News Analysis
Third Colonnade global completed
Barclays has closed its third Colonnade global significant risk transfer trade (SRT), Colonnade Global 2017-3 Financial Guarantee. In unusual fashion for capital relief trades the credit protection covers both principal and accrued interest.
The SRT transaction is a US$140m CLN that references a US$1.6bn corporate loan portfolio from thirty countries across the globe.
Rated by DBRS the deal comprises US$1.3bn triple-A rated class A notes, US$22m double-A rated class Bs, US$8.5m double-A rated class Cs, US$10.2m double-A rated class Ds, US$19.7m single-A rated class Es, US$5.9m single-A rated class Fs, US$15.5m single-A rated class Gs, US$21.4m triple-B rated class Hs, US$7m triple-B rated class Is, US$9.5m triple-B rated class Js, and US$22.5 double-B rated class Ks.
The transaction features a three-year replenishment period during which Barclays can add new reference obligations or increase the notional amount of existing reference obligations. The replenishment will follow rules-based selection guidelines that are designed to ensure the new reference obligations are not adversely selected.
Other features include a tranche thickness of 82.8% for the senior tranche, a WAL of six years and a sequential amortisation structure as expected by CRR/SRT regulations. Under the senior guarantee, Barclays will buy protection against principal losses as well as accrued and unpaid interest on the reference portfolio for a period of eight years.
"In this way it is an unusual deal," says Carlos Silva, svp at DBRS. "With this trade the financial guarantee is covering both principal and accrued interest given the likely beneficial treatment in terms of regulatory capital allocation. At the same time we have stressed it as an additional risk precisely because it guarantees both principal and interest."
This risk becomes particularly acute with the presence in the transaction of a broad number of interest rate indices. The interest rate index, spread and interest payment frequency will determine the amount of additional risk that the guarantee has to cover.
DBRS has used stressed assumptions to cover for this, in particular for interest rates, spread and weighted-average payment frequency covenants defined as part of the transaction's portfolio profile tests. The benefit of the indices though is that it offers flexibility, since it allows Barclays to add reference loans in the portfolio without being restricted by the stressed approach of DBRS.
Another challenge is foreign exchange risk since the credit facilities under the reference portfolio can be drawn in various currencies. Yet DBRS confirms that foreign exchange risk has a neutral impact in this case, because unlike cash securitisations, synthetic securitisations feature a cap on the protection.
From across the capital structure the rated tranches as opposed to the junior tranche remained unexecuted. The key to achieve regulatory capital relief on these trades is the significant risk transfer obtained by the sale of the first loss position as well as the ratings on the tranches that sit above it.
As the risk on the senior and mezzanine tranches does not need to be transferred, these contracts remain unexecuted which is why the ratings are provisional. The bank and the regulator can now use the external ratings assigned to those tranches as a method to measure the risk retained by the bank and calculate the new regulatory capital.
As of June 2017, Barclays has reported a CET1 ratio of 13.1%, a near 1% rise compared to December 2016. During the same period the lender's risk weighted assets declined by £39bn from £366bn, while the UK leverage ratio increased from 4.5% to 4.8% in the same period.
All throughout Q4 the market expects a slew of risk transfer trades given banks efforts to showcase strong capital ratios by year-end. Along with the programmatic nature of the Colonnade transactions, market sources expect Barclays to issue other such transactions during this period.
08/09/2017 16:31:01
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