Rating action

This transaction comprises the following instruments:

Class A1 Senior Secured Floating Rate Notes due 2039 (ISIN XS1846706585), EUR 1,265,625,000: withdrawn due to full repayment, previously: AAA_SF

Class A2 Senior Secured Floating Rate Notes due 2039 (ISIN XS1846709175), USD 1,527,525,000: withdrawn due to full repayment, previously: AAA_SF

Class A Senior Secured Floating Rate Notes due 2051 (previously Class A3 Senior Secured Floating Rate Notes due 2039): GBP 2,350m: affirmed at AAA_SF (ISIN: XS1846709258)

Class B Mezzanine Secured Floating Rate Notes due 2051: GBP 400m: rated A+_SF (ISIN: XS2419777573)

Subordinated Notes due 2051: GBP 500m: not rated

The affirmation of the class A notes rating and the assignment of the class B notes rating incorporate transaction amendments effective on 9 December 2021. The main amendments include: i) the redemption of class A1 and A2 notes and the partial redemption of class A3 notes, now renamed class A notes; ii) the issuance of class B mezzanine notes; iii) the modification of the priorities-of-payment waterfalls to accommodate the new capital structure; iv) the amendment of various portfolio profile and collateral quality tests ; v) the migration of the floating-rate component of the rated notes from GBP Libor to Sonia; vi) a small adjustment of the class A notes’ margin to offset the change in the floating-rate component; vii) the extension of the notes’ maturity date to July 2051; and viii) the extension of the reinvestment period to January 2024.

Transaction overview

Sirius Funding plc is a true-sale cash securitisation of a portfolio comprised of corporate loans denominated in sterling. The loans have been granted by Barclays Bank plc (Barclays) to its United Kingdom and European corporate borrowers. The portfolio collateralises class A senior notes, class B mezzanine notes and subordinated notes. The transaction originally closed on 28 June 2018 and was most recently restructured on 5 December 2019.

The transaction now features a GBP 3.25bn portfolio and a revolving period ending in January 2024. Prepayments will be reinvested throughout the transaction’s life and Barclays may exchange assets at its own discretion. Rules-based reinvestment criteria protect the transaction from adverse portfolio migration by ensuring eligible loans selected from Barclays’ loan book either maintain or improve the portfolio’s credit quality.

The portfolio comprises 371 loans to 257 obligors as of 30 November 2021. The portfolio is representative of Barclays’ corporate loan book and illustrates the bank’s lending focus on medium to large UK corporates. Up to 10% of the portfolio may comprise senior secured real estate loans and up to 15% of the portfolio may comprise infrastructure and project finance loans. Barclays’ consistent lending strategy coupled with the portfolio management criteria will help to maintain the current credit profile.

The notes’ overcollateralisation is 138.3% for the class A notes. Upon a breach of a minimum overcollateralisation of 130%, 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 137.9% 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 performance and current credit quality of the underlying portfolio and its management criteria in the context of UK macroeconomic conditions; and iii) the ability and incentives of Barclays as loan originator and collateral manager of the loan portfolio.

The ratings account for the credit enhancement and strictly sequential amortisation of the rated notes from a loan portfolio whose maximum weighted average maturity is the earlier of: i) five years after the applicable replenishment date; and ii) the interest payment date in January 2029. 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 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 principal paying agent, account bank and registrar; iii) U.S. Bank Global Corporate Trust Limited as collateral administrator and calculation agent; and iv) U.S. Bank Trustees Limited as trustee. Counterparty risks are 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 and principal paying agent upon the loss of a BBB rating. Scope has a rating on Barclays and analysed the credit quality of Elavon based on public ratings. 

Key rating drivers

Portfolio management criteria (positive)¹. These criteria maintain the portfolio at its current credit profile, i.e. a senior unsecured loan portfolio with a BB+ rating (probability of default measure) and a maximum weighted average maturity date that is the earliest of: i) five years after the applicable replenishment date; and ii) the interest payment date in January 2029.

Experienced corporate lender (positive)¹. 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.

Overcollateralisation test (positive)¹. The overcollateralisation and minimum excess spread reserve tests help to maintain proper collateralisation on 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.

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. About 34.2% of the portfolio is concentrated in four industries as per the Moody’s industrial classifications: Real Estate, Banking, Finance and Insurance. This leaves the transaction vulnerable to a downturn in these specific industries. This is mitigated by the eligibility criteria ensuring that no new senior secured real estate loans enter the portfolio, which may drive this concentration down.

UK SME obligors (negative)¹. About 19.4% of the portfolio consists of obligors whose default grades were derived using Barclays’ rating models specific to UK small and medium enterprises. These obligors are usually more susceptible to economic downturns and have lower recoveries upon default.

Infrastructure and project finance loans (negative)¹. About 12.7% of the portfolio consists of infrastructure and project finance loans. These loans have a longer weighted average life and introduce new kinds of risk into the portfolio. Although these loans have a better average quality according to Barclays’ default grade metric, Scope has capped their credit quality at BB+, given the limited information available. 

Upside rating-change drivers

Increased credit enhancement from deleveraging, accompanied by good underlying portfolio performance, may result in a rating upgrade of the class B notes.

Downside rating-change drivers

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.

The resulting default distribution for the reference portfolio has a mean default rate of 9.7% and an implicit coefficient of variation of 65.4% over a weighted average portfolio life of 7.2 years. This assumption represents a long-term view of the portfolio’s credit performance and incorporates the portfolio’s credit quality as of 30 November 2021, 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 specific to the transaction. For obligors whose default risk was derived using Barclays’ rating models specific to UK small and medium enterprises, Scope applied a stress to the mapping commensurate with a two-notch downgrade of the default grade.

Scope assumed a base-case portfolio recovery rate of 67.7%, based on Barclays’ information on recovery performance after the 2008 financial crisis for similar types of loans as well as Scope’s internal assumptions. The rating-conditional portfolio recovery rates were 39.3% for class A and 51.5% for class B, which reflect haircuts of 41.9% and 23.9%, respectively, and account for the recovery rate fluctuation found in Barclays’ historical data. In addition, Scope applied a 10% recovery rate haircut to loans from the five largest obligors, as per Scope’s SME ABS Rating Methodology (no loan exposure exceeds 5% of the portfolio balance). Scope also assumed that recovery proceeds will be fully realised 12 months after a default.

For the corporate loans and senior secured real estate loans segment, each loan’s recovery rate reflects the loss-given-default rate assigned by Barclays to each exposure. Scope adjusted each loan’s recovery rate to ensure the portfolio’s weighted average recovery rate matches Barclays’ information on recovery performance after the 2008 financial crisis for similar types of loans. For the infrastructure and project loans segment, Scope assumed a base-case weighted average recovery rate of 89.3%.

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 as well as the respective jurisdiction and industry. Scope added a 20pp factor for the five largest obligors, as per the agency’s SME ABS Rating Methodology (no loan exposure exceeds 5% of the portfolio balance).

Scope assumed a portfolio margin of 1.80%, aligned with the minimum weighted average spread limit.

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 rated note class. 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 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: sensitivity to probability of default, zero notch; sensitivity to recovery rates, one notch.
   
• Class B: sensitivity to probability of default, three notches; sensitivity to recovery rates, four notches.

Rating driver references
1. Confidential documents of the issuer, arranger and originator.

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 on October 2019 in the context of the transaction’s previous restructuring. The external due diligence assessment/asset audit 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 on the class A1,A2 and A3 senior notes were first released by Scope Ratings on 28 June 2018. The Credit Ratings were last updated on 5 December 2019.
The Credit Rating on the class B mezzanine notes was first released by Scope Ratings on 9 December 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
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