Rating action

The rating actions are as follows:

Class A notes (XS2537092350), GBP 2,450,000,000: assigned new rating of AAA_SF

Class B notes (XS2537093838), GBP 525,000,000: assigned new rating of AA-_SF

Class C notes (XS2537463601), GBP 525,000,000: not rated

Transaction overview

Shelby Real Estate Funding Limited (Shelby) is a cash securitisation of a portfolio composed of commercial real estate (CRE) mortgage loans originated in the UK in the ordinary course of business by Barclays Bank PLC. The proceeds from the notes will be used to acquire from the vendor the beneficial interest in the portfolio. Some of the principal and interest proceeds collected from the portfolio will be used to repay the notes outstanding as per the applicable priority of payments. During the two-year scheduled reinvestment period, further eligible loans can be purchased through the reinvestment of past portfolio collections, subject to reinvestment criteria. The notes have a mandatory final redemption in November 2039.

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 the macroeconomic conditions in the UK; and the ability and incentives of Barclays as loan originator and collateral manager of the loan portfolio.

The ratings account for the respective credit enhancements of the rated notes (class A and B) and the strictly sequential amortisation of all three classes of notes from the CRE mortgage loan portfolio, whose maximum weighted average maturity date is the earlier of five years from the last measurement date and the payment date in November 2029. 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 November 2024, as well as the loan eligibility criteria, collateral quality and portfolio profile tests and the excess spread reserve test.

The ratings address the exposures to key transaction counterparties: i) Barclays as collateral manager, vendor, vendor trustee, servicer collection account bank, liquidity facility provider, initial purchaser and retention holder; ii) Elavon as issuer account bank, agent bank, principal paying agent and registrar; iii) U.S. Bank Global Corporate Trust Limited as collateral administrator; and iv) U.S. Bank Trustees Limited as trustee. Risks posed by the transaction’s material counterparties are mitigated by: i) the credit quality of Barclays and Elavon; and ii) the replacement mechanism attached to the roles of issuer account bank and liquidity facility provider, which is implemented within 30 calendar days upon loss of the minimum required ratings (BBB or S-2). Scope has a subscription rating on Barclays and has analysed the credit quality of Elavon based on public ratings.

Key rating drivers

Credit enhancement (positive)². The rated class A and B notes benefit from credit support of respectively 30% and 15% provided by the notes’ subordination.

Excess spread reserve test (positive)². This curable test, which is only applicable during the reinvestment period, helps to maintain the proper collateralisation of the class A notes with non-defaulted collateral. Upon a breach of the test, any excess of issuer interest funds after class B interest will be redirected into the issuer principal account for the purchase of new assets.

Liquidity protection (positive)². A non-amortised liquidity facility mitigates liquidity risk in the event of a collateral management disruption. Further mitigation comes from the possible redirection of issuer principal funds to cover any interest shortfall related to senior costs and class A and B notes interest due.

Low loan-to-value level (positive)^1,2. The current pool weighted average loan-to-value ratio (45.4%) provides noteholders adequate protection against a possible market value downturn.

Granular CRE portfolio (positive)¹. The CRE mortgage loan portfolio is made of 89 loans related to 4,297 properties and 13,961 tenants/units. The top debtor group accounts for around 5% of the total pool by current principal balance. This feature protects the portfolio’s performance against idiosyncratic borrower credit risk and ensures stable cash flows.

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

Portfolio refinancing risk (negative)^1,3. All commercial real estate loans are exposed to refinancing risk, which will be further aggravated if interest rates continue to rise.

Pool concentration to the UK (negative)^1,3. The portfolio is entirely located in the UK, increasing the transaction’s concentration risk to the UK economy and to its property market value. We believe this risk is mitigated to a degree due to the pool’s low LTV and the UK’s large, wealthy and diversified economy, reflected in the sovereign’s rating of AA/Stable by Scope.

Credit risk profile migration (negative)². Under certain conditions the transaction could be revolving for up to two years. Associated risks related to the replenishment of new loans are mitigated mostly through eligibility criteria, portfolio profile tests, collateral quality tests, an excess spread reserve test and stop reinvestment triggers. All are designed to ensure a minimum portfolio credit quality at the start of the amortisation phase.

Counterparty concentration risk (negative)². Barclays performs numerous transaction roles such as originator, collateral manager, liquidity facility provider, vendor, vendor trustee, servicer collection account bank, initial purchaser and retention holder. This risk is mostly mitigated by Barclays’ credit quality and, in terms of its material role as liquidity facility provider and issuer account bank, by the downgrade and replacement language upon loss of a BBB or S-2 rating within 30 calendar days.

Rating-change drivers

Increased credit enhancement (upside) from deleveraging accompanied by good portfolio performance may result in a class B notes upgrade.

A worse-than-expected default and recovery performance (downside) of the assets may result in a downgrade of the rated notes.

Quantitative analysis and assumptions

Scope analysed the underlying 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 among the loans.

The resulting default distribution for the underlying portfolio exhibits a mean default rate of 8.9% and an implicit coefficient of variation of 79.4% over a weighted average portfolio life of 7.0 years. The default rate distribution accounts for the diversification effects in the underlying portfolio. The analysis incorporates the reinvestment period, and portfolio profile and collateral quality tests, which result in the underlying portfolio exhibiting a longer weighted average life, worse credit quality and higher concentration by property type and region 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.

Scope used the resulting default rate distribution and default timing to project cash flows from the underlying portfolio and to determine the expected life and expected loss for both rated note class. 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 98.3% and AAA and AA rating-conditional portfolio recovery rates of 78.5% and 89.0% that reflect haircuts of 20.1% and 9.4%, respectively.

Scope considered security value haircuts and market value decline rating-conditional assumptions that were defined as function of four main variables: i) property location (London, big UK cities and big cities outside of the UK); ii) main property type under Scope’s simplified mapping; iii) rating category; and iv) valuation date pre-pandemic (i.e. before 20 March 2020) and post-pandemic (i.e. after 20 March 2020). The date of 20 March 2020 is when Covid-19 social restrictions were first imposed by the UK government. For the provisional pool, Scope considered the big UK cities to be Manchester, Birmingham, Bristol, Leeds and Liverpool.

When defining the loan-by-loan ultimate recovery rate Scope considered the CRE loan maximum recovery as per its CRE and CMBS rating methodology.

Additionally, Scope applied a 10% recovery rate haircut to the exposures to the five largest obligor groups. Finally, Scope assumed that recovery proceeds are fully realised 12 months after a default.

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 a property type factor of 20%. The asset correlation reflects the loans’ exposure to common factors such as the general economic environment, the jurisdiction and the respective property type. Scope considered an additional top-obligor factor of 20% for the exposures to five largest obligor groups.

Scope considered the minimum weighted average portfolio margin of 1.75% as the portfolio spread in the analysis. On the one hand, the transaction might become subject to margin compression because the single-asset reinvestment criteria and the minimum margin of 0.25% allow 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.

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 notes: sensitivity to probability of default, zero notches; sensitivity to recovery rates, zero notches.
   
• Class B notes: sensitivity to probability of default, zero notches; sensitivity to recovery rates, one notch.

Rating driver references
1. Loan-by-loan data tape (confidential)
2. Transaction documents (confidential)
3. Scope affirms the United Kingdom’s credit ratings at AA with a Stable Outlook

Stress testing
Stress testing was considered in the quantitative analysis by considering scenarios that stress factors, like defaults and Credit-Rating-adjusted recoveries, contributing to sensitivity of Credit Ratings and consider the likelihood of severe collateral losses or impaired cash flows. The impact on the rated instruments is weighted by the assumptions of the likelihood of the events in such scenarios occurring.

Cash flow analysis
Scope Ratings primarily analysed the distribution of portfolio losses and its impact on the rated instruments, with the use of Scope Ratings’ Portfolio 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 relevant asset assumptions, and taking into account the transaction’s main structural features, such as the instruments’ priority of payments, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodologies used for these Credit Ratings, (General Structured Finance Rating Methodology, 17 December 2021; CRE Loan and CMBS Rating Methodology, 6 October 2022; Counterparty Risk Methodology, 14 July 2022) 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. 
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/eu-regulation. 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-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 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 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 is based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
The Credit Rating is issued by Scope Ratings UK Limited at 52 Grosvenor Gardens, London, United Kingdom, SW1W 0AU, Tel +44 20 7824 5180. The Credit Rating is 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 12 December 2022.

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
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