Rating action

Scope Ratings UK Limited (Scope) performed the following rating actions after completing a monitoring review on the notes issued by Heta Funding DAC:

Class A-1 notes (ISIN XS0472601912): GBP 2,900m: affirmed at AAA_SF

Class A-2 notes (ISIN XS1881860339): GBP 2,900m: affirmed at AAA_SF

Class B-1 notes (ISIN XS1881859836): GBP 480m: affirmed at A+_SF

Class B-2 notes (ISIN XS1881860172): GBP 480m: affirmed at A+_SF

Class C notes: GBP 1,240m: not rated

Scope’s review was based on payment date reporting as of the January 2024 payment date and portfolio data as of 1 March 2024.

Transaction overview

The transaction is a securitisation of a GBP 8.0bn 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 in August 2010 and has been restructured and amended several times since then.

The transaction features a reinvestment period ending in May 2026. Throughout the reinvestment period repaid amounts will be reinvested and loans in the portfolio may be exchanged on a discretionary basis, but rules-based reinvestment criteria protect the transaction from adverse portfolio migration. As per the portfolio data with 1 March 2024 cut-off date, the loan portfolio comprises 2,544 loans which were granted to 1,699 borrowers.

Rating rationale

The ratings reflect: i) the legal and financial structure of the transaction; ii) the performance and current credit quality of the underlying portfolio and its management criteria in the context of UK macroeconomic conditions; and iii) the ability and incentives of Barclays as loan originator, basis swap provider and collateral manager of the loan portfolio.

The ratings account for the credit enhancement and strictly sequential amortisation of the rated notes. The underlying loan portfolio has a maximum weighted average maturity which is the earlier of: i) the date that is five years after the applicable measurement date; and ii) 19 May 2031. 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 address the risk exposure to key transaction counterparties, namely: i) Barclays as basis swap counterparty; ii) Elavon Financial Services DAC (‘Elavon’) as account bank, calculation agent and principal paying agent. Counterparty 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 swap counterparty and account bank, principal paying agent upon the loss of a BBB rating. Scope analysed the credit quality of Barclays and Elavon using public ratings and Scope’s ratings where available.

Key rating drivers

Credit enhancement (positive). The Class A and Class B notes benefit from 27.5% and 15.5% subordination, respectively¹.

Overcollateralisation test (positive). The overcollateralisation and minimum excess spread reserve tests help to maintain proper collateralisation on the notes with performing collateral¹.

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 corporates.

Reinvestment period (negative). Scope’s quantitative analysis covers the reinvestment period. Although the portfolio management criteria ensure that the portfolio profile remains within certain limits, the reinvestments may result in a longer risk horizon than that of the current portfolio¹. The risk is mitigated by the maximum weighted average maturity test.

SME obligors (negative). About 20.8% of the portfolio consists of obligors whose default grades were derived by using Barclays’ rating models specific to UK small and medium enterprises². These obligors are usually more vulnerable to economic downturns and lower recoveries are achievable upon default on their loans.

Portfolio concentration (negative). The combined share of the top five borrower industries accounts for 74.5%². The high concentration has a negative impact on the default probability distribution assumption.

All transaction counterparties continue to support the ratings.

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 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) correlations between the loans.

The resulting default distribution for the portfolio has a mean default rate of 7.0% and an implicit coefficient of variation of 64.8% over a weighted average portfolio life of 5.0 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 1 March 2024, management criteria and the potential life extension afforded by the reinvestment period.

Scope inferred each loan’s default probability by mapping each borrower’s public credit rating or Barclays’ through-the-cycle default grade into a Scope credit rating. For obligors whose default risk was derived by using Barclays’ rating models specific to UK small and medium enterprises, we applied an additional stress in the mapping. The asset correlation factors include a general factor of 2%, a location factor of 5% and an industry factor of 20% as well as a 20% factor for the five largest obligors.

The rating-conditional portfolio recovery rates were 36.4% for classes A-1 and A-2 and 46.3% for classes B-1 and B-2. In addition, Scope applied a 10% recovery rate haircut to loans of the five largest obligors. The recovery proceeds were assumed to be fully realised twelve months after a default.

We 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, one notch; sensitivity to recovery rate, two notches
   
• Class B-2: sensitivity to mean default rate, one notch; sensitivity to recovery rate, two notches

Rating driver references
1. Transaction documents (Confidential)
2. Portfolio data as of 1 March 2024 (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 Structured Finance Expected Loss Model Version 1.2, 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, 6 March 2024; SME ABS Rating Methodology, 16 May 2023; Counterparty Risk Methodology, 13 July 2023), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The models used for these Credit Ratings are (Portfolio Model Version 1.1; Cash Flow Structured Finance Expected Loss Model Version 1.2), 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/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 has 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 received a third-party asset due diligence assessment/asset audit at the initial rating. The external due diligence assessment/asset audit was considered when preparing the Credit Ratings and it had 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: Adam Plajner, Associate Director
Person responsible for approval of the Credit Ratings: Antonio Casado, Managing Director
The Credit Ratings were first released by Scope Ratings on 11 October 2018. The Credit Ratings were last updated on 11 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
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