Overview
- We raised our ratings on Barings Euro CLO 2018-1 DAC 's class B-1, B-2, C, D, and E notes following the deleverage of the senior notes and the increase in the credit enhancement.
- At the same time, we affirmed our ratings on the class A and F notes.
- Barings Euro CLO 2018-1 is a European cash flow CLO transaction that securitizes loans granted to primarily speculative-grade corporate firms. The transaction is managed by Barings (U.K.) Ltd.
LONDON (S&P Global Ratings) Nov. 9, 2023--S&P Global Ratings today raised its credit ratings on Barings Euro CLO 2018-1 DAC's class B-1 and B-2 notes to 'AAA (sf)' from 'AA (sf)', class C notes to 'AA (sf)' from 'A (sf)', class D notes to 'A+ (sf)' from 'BBB (sf)', and class E notes to 'BB+ (sf)' from 'BB (sf)'. At the same time, we affirmed our 'AAA (sf)' rating on the class A notes and our 'B- (sf)' rating on the class F notes.
Today's rating actions follow the application of our global corporate CLO criteria and our credit and cash flow analysis of the transaction based on the September 2023 trustee report.
Our ratings on the class A, B-1, and B-2 notes address the payment of timely interest and ultimate principal, and the payment of ultimate interest and principal on the class C to F notes.
Since our previous review in March 2018(see "Related Research"):
- The weighted-average rating of the portfolio remains unchanged at 'B'.
- The portfolio has become more diversified (number of performing obligors has increased to 110 from 102).
- The portfolio's weighted-average life decreased to 3.13 years from 6.22 years.
- The percentage of 'CCC' rated assets increased to 8.26% from 2.56%.
- The scenario default rate decreased for all rating scenarios, primarily due to decreased weighted-average life of the deal.
| Portfolio benchmarks | ||||||
|---|---|---|---|---|---|---|
| Current | Previous rating action (March 19, 2018) | |||||
| SPWARF | 2,877.02 | 2659.41 | ||||
| Default rate dispersion | 802.27 | 691.31 | ||||
| Weighted-average life (years) | 3.13 | 6.22 | ||||
| Obligor diversity measure | 71.22 | 85.86 | ||||
| Industry diversity measure | 22.96 | 20.93 | ||||
| Regional diversity measure | 1.29 | 1.46 | ||||
| SPWARF--S&P Global Ratings weighted-average rating factor. | ||||||
On the cash flow side:
- The reinvestment period for the transaction ended in April 2022. The class A notes have since deleveraged by €163.25 million according to the October 2023 trustee report.
- Credit enhancement has increased due to deleveraging. No class of notes is currently deferring interest.
- All coverage tests are passing as of the September 2023 trustee report.
- The weighted-average recovery rate has deteriorated at all rating levels.
| Transaction key metrics | ||||||
|---|---|---|---|---|---|---|
| Current | Previous rating action (March 19, 2018) | |||||
| Total collateral amount (mil. €)* | 378.00 | 500 | ||||
| Defaulted assets (mil. €) | 6.59 | 0.00 | ||||
| Number of performing obligors | 110 | 102 | ||||
| Portfolio weighted-average rating | B | B | ||||
| 'CCC' assets (%) | 8.26 | 2.56 | ||||
| 'AAA' SDR (%) | 56.56 | 69.10 | ||||
| 'AAA' WARR (%) | ||||||
| *Performing assets plus cash and expected recoveries on defaulted assets. SDR--scenario default rate. WARR--Weighted-average recovery rate. | ||||||
In our view, the portfolio is diversified across obligors, industries, and asset characteristics. There are 110 obligors and aggregate exposure to the top 10 obligors is now 25.48%. At the same time, almost 35.39% of the assets pay semiannually. The CLO has a smoothing account that helps to mitigate any frequency timing mismatch risks. Hence, we have performed additional scenario analysis by applying a spread and recovery compression analysis.
Considering the continued deleveraging of the senior notes, which has increased available credit enhancement, we raised our ratings on the class B-1, B-2, C, D, and E notes. Their available credit enhancement is now commensurate with higher levels of stresses. At the same time, we affirmed our ratings on the class A and F notes.
The cash flow analysis indicated higher ratings than those currently assigned for the class C, D, and E notes. However, today's rating actions address concentration risk and the effect this may have on the weighted-average spread and recovery generated on the portfolio. For these classes, we considered that the manager may still reinvest unscheduled redemption proceeds and sale proceeds from credit-impaired and credit-improved assets. Such reinvestments, as opposed to repayment of the liabilities, may therefore prolong the note repayment profile for the most senior class. We also considered the portion of senior notes outstanding, the current macroeconomic environment, and these classes' seniority. Considering all of these factors, we raised our ratings on the class C note by three notches, class D note by four notches, and class E note by one notch.
Following this analysis, we consider that the class F notes' available credit enhancement is commensurate with a 'B- (sf)' rating. We therefore affirmed our rating on the class F notes.
Counterparty, operational, and legal risks are adequately mitigated in line with our criteria.
Following the application of our structured finance sovereign risk criteria, we consider the transaction's exposure to country risk to be limited at the assigned ratings, as the exposure to individual sovereigns does not exceed the diversification thresholds outlined in our criteria (see "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions," published on Jan. 30, 2019).
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- Criteria | Structured Finance | General: Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
- Criteria | Structured Finance | General: Methodology To Derive Stressed Interest Rates In Structured Finance, Oct. 18, 2019
- Criteria | Structured Finance | CDOs: Global Methodology And Assumptions For CLOs And Corporate CDOs, June 21, 2019
- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
- Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
- Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
- Criteria | Structured Finance | General: Global Derivative Agreement Criteria, June 24, 2013
- General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
- General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
- 2017 EMEA Structured Credit Scenario And Sensitivity Analysis, July 6, 2017
- European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
| Primary Credit Analyst: | Parashar Tendolkar, London +44 20 7176 4173; Parashar.Tendolkar@spglobal.com |
| Secondary Contact: | Shane Ryan, London + 44 20 7176 3461; shane.ryan@spglobal.com |
| Research Contributor: | Tejas Parab, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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