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 3,736,000,000: affirmed at AAA_SF

(ISIN XS0418594403 / US651343AC93)

Class B-1 Mezzanine Secured Floating Rate Notes due 2039: USD 616,250,000: affirmed at A+_SF

(ISIN XS1882681882 / US651343AE59)

Class B-2 Mezzanine Secured Floating Rate Notes due 2039: USD 743,750,000: affirmed at A+_SF

(ISIN XS1882681965 / US651343AF25)

Class C-1 Subordinated Notes due 2039: USD 820,000,000: not rated

Class C-2 Subordinated Notes due 2039: USD 820,000,000: not rated

Scope Ratings GmbH (Scope) has today affirmed the class A-1, A-2, B-1 and B-2 notes’ ratings following the transaction amendments made effective on 27 February 2023. The main changes are: i) the upsizing of the portfolio to USD 12,600m and of the notes’ principal amounts, to USD 5,864m for class A-1 notes, to USD 3,736m for class A-2 notes, to USD 616.25m for class B-1 notes, to USD 743.75m for class B-2 notes and to USD 820m for both class C-1 and C-2 notes; ii) the extension of the reinvestment period to February 2026 from February 2023; iii) the updating of eligibility criteria now excluding LIBOR-linked loans, except for those which are USD LIBOR-linked maturing before the 30 June 2023; iv) the updating of the collateral quality tests allowing the portfolio weighted average maturity to be the earlier of i) 3.5 years from the measurement date or ii) August 2029; and v) the transition of the benchmark interest rate to USD Term SOFR from USD LIBOR.

Transaction overview

Newfoundland is a cash securitisation of a portfolio composed 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), all denominated in US dollars. The transaction closed on 26 November 2008 and was last restructured on 17 February 2021. Legal maturity is on 26 November 2039.

The transaction after the change contemplated will feature a revolving period ending in February 2026. Prepayments will be reinvested throughout the life of the transaction and Barclays may exchange assets at its own discretion, as long as the rules-based reinvestment criteria, eligibility criteria, profile and collateral quality tests are respected.

The portfolio as of cut-off date 07 February 2023 is composed of 1,120 loans related to 447 obligors. The portfolio is representative of Barclays’ corporate loan book and illustrates Barclays investment bank’s focus on lending to large international corporates. At present, 58.0% of the portfolio is composed of obligors incorporated in the US. The remainder is mainly exposed to the UK, continental Europe and Canada.

The multi-currency portfolio is fully hedged by a swap provided by Barclays. The hedging 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 the 3-month USD Term SOFR plus a spread of 3.06161% to the issuer based on the notional balance of the portfolio, while the issuer pays to Barclays all interest accrued from the portfolio. Any principal proceeds received from the portfolio are converted into USD 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 131.25% for each of the Class A-1 and A-2 notes. 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 131.25% 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, portfolio collateral manager and swap provider.

The ratings account for the credit enhancement and strictly sequential amortisation of the rated notes from the loan portfolio, whose maximum weighted average maturity is at closing August 2026, based on the transaction weighted average maturity test. 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 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 subscription ratings on Barclays and public ratings on Elavon.

Key rating drivers

Credit enhancement (positive)^1,2. The notes benefit from subordination of 23.8% for classes A-1 and A-2 and 13.0% for classes B-1 and B-2, and from excess spread, available subject to portfolio losses.

Overcollateralisation test (positive)². 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.

Swap (positive)². A swap mitigates any risk from currency mismatches between portfolio assets and the issued notes. The swap also promises three-month USD Term SOFR plus a spread of 3.06161% based on an initial notional principal balance of USD 12.6bn, to be paid quarterly to the issuer, which effectively eliminates interest rate risk.

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

Geography and industry portfolio concentration (negative)^2,3. 58.0% of the portfolio consists of US obligors and 36.5% has classifications in the Moody’s financial services industry categories. Portfolio concentrations may further increase due to: i) the transaction’s priority levels which favour obligors incorporated in North America; and ii) the single largest industry exposure limit set at 45%.

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 10%.

The resulting default distribution for the reference portfolio has a mean default rate of 8.9% and an implicit default coefficient of variation of 53.6% over a weighted average portfolio life of 5.6 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 7 February 2023, 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. Scope’s 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 51.9%, based on Barclays’ recovery performance for similar type of loans following the financial crisis in 2008. The rating-conditional portfolio recovery rates are 31.1% for the class A-1 and A-2 notes and 39.4% 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 type 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. An additional top-obligor factor of 20% was applied to the five largest obligors and any obligors representing 5% or more of the portfolio balance, as per Scope’s SME ABS Rating Methodology.

Scope assumed a portfolio margin of 3.06161%, aligned with the transaction minimum weighted average spread, which must be paid by the swap counterparty to the issuer under the swap agreement on top of the applicable 3-month SOFR.

Scope used the resulting default rate distribution and default timings to project cash flows from the portfolio, 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 levels 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, four notches;
   
• Class B-2: sensitivity to mean default rate, four notches; sensitivity to recovery rate, four 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 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 1.1.
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, 25 January 2023; Counterparty Methodology, 14 July 2022; SME ABS Rating Methodology, 16 May 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 1.1, 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 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 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: Antonio Casado, Executive Director
The Credit Ratings were first released by Scope Ratings on 26 November 2018. The Credit Ratings were last updated 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
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund 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.