Rating action

Scope Ratings UK Limited (Scope) has rated the following instruments:

Class A1 (ISIN XS2134386031) Senior Fixed Rate Notes due 2057: GBP 435,000,000: rating affirmed at AAA_SF

Class A2 (ISIN XS2134388086) Senior Floating Rate Notes due 2057: GBP 1,670,000,000: rating affirmed at AAA_SF

Class B1 (ISIN XS2134388326) Mezzanine Fixed Rate Notes due 2057: GBP 160,000,000: downgraded to A+_SF, previously rated AA-_SF

Class B2 (ISIN XS2134388912) Mezzanine Floating Rate Notes due 2057: GBP 160,000,000: downgraded to A+_SF, previously rated AA-_SF

Subordinated Notes due 2057: GBP 475,000,000: Not rated.

The affirmation of the class A notes rating and the downgrade of the class B notes rating incorporates transaction amendments effective on 23 March 2022. The main amendments include: i) the restructuring of the of class A and B notes thereby changing the credit enhancement available to each class; ii) the amendment of various portfolio tests covering eligibility criteria and concentration limits; iii) an adjustment of the class A and B fixed notes’ margins to reflect the change in the Bank of England Base Rate; iv) the extension of the reinvestment period to April 2024; and v) the upsizing of the transaction to GBP 2.9bn.

Transaction overview

North Dock No.1 is a true-sale cash securitisation of a portfolio comprised of residential mortgages originated to predominantly high net worth clients denominated in sterling (GBP). The mortgages were granted by Barclays Private Bank (PB), a private bank division of Barclays Bank PLC (Barclays).

The transaction features a replenishment period ending in April 2024 and PB may exchange assets at its own discretion. Rules-based reinvestment criteria protect the transaction from adverse portfolio migration and ensure that eligible loans selected from PB’s loan book maintain or improve the credit quality of the portfolio.

The portfolio shared on 13 January 2022 is comprised of 1120 loans to 830 effective obligors. The portfolio benefits from a moderate weighted average loan-to-value ratio of 57.9%* based on a third-party property valuation. Borrower concentration is above that for standard mortgage portfolios. The properties are predominantly located in London (88%) and the top 10 borrowers account for 5.5% of the total portfolio.

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 macroeconomic conditions in the United Kingdom; and iii) the ability and incentives of PB as loan originator and collateral manager of the loan portfolio.

The ratings account for the respective credit enhancement of the rated notes and liquidity support. They also reflect the strictly sequential amortisation of the senior notes from a loan portfolio whose maximum weighted average maturity is the earlier of 10 years from the replenishment date and April 2034. The ratings further reflect the default risk, recoveries upon default and cash flow features. Scope’s analysis incorporates the transaction’s mitigants against adverse portfolio migration during the replenishment period.

The ratings also reflect the counterparty risk exposure to i) Barclays as collections account bank, mortgage administrator; ii) Elavon Financial Services DAC, UK Branch (Elavon) as issuer account bank and principal paying agent; iii) U.S. Bank Global Corporate Trust Limited as cash administrator; 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

Credit enhancement (positive)¹. The Class A and Class B notes benefit from 27.4% and 16.4% credit enhancement provided by subordination.

Moderate loan to value ratio (positive)². Moderate loan-to-value results in relatively high recovery rate estimates, even though Scope applied severe market value and liquidation cost stresses. Scope estimated a base case recovery rate on defaulted assets of 84%, and a 45% recovery rate under a severely distressed scenario (i.e. a AAA stress).

Strong liquidity (positive)¹. Liquidity shortfalls are extremely unlikely for Class A, as Class A is supported by a non-amortising liquidity facility, consisting of 2% of the initial total collateral balance. In addition, principal proceeds can be diverted to cover Class A interest shortfall risk, in accordance with the transaction’s waterfalls (principal-to-interest). However, liquidity support for Class B is weaker as it is heavily reliant on the liquidity facility, especially in the early life of the transaction. Class B does not benefit from the principal-to-interest mechanism until Class A is fully redeemed.

Adequate replenishment covenants (positive)¹. The risk of credit quality deterioration during the replenishment period is partially mitigated through single-asset and portfolio-level covenants as well as performance-based triggers. These further tightened in the restructuring.

Lifetime default rate (negative)². Scope’s lifetime portfolio default rate distribution captures relatively high expected defaults, which reflect the volatility of historical vintage data and underlying refinancing risks owing to the bullet nature of most underlying assets. Scope modelled an inverse Gaussian portfolio default rate distribution with a mean of 8% and a coefficient of variation of 50%.

Portfolio composition (negative)². Scope revised its coefficient of variation in line with the improved granularity within the restructured portfolio and the revised concentration thresholds. The coefficient of variation which is in embedded in its lifetime portfolio default distribution, is the metric utilised to address concentration. The revision of the concentration threshold now limits the top ten borrowers to a maximum of 11.5% of the closing balance as per the replenishment covenant, down from the 20.5% maximum in the initially rated portfolio. However, the proportion of bullet mortgages (92% of the pool) and interest only mortgages (84% of the pool) combined with the concentration limits, although improved, still may result in higher performance volatility and thicker default distribution tails.

Geographic concentration of properties (negative)². Recovery assumptions are heavily exposed to London property values, where 87.5% of the properties are located. Scope draws comfort from the significant market value and liquidation stresses (i.e. firesale discounts) that the rating agency applied when deriving its recovery rate assumptions.

Limited excess spread (negative)². Scope gave very limited credit to excess spread of 85bps** at closing. This is because the post-replenishment portfolio may face a potential yield compression during the revolving period (minimum portfolio covenant of a 1.5% margin but subject to Bank of England rates) and the available asset yield is further decreased after applying about 25bps of stressed senior fees.

Interest rate mismatch (negative)². Fixed rate assets represent 28.8% of the closing balance; a maximum of 40% is allowed during the replenishment period. In contrast, 24.5% of the liabilities are fixed rate. Class B is particularly exposed to negative carry in the context of limited excess spread. Scope tested several interest rate scenarios to capture the impact on the ratings.

Rating-change drivers

An improved excess spread at the end of the revolving period may positively impact the rating of the Class B notes due to a decreased risk of negative carry and faster deleveraging from excess spread.

Worse-than-expected default and recovery performance of the assets may result in downgrades of the rated notes.

Quantitative analysis and assumptions

Scope used a cash flow model to analyse the transaction and applied a large homogenous portfolio approximation approach when modelling the granular collateral pool. The key assumptions derived were then applied to the cash flow analysis of the transaction over its amortisation period.

A mean default rate of 8.0% and a coefficient of variation of 50.0% were applied over the portfolio’s maximum expected weighted average life of 8 years, including the two-year replenishment period. Scope derived an expected portfolio default rate distribution based on 2013-18 vintage data provided by PB and the performance data collated during the 2020-22 monitoring. Scope gave no credit to the loans’ seasoning when calibrating defaults because the vintage data covered a relatively short time series compared to the overall loan terms. The default rate and coefficient of variation reflect high performance volatility in the historical data, high borrower concentrations in the portfolio, as well as a relationship driven business model.

Scope considered a rating-conditional recovery rate of 45% for Class A and 63% for Class B. Scope derived these rates based on its fundamental recovery framework, which applies line-by-line haircuts to indexed property appraisals. The haircuts mainly reflect market value losses under rating-specific stress scenarios, as well as a constant liquidation discount of 30% (i.e. a firesale discount) and foreclosure costs.

The recovery timing has a vectorized recovery schedule and a weighted average recovery lag of 2.9 years. Scope assumed that the work-out time will be longer than for a standard residential mortgage-backed security transaction because it would include a negotiation and consultation process with mortgage borrowers to find an adequate solution. Barclays will only enforce securities if all other possible solutions are ruled out.

Scope assumed a minimum portfolio margin of 1.54%, defined by the portfolio replenishment eligibility criteria with Scope’s stressed Bank of England base rate hike scenarios. In addition, Scope assumed that the fixed loan exposure will reach its maximum allowable limit (40%).

A cash flow analysis was performed considering the collateral portfolio’s characteristics and the transaction’s main structural features. Scope analysed the transaction under both a high (20%) and low (0%) prepayment assumption.

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 A1: sensitivity to mean default rate, 0 notch; sensitivity to recovery rate, 0 notch;

Class A2: sensitivity to mean default rate, 0 notch; sensitivity to recovery rate, 0 notch;

Class B1: sensitivity to mean default rate, -2 notch; sensitivity to recovery rate, 0 notch;

Class B2: sensitivity to mean default rate, -2 notch; sensitivity to recovery rate, 0 notch

* Based on Scope’s indexed property prices and adjustments.
** Based on the assumption of 15bps in fees and costs.

Rating driver references
1.Transaction documentation (Confidential)
2. Confidential documents of the issuer, arranger and originator (Confidential)

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

Cash flow analysis
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, 17 December 2021; Methodology for Counterparty Risk in Structured Finance, 13 July 2021), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies..
The models used for these Credit Ratings are (Cash Flow SF EL Model version 1.1.; Portfolio Model Version 1.0) available in Scope Ratings’ list of models, published under: https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/uk-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.

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 the 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 November 2019 in the context of the transaction’s initial issuance on 27 March 2020. 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 UK Limited at 52 Grosvenor Gardens, London, United Kingdom, SW1W 0AU, Tel +44 20 7824 5180. The Credit Ratings are EU-endorsed.
Lead analyst: Mark Vrdoljak, Associate Director
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director
The Credit Ratings were first released by Scope Ratings on 27 March 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/UK Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2022 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.