivity to recovery rate, three notches.

Rating driver references
1. Investor payment reports (confidential)
2. Transaction documentation (confidential)
3. Loan-by-loan data tape (confidential)

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

Cash flow analysis
Scope has primarily analysed the distribution of portfolio losses and its impact on the rated instruments, with the use of Scope Portfolio Model (Model) Version 1.0.
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Cash Flow SF EL Model Version 1.1, incorporating default and recovery rate assumptions over the portfolio’s amortisation period, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for these credit ratings were Scope’s ‘General Structured Finance Rating Methodology’ published on 14 December 2020 and its ‘Methodology for Counterparty Risk in Structured Finance’ published on 8 July 2020. The analysis also included principles set out in the ‘SME ABS Rating Methodology’ published on 26 May 2020. All documents are available on https://www.scoperatings.com/#!methodology/list.
The models used for these ratings, Scope Cash Flow SF/EL Model Version 1.1 and Scope Portfolio Model (Model) Version 1.0, 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 Ratings’ 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 ratings 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 ratings: public domain, the rated entity, the rated entities’ agents, third parties and Scope Ratings internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the rated entity or instrument to be satisfactory. The information and data supporting Scope Ratings’ credit ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has not received a third-party asset due diligence assessment/asset audit. Scope Ratings has performed its own analysis of the data quality, based on information received from the rated entity or related third parties, which is not and should be not deemed equivalent to the performance of due diligence or an audit. The external due diligence assessment/asset audit/internal analysis was considered when preparing the credit ratings and it has no impact on the credit ratings.
Prior to the issuance of the credit rating action, the rated entity was given the opportunity to review the credit ratings and the principal grounds on which the credit ratings are based. Following that review, the credit ratings were 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. The credit ratings are UK endorsed.
Lead analyst Benoit Vasseur, Executive Director
Person responsible for approval of the credit ratings: David Bergman, Managing Director
The credit ratings were first released by Scope Ratings on 26 November 2018. The credit ratings were last updated on 3 April 2020.

Potential conflicts
Please see www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures 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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