Rating action

Scope Ratings GmbH (Scope) has assigned the following ratings:

Class A-1 Senior Secured Floating Rate Notes due 2050: GBP 1,156,000,000: rated AA+_SF (ISIN XS2404569746)

Class A-2 Senior Secured Floating Rate Notes due 2050: USD 1,944,000,000: rated AA+_SF (ISIN XS2404573003)

Subordinated Notes due 2050: GBP 1,435,880,000: not rated

The transaction closed on 9 November 2021 and the legal maturity is 16 December 2050.

Transaction overview

Duke Global Funding Ltd is a true-sale cash securitisation of a portfolio of corporate loans, commercial real estate loans and trade finance obligations denominated pound sterling, US dollar and euro. The loan obligations have been granted by Barclays Bank plc (Barclays), mainly to corporate borrowers based in the United States or the United Kingdom. The portfolio collateralises two pari-passu senior notes (classes A-1 and A-2) and subordinated notes.

The transaction features a revolving period until March 2024. Prepayments will be reinvested throughout the life of the transaction and Barclays may exchange assets at its own discretion. Rule-based reinvestment criteria help to maintain the portfolio’s credit profile.

As of 5 October 2021, the portfolio comprised 519 loans from 254 obligors. The portfolio has an average default risk commensurate with a B+ rating^*, based on the mapping of Barclays’ through-the-cycle default grades for the portfolio loans to Scope’s ratings. The portfolio consists of senior unsecured corporate loans, senior secured commercial real estate exposures and trade finance obligations from Barclays’ loan book. The commercial real estate exposures and the trade finance obligations are each limited to up to 10% of the portfolio. The collateral quality test based on the weighted average rating factor allows a possible deterioration of the portfolio’s current credit profile. This is mitigated by the reinvestment criteria, which ensure that the credit quality of replenished assets is at least maintained.

At inception, the transaction provides overcollateralisation of 147.1% and 138.9% for class A-1 and A-2 notes, respectively. The overcollateralisation test is set at 135% for class A-1 and 130% for class A-2 on an individual currency basis. Should overcollateralisation for any of the note classes fall below the respective test level, all available excess interest proceeds will be diverted to amortise the respective currency’s senior notes until the test is cured. Principal collections in the respective currency will also be used to cure the test before any reinvestment.

Rating rationale

The ratings reflect the legal and financial structure of the transaction; the credit quality of the underlying portfolio and its management criteria in the context of macroeconomic conditions in the UK and the US; and the ability and incentives of Barclays as loan originator and collateral manager of the loan portfolio.

Brexit’s impact on the UK economy, especially on the financial services sectors, is becoming clearer with the enactment in 2021 of the EU-UK Memorandum of Understanding and Trade and Cooperation Agreement. At the same time, the UK is being challenged by the Covid-19 pandemic. The resilience of the UK's economy, government debt profile and reserve-currency status has been demonstrated amid this dual crisis. Rising public debt and Covid-19 variants still pose risks to the UK’s economic recovery. However, as for Barclays, the portfolio originator of the transaction in the UK, its business focus on lending to large corporates and its global business diversification have enabled considerable stability despite the sluggish and uncertain macroeconomy. As for the US, despite its economic recovery and stability being challenged by high and rising government debt, Scope projects its economy to recover robustly and its GDP to exceed pre-crisis output in Q2 2021. This is well ahead of the pace of recovery in most European economies, including France and the UK.

The ratings account for the respective credit enhancements of the rated notes and the strictly sequential amortisation of the senior notes from the loan portfolio, whose maximum weighted average maturity date is the earlier of four years since the last purchase date and the payment date in December 2028. The ratings also reflect the default risk and recoveries upon default of the revolving portfolio. Scope’s analysis incorporates the transaction’s mitigants against adverse portfolio migration during the reinvestment period, scheduled to end in March 2024, as well as overcollateralisation tests for the rated notes. In addition, the ratings account for the transaction’s partial risk exposure to fluctuations in i) the two reference rates (compounded daily SONIA and three-month USD-Libor); and ii) the three currency pairs involved – the US dollar and pound sterling, the euro and pound sterling, and the US dollar and euro.

The ratings address exposures to the key transaction counterparties: i) Barclays as collateral manager, vendor, vendor trustee, initial purchaser and retention holder; ii) Elavon Financial Services DAC, UK Branch (Elavon) as account bank, principal paying agent, transfer agent and registrar; iii) U.S. Bank Global Corporate Trust Limited as calculation agent, information agent and collateral administrator; and iv) U.S. Bank Trustees Limited as trustee. Counterparty risks are mitigated by: i) the credit quality of Barclays and Elavon (a division of US Bancorp); and ii) the replacement mechanism attached to the roles of account bank and principal paying agent upon loss of a BBB rating. Scope has a rating on Barclays and analysed the credit quality of Elavon based on public ratings available.

Key rating drivers

Credit enhancement (positive)¹. The class A-1 and class A-2 notes benefit from the 36% of credit enhancement provided by subordination and cross-collateralisation upon shortfalls and note pay-offs.

Overcollateralisation test (positive)². The OC test helps to maintain the proper collateralisation of the senior notes with performing collateral. Upon a breach of the test, interest and principal proceeds from the portfolios will be captured to repay the senior notes.

Experienced corporate lender (positive)². The loans are part of the core origination activity of Barclays, whose record in domestic and international corporate lending spans more than a century, with a focus on lending to large corporates.

Market risk exposure (negative)^1,2. The transaction is exposed to fluctuations in foreign exchange rates and interest rates, which are partially mitigated by the natural hedge provided by the senior notes.

Low recovery rates (negative)¹. The portfolio will generally comprise senior unsecured exposures, which results in low expected recoveries upon default.

High concentration in specific industries (negative)^1,2. About 36.4% of the portfolio is concentrated in four industries as per the Moody’s industrial classifications: Real Estate, Banking, Finance and Insurance. This may further rise during the life of the transaction as the corresponding portfolio profile limit is set at 50%. This leaves the transaction vulnerable to a downturn in these specific industries.

Portfolio management criteria (negative)². The collateral quality test based on the weighted average rating factor allows a possible deterioration of the portfolio’s current credit profile to a default risk commensurate with B-. This is mitigated by the reinvestment criteria, which ensure that the credit quality of replenished assets is at least maintained.

Upside rating-change drivers

Increased credit enhancement from deleveraging accompanied by good portfolio performance may result in a further stabilisation of the ratings or even an upgrade.

Downside rating-change drivers

A 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 correlation between the loans.

The resulting default distribution for the reference portfolio exhibits a mean default rate of 30.1% and an implicit coefficient of variation of 26.6% over a weighted average portfolio life of 7.2 years. The default rate distribution accounts for the diversification effects among the three sub-portfolios. The analysis incorporates the reinvestment period, portfolio profile and collateral quality tests, which result in a reference portfolio exhibiting a longer weighted average life, worse credit quality and higher industry concentration than the portfolio at closing date.

Scope inferred the loans’ default probability from the mapping of Barclays’ through-the-cycle default grades to Scope’s ratings. For obligors of senior unsecured corporate loans whose default risk was derived using Barclays’ rating models specific to UK SMEs, Scope applied a stress to the mapping commensurate with a two-notch downgrade of the Barclays’ score.

Scope used the resulting default rate distribution and default timing to project cash flows from the reference 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 enhancements of the respective tranches.

Scope assumed a base case portfolio recovery rate of 59.8% and an AA-rating-conditional portfolio recovery rate of 41.1%, which reflects a haircut of 31.3%.

The recovery rate for each loan reflects the recovery rate implied by the loss-given-default (LGD) rate that Barclays assigns to each exposure. For the corporate loans segment, Scope adjusted each loan’s recovery rate to ensure the portfolio’s weighted average recovery rate matches the recovery performance recorded by Barclays for similar types of loans after the 2008 financial crisis. For the commercial real estate loans, Scope assumed a base-case weighted average recovery rate of 96.7%, given the low weighted average loan-to-value ratio (LTV) of 44.7%. For the trade finance loans, Scope applied the same approach to adjust the base-case recovery rate as for the corporate loans segment. This conservative approach is justified by the lack of realised LGD information for that particular segment, as no default has occurred since 2007.

An additional 10% recovery rate haircut was applied to exposures from the five largest obligors. Scope also assumed that recovery proceeds are fully realised 12 months after defaulting.

For this transaction, 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 20% for exposures from five largest obligors.

Scope considered the minimum weighted average portfolio margin of 1.95% as the portfolio spread in the analysis. On the one hand, the transaction might become subject to margin compression, as the single-asset reinvestment criteria, a minimum margin of 0%, allows an erosion of the portfolio margin. On the other hand, a significant decrease is unlikely given the mainly non-investment grade nature of the borrowers in the pool. In an additional sensitivity run, Scope tested a 50bps margin compression and the results indicated a negligible impact.

Sensitivity analysis

Scope tested the resilience of the ratings to deviations in the main input parameters: the portfolio mean default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the results for the rated notes would change if the portfolio’s expected default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

• Class A-1: sensitivity to probability of default, two notches; sensitivity to recovery rates, three notches.
   
• Class A-2: sensitivity to probability of default, two notches; sensitivity to recovery rates, three notches.

*. The default risk of B+ rating is considered on a basis where Scope extended the weighted average maturity of the portfolio to 7.2 years.

Rating driver references
1. Loan-by-loan datatape of the securitised pool (Confidential)
2.  Transaction documents (Confidential)

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

Cash flow analysis
Scope Ratings has primarily analysed the distribution of portfolio losses and its impact on the rated instruments, with the use of Scope Ratings’ Portfolio Model (Model) Version 1.0.
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ 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, (General Structured Finance Rating Methodology,14 December 2020; Methodology for Counterparty Risk in Structured Finance, 13 July 2021; SME ABS Rating Methodology, 17 May 2021), are available on https://www.scoperatings.com/#!methodology/list.
The models used for these Credit Ratings are (Cash Flow SF EL Model v1.1.; Portfolio Model 1.0), available in Scope Ratings’ list of models, published under https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Credit 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 factors) are incorporated into the Credit 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 Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, 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 these 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 received a third-party asset due diligence assessment/asset 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: Guang Yang, Analyst
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director
The Credit Ratings were first released by Scope Ratings on 9 November 2021.

Potential conflicts
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
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.