Rating action

Scope Ratings UK Limited (Scope) has assigned a final rating for the Series 2023-124 notes issued by Single Platform Investment Repackaging Entity SA (SPIRE). The rating action is as follows:

Series 2023-124 (ISIN: XS2664934101), EUR 7,800,000: assigned new rating of B+

Transaction overview

The transaction, Series 2023-124, is a repackaged issuance of NatWest Group PLC’s 4.771% 2029 bonds to inflation-linked notes with a notional amount of EUR 7.8m.

The transaction’s underlying collateral (NatWest bonds) pays fixed then floating interest rates in EUR, whereas the rated notes pay structured floating rates of interest in EUR. The redemption and floating interest rates of the rated notes are linked to the Harmonised Consumer Price Index ex-Tobacco for the Euro area (HICP).

The interest rate mismatch between the underlying collateral and the rated notes is addressed through a swap between the swap counterparty Barclays Bank PLC (Barclays) and the issuer of the rated notes. The transaction also has counterparty risk exposures to HSBC Bank plc as custodian and to Barclays as the disposal and calculation agent.

Rating rationale

The rating reflects: i) the credit quality and characteristics of the underlying collateral; ii) the credit quality of the swap counterparty and potential mitigants to counterparty risk; iii) the potential swap mark-to-market evolution of the embedded swap; and iv) the legal and financial structure of the transaction.

Key rating drivers

Underlying collateral’s credit quality (positive).¹ NatWest Group’s credit quality is underpinned by the following credit strengths: i) resilience of the group’s core retail and commercial banking businesses; ii) supportive and consolidated operating environment; and iii) sound asset quality with a well-diversified loan book.

Swap counterparty (positive).⁴ Barclays is the swap counterparty to the issuer. Barclays’ strong credit quality implies a lower likelihood of default and thereby reduces its contribution to expected loss.

Transaction structure (positive).² SPIRE established its single platform in May 2016 and has since facilitated several transactions. The issuance terms agreed for this platform make the issuance of the rated notes simple and efficient.

Call risk (negative).³ The issuer call provision of the underlying collateral introduces scenarios where the calculated redemption amounts could create a loss for the investor. Scope views such events as a potential default, thereby constraining the rating outcome.

Early settlement of swap mark-to-market (negative).⁴ The mismatch between incoming and outgoing legs of the swap could create mark-to-market positions that need to be settled upon early termination of the transaction.

CSA friction (negative).⁴ Valuation haircuts and minimum transfer amounts on collateral posted under the Credit Support Annex (CSA) introduce potential losses for SPIRE in the event of early termination. The eligible currency options may further expose the transaction to foreign exchange risk.

Rating-change drivers

Positive:

Better-than-expected performance of underlying collateral. The rating for the notes could improve if the underlying collateral’s rating strengthens.

Lower-than-expected probability of call. The rating for the notes could improve if the likelihood of underlying collateral call in the near future decreases.

Negative:

Worse-than-expected performance of underlying collateral. The rating for the notes could deteriorate if the underlying collateral’s credit quality worsens.

Higher-than-expected probability of call. The rating for the notes could deteriorate if the likelihood of underlying collateral call in the near future increases.

Quantitative analysis and assumptions

Scope performed the quantitative analysis using a bespoke tool tailored to capture the main risks associated with the notes. The tool calculates the expected loss and weighted average life of the notes in line with Scope’s General Structured Finance Rating Methodology.

The quantitative analysis is aligned with forward HICP expectations.

Scope identified the primary risks:

Scenario 1: default of the underlying collateral,

Scenario 2: default of the swap counterparty,

Scenario 3: exercise of underlying collateral call.

For Scenario 1, Scope derived the probability of default for the expected maturity from the credit rating of the underlying collateral, conditional on the survival of the swap counterparty.

The loss given default is calculated as the sum of: i) the unrecovered notional amount from the sale of the NatWest bonds; and ii) amounts to cover any negative mark-to-market position owed to the swap counterparty.

Scope tested several assumptions on future mark-to-market values, including a stressed negative value, a stressed positive value, and the forward implied mark-to-market value.

For Scenario 2, Scope derived the probability of default based on Barclays’ credit rating, calculated as the probability of Barclays’ default conditional on the survival of the underlying collateral.

Given no swap counterparty replacement mechanism, loss given default could arise from termination costs incurred by the issuer due to settlement of the swap agreement and CSA friction on the collateral posted.

For Scenario 3, Scope opts for a conservative assumption of a very high likelihood of call exercise when the underlying issuer call is applicable. This scenario involves a potential loss for the investor resulting from early swap settlement amounts. Scope models such event as a potential default.

Scenario 3 implies a minimum likelihood of default which constrains the best possible credit rating according to our General Structured Finance Rating Methodology.

The high likelihood of call, in combination with a short remaining time until the call is applicable results in scenario 3 being the main risk driver of the transaction.

Further, commingling risk with the custodian is immaterial due to the rating trigger. Therefore, Scope did not consider it in its quantitative analysis.

Sensitivity analysis

Scope tested the resilience of the rating to deviations in the main input parameters: the underlying bond rating, the swap counterparty rating, and swap mark-to-market expectations. 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 change compared to the assigned credit rating in the event of:

• a downgrade of the underlying entity by one notch, zero notches;
   
• a downgrade of the swap counterparty by three notches, zero notches; and
   
• the assumption of the stressed negative value for the mark-to-market value of the swap, zero notches.

Rating driver references
1. Scope Corporate rating on NatWest Group plc (Confidential)
2. Base documentation and marketing materials for the SPIRE programme
3. Underlying collateral final terms
4. Term sheets, series memorandum, issue deed, swap confirmation (Confidential)

Stress testing
No stress testing was performed.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of a bespoke tool incorporating the relevant asset assumptions, taking into account the transaction’s main structural features. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for this Credit Rating, (General Structured Finance Rating Methodology, 25 January 2023; Counterparty Risk Methodology, 13 July 2023) are available on 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/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 Rating: 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 Rating 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 Rating and the principal grounds on which the Credit Rating are based. Following that review, the Credit Rating was not amended before being issued.
 
Regulatory disclosures
The Credit Rating is issued by Scope Ratings UK Limited, 52 Grosvenor Gardens, London, United Kingdom, SW1W 0AU, Tel +44 20 7824 5180. The Credit Rating is EU-endorsed.
Lead analyst: Mirac Ugur, Senior Specialist
Person responsible for approval of the Credit Rating: David Bergman, Managing Director
The Credit Rating was first released by Scope Ratings on 3 November 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
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