Rating action

The transaction comprises the following instruments: 

Class A-1 Senior Secured Floating Rate Notes due 2051: GBP 2,900m: affirmed at AAA_SF
(ISIN XS0472601912)

Class A-2 Senior Secured Floating Rate Notes due 2051: GBP 2,900m: affirmed at AAA_SF
(ISIN XS1881860339)

Class B-1 Mezzanine Secured Floating Rate Notes due 2051: GBP 480m: downgraded to A+_SF from AA_SF under review for a possible downgrade
(ISIN XS1881859836)

 Class B-2 Mezzanine Secured Floating Rate Notes due 2051: GBP 480m: downgraded to A+_SF from AA_SF under review for a possible downgrade
(ISIN XS1881860172)

Class C Notes due 2051: GBP 1,240m: not rated

The affirmation of the class A-1 and A-2 notes, and the downgrade of the class B-1 and B-2 notes reflect transaction amendments executed on 11 May 2023. The main changes are: i) the extension of the reinvestment period by a three-year period to May 2026; ii) the extension of the maximum weighted average maturity to the earlier of: a) the date that is five years after the applicable measurement date; and b) 19 May 2031; iii) the exclusion of LIBOR linked loans, project finance loans with the asset in the construction phase, discount obligations, and senior secured real estate Loans from the eligible universe; iv) the capping of the maximum exposure to C(L)BILS loans to 5% of the portfolio.  

Transaction overview

Heta Funding Designated Activity Company is a cash securitisation of a portfolio of mainly corporate loans denominated in pound sterling (GBP). The loans were granted by Barclays Bank PLC (Barclays) to its UK borrowers. 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 the class C notes. The transaction originally closed on 11 August 2010 and was most recently restructured on 29 July 2021.

The transaction features a revolving period ending in May 2026. 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 shared by the issuer as at 31 March 2023 comprises 2,717 loans to 1,878 obligors. The portfolio is representative of Barclays’ corporate loan book and illustrates the bank’s lending focus on medium to large UK corporates. Loans originated under the Corona Business Interruption Loan Scheme may represent up to 5% of the portfolio. Barclays’ consistent lending strategy coupled with the portfolio management criteria will help to maintain the current credit profile.

The notes’ overcollateralisation is 137.9% for the class A-1 and A-2 notes, respectively. Upon a breach of a minimum overcollateralisation of 132.5%, 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 transaction amendments iii) the performance and current credit quality of the underlying portfolio and its management criteria in the context of UK macroeconomic conditions; and iv) the ability and incentives of Barclays as loan originator, collateral manager of the loan portfolio and basis swap provider.

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) the date that is five years after the applicable measurement date; and ii) 19 May 2031. 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 also reflect the counterparty risk exposure to: i) Barclays as basis swap counterparty; ii) Elavon Financial Services DAC as account bank, calculation agent and principal paying agent; iii) Deutsche Bank AG, London Branch as collateral administrator; iv) Deutsche Bank Luxembourg SA as registrar; and v) Deutsche Trustee Company Limited as trustee. 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 ratings on Barclays and public ratings on US Bancorp.

Key rating drivers

Portfolio management criteria (positive). These criteria maintain the portfolio at its current credit profile, i.e. a senior unsecured loan portfolio with a BB to BB+ rating (probability of default measure), a maximum weighted average maturity date which is the earlier of: i) the date that is five years after the applicable measurement date; and ii) 19 May 2031¹.

Experienced corporate lender (positive). The loans are part of the core origination activity of Barclays, which has a significant track record in domestic and international corporate lending dating back to 1920, with a focus on lending to large corporates¹.

Overcollateralisation test (positive). 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 collateral¹.

Extended replenishment period (negative). Scope’s quantitative analysis covers the replenishment period. Although the portfolio management criteria maintain the portfolio at a certain credit profile from a probability of default perspective, the extension of the replenishment period to three years from two years as of the last restructuring in July 2021 implies a longer risk horizon. Besides this, since the current portfolio consists of more short-term loans, the portion of the portfolio which needs to be replenished is also larger than the portion as at of July 2021¹.

Portfolio concentration (negative). The top five industries of the portfolio increased to 75.1% from 66.4% as of Scope’s last monitoring in June 2022. Although the obligor concentration level slightly decreased at the same time, it does not mitigate the rise of the industry concentration level and the overall portfolio concentration increase has a negative impact on the default probability distribution assumption¹.    

Low recovery rates (negative). The portfolio will generally comprise senior unsecured exposures, which results in low expected recoveries upon default¹.

UK SME obligors (negative). About 20.0% of the portfolio consists of obligors whose default grades were derived using Barclays’ rating models specific to UK small and medium enterprises¹. These obligors are usually more susceptible to economic downturns and have lower recoveries upon default. 

Infrastructure and project finance loans (negative). About 7.6% of the portfolio consists of infrastructure and project finance loans. These loans have a longer weighted average life and introduce risks which are different in nature to the rest of the portfolio, which comprises corporate exposures. 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. Positively, loans in the construction phase have been excluded¹.

Rating-change drivers

Positive. Increased credit enhancement from deleveraging, accompanied by good underlying portfolio performance, may result in a rating upgrade of the class B-1 and B-2 notes.

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.

The resulting default distribution for the reference portfolio has a mean default rate of 9.2% and an implicit coefficient of variation of 57.8% over a weighted average portfolio life of 5.4 years. The default distribution assumption represents a long-term view of the portfolio’s credit performance and incorporates the portfolio’s credit quality as of 31 March 2023, 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 the base-case portfolio recovery rate of 62.2%, based on Barclays’ recovery performance for similar types of loans following the 2008 financial crisis and Scope’s internal assumptions. The rating-conditional portfolio recovery rates were 36.9% for classes A-1 and A-2 and 47.3% for classes B-1 and B-2, which reflect haircuts of 40.6% and 23.8%, 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 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 the recovery performance recorded by Barclays for similar types of loans after the 2008 financial crisis. For the infrastructure and project loans segment, Scope assumed a base-case weighted average recovery rate of 90%, given that all projects in the portfolio are operating.

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 1.85%, 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 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%:

• Class A-1: sensitivity to mean default rate, one notch; sensitivity to recovery rate, one notch
   
• Class A-2: sensitivity to mean default rate, one notch; sensitivity to recovery rate, one notch
   
• Class B-1: sensitivity to mean default rate, three notches; sensitivity to recovery rate, three notches
   
• Class B-2: sensitivity to mean default rate, three notches; sensitivity to recovery rate, three notches

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

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 Risk 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. 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 11 October 2018. The Credit Ratings were last updated on 5 May 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures 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.