Rating action

Scope Ratings GmbH (Scope) has assigned a final rating to notes issued by Prunelli Issuer I S.a r.l., Compartment Denali 2024-1 as follows:

Series 2024-1 notes (ISIN: XS2707631037), USD 2,100,000,000: rated AAA

Transaction overview

The transaction is a USD 2.1bn debt issuance securitisation of financial exposures (FEs) related to corporate lending and trade finance exposures originated by Standard Chartered Bank UK Branch (SCB UK) and its subsidiaries Standard Chartered Bank (Hong Kong) Limited (SCB HK) and Standard Chartered Bank (Singapore) Limited (SCB SIN), hereafter also referred to as ‘the originators’. The three entities are also the transaction’s servicers. The securitised pool is diversified geographically with sizeable portions from Singapore, Hong Kong, South Kora, India and China, and relates to the corporate lending and trade finance obligations of corporates and financial institutions. The securitised pool is exposed to obligors from several industries and has a significant concentration in the banking industry.

The transaction’s initial 2.5 years revolving period can, subject to certain conditions, be extended up to three times for a subsequent additional two years under each extension, allowing a maximum revolving period of 8.5 years since closing date. The revolving period can be terminated upon the occurrence of a stop revolving event.

The transaction utilises a two-tier issuance structure in which the issuer uses the proceeds from the series 2024-1 notes to subscribe to notes issued by asset funding companies (AFCs) located in the UK, Singapore and Hong Kong (the ‘AFC funding notes’). Proceeds from the AFC funding notes can be used by the AFC to acquire eligible FEs from the related originator (located in the UK, Singapore or Hong Kong), among other uses.

This transaction is a sequential pay-down structure in which all interest and principal collected from the portfolio will be used to repay the notes during the amortisation phase. Originators receive no payments – and, hence, no excess spread – until the notes are fully repaid, through the applicable combined principal and interest waterfall.

Rating rationale

The rating reflects: i) the legal and financial structure of the transaction; ii) the quality of the underlying collateral in the context of the macroeconomic environment; iii) the ability of the originators and servicers, all part of the Standard Chartered Bank Group; and iv) the counterparty credit risk exposure to SCB HK, SCB SIN and SCB UK on their roles as originators, servicers, AFC collection account banks and issuer account bank (concerning only SCB UK).

The notes’ main sources of credit enhancement are overcollateralisation, both at issuance and as required during the revolving phase, as well as available excess spread. A liquidity reserve is also available to address transaction liquidity risk.

The rating accounts for protection provided to the notes by the transaction’s stop revolving events. These include an originator becoming insolvent, the interest reserve falling below the targeted level, overcollateralisation and set-off tests not being satisfied, and defaults in the transaction exceeding a certain level.

Throughout the revolving phase, only eligible assets can be sold by an originator to the related AFC. Single asset eligibility criteria include a certain credit grade as determined by Standard Chartered Bank (SCB). Assets purchased from the originators are also subject to replenishment conditions. These include a maximum concentration in the exposure pool in terms of industries, jurisdictions, number of obligor groups, regions, and SCB credit grades, as well as a restriction on the exposure pool’s remaining term, which limits the transaction’s loss horizon.

The notes benefit from a liquidity reserve funded at closing, which must be maintained at a targeted level during the transaction’s life. The reserve falling below its target level will trigger a stop purchase event and the notes’ early amortisation. This reserve also partially mitigates interest rate risk caused by the mismatch between the exposure pool’s fixed interest rate loans and the floating rate of the notes’ interest costs.

The transaction has no currency risk as all assets and liabilities are denominated in US dollars.

The rating has considered the exposure pool’s strong diversification across multiple jurisdictions in which the originators/servicers also have longstanding experience. The originators/servicers have established underwriting and credit monitoring processes as well as a proactive risk management approach.

Scope’s assessment of the pool’s credit quality involved a mapping between SCB internal credit grades and Scope’s ratings. A single exposure may represent up to 4.99% of the aggregate portfolio and Scope’s analysts validated the mapping exercise by: i) a comparison of the obligors’ SCB credit grades with available public credit ratings on more than 1,000 obligors; ii) the historical performance of SCB credit grades over the last 20 years; and iii) a detailed explanation provided by SCB on how its credit grades were created and currently operate.

Key rating drivers

Experienced originators/servicers (positive)^1,2,4. The originators/servicers have long lending experience in the main transaction top five asset jurisdictions (Singapore, Hong Kong, South Korea, India and China). (ESG factor)

Trapped excess spread (positive)³. Available excess spread is not paid to the originators until the notes are fully repaid. The trapping of excess spread occurs on the AFCs and on the issuer’s applicable waterfall throughout the revolving and amortisation phases.

Liquidity reserve; combined principal and interest waterfall (positive)³. The transaction’s interest reserve can withstand liquidity stresses as well as partially mitigates the risk resulting from the notes’ floating-rate interest costs rising faster than the increase in the loans’ pricing and related available pool yield. The transaction benefits from a combined principal and interest waterfall under which collections can be used to pay timely senior costs and notes interest.

Risk of portfolio migration (negative)³. Under certain conditions the transaction could be revolving for up to 8.5 years. Associated risks are mitigated through eligibility criteria and replenishment conditions. Our worst-case portfolio model was also based mostly on the assumption that the pool would migrate to the limits imposed by the replenishment conditions.

Counterparty concentration risk (negative)^3,5. SCB entities located in the UK, Singapore and Hong Kong perform most of the key transaction roles. This risk is mitigated by the entities’ high credit quality and the transaction’s structural features, including increased cash-sweeping frequency for collections, a redirection of collections into AFC collection accounts, and the appointment of a back-up servicer and account bank replacement.

Difficult legal sale of assets (negative)³. At closing the assets are located in 33 jurisdictions with different legal regimes, which complicates the legal transfer of assets into the related AFC. The transaction has obligor notification and power of attorney activation events upon: i) loss of a minimum rating on an originator; ii) an originator’s insolvency; or iii) a servicer termination event or resignation followed by the appointment of the back-up servicer.

One key rating driver of the credit rating action is considered an ESG factor.

Rating-change drivers

Positive. Improvements in the macroeconomic environment would enhance the support for the rated series 2024-1.

Negative. Worse-than-expected asset performance, reflected in higher-than-expected defaults or lower-than-expected recoveries upon asset default, may negatively impact the rating.

Quantitative analysis and assumptions

Due to the length of the revolving period, fast amortisation of the portfolio and taking into consideration the transaction eligibility criteria and replenishment conditions, Scope has created two theoretical worst-case portfolios at the start of the amortisation phase. One portfolio 100% made of corporate lending exposures (CLEs) and another one 100% made of trade finance exposures (TFEs), both under a weighted average life of one year. Such portfolios factor in the obligor’s credit grade, country rating and industry maximum concentrations permitted, as per the transaction replenishment conditions. Scope has taken into consideration the minimum overcollateralisation guaranteed by the transaction’s stop revolving event.

For CLEs a recovery rate of 21% and 10% for investment grade and non-investment obligor country, respectively, was considered commensurate with the rating on the notes. While for TFEs a recovery rate of 18% and 10% for investment grade and non-investment obligor country, respectively, was considered commensurate with the rating on the notes. The recovery rate takes into consideration the recovery rates observed in SCB’s past transactions and in the market, as well as the three-year work-out time available for recoveries. Scope has considered a 48% recovery rate haircut, commensurate with the rating on the notes.

Scope has considered a base case global correlation of 2%, a country correlation of 5% and a sector correlation of 20%.

Scope assumed for a worst-case pool entirely made of CLEs, at the start of the amortisation phase, a mean lifetime default rate of 1.5%, a coefficient of variation of 125.0% and pool with a weighted average life of one year. While for a worst-case pool entirely made of TFEs, at the start of the amortisation phase, a mean lifetime default rate of 1.5%, a coefficient of variation of 121.3% and a pool with a weighted average life of one year.

We have identified for a portfolio entirely made of CLEs and TFEs, before our mapping and construction of the worst-case pool, a portfolio with an average credit quality similar to a BBB- and A- proxy probability of default over a WAL of one year and according to our idealised probability of default tables, respectively. After our mapping and worst-case pool construction, we fond for a portfolio entirely made of CLEs and TFEs a portfolio with an average credit quality similar to a BB proxy probability of default over a WAL of one year according to our idealised probability of default tables.

The analysis provided an expected loss and an expected weighted average life for the notes.

Sensitivity analysis

Scope tested the resilience of the credit rating against deviations of the main input parameters: the mean default rate and the recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the credit rating to input assumptions and is not indicative of expected or likely scenarios.

For the rated notes assuming a worst-case pool entirely made of CLEs, the following shows how the results change compared to the assigned credit rating in the event of:

• an increase of the mean default rate by 50%: minus one notch;
   
• a decrease of the recovery rate by 50%: zero notches;

For the rated notes assuming a worst-case pool entirely made of TFEs, the following shows how the results change compared to the assigned credit rating in the event of:

• an increase of the mean default rate by 50%: zero notches;
   
• a decrease of the recovery rate by 50%: zero notches;

Rating driver references
1. Loan-by-loan data tape of the securitised pool (Confidential)
2. Originators’ historical performance data (Confidential)
3. Transaction documents (Confidential)
4. Originators’ internal documents (Confidential)
5. Global economic update: soft landing reinforces prospect of higher-for-longer interest rates

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 Model Version 2.0, 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 this Credit Rating, (CLO Rating Methodology, 26 April 2024; General Structured Finance Rating Methodology, 6 March 2024; Counterparty Risk Methodology, 13 July 2023) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The models used for this Credit Rating (Portfolio Model Version 1.1., Cash Flow Model Version 2.0) are 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 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 this 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 received a third-party asset due diligence assessment/asset audit. The external due diligence assessment/asset audit was considered when preparing the Credit Rating and it has no impact on the Credit Rating.
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 GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Miguel Barata, Director
Person responsible for approval of the Credit Rating: Antonio Casado, Managing Director
The Credit Rating was first released by Scope Ratings on 25 June 2024.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis 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.