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Rating Action:

Moody's assigns definitive ratings to three classes of notes issued by Sirius Funding plc

28 Jun 2018

London, 28 June 2018 -- Moody's Investors Service ("Moody's") announced that it has assigned definitive ratings to three classes of notes issued by Sirius Funding plc (the "Issuer"):

....EUR 1,265,625,000 Class A1 Senior Secured Floating Rate Notes due 2039, Assigned Aaa (sf)

....USD 1,527,525,000 Class A2 Senior Secured Floating Rate Notes due 2039, Assigned Aaa (sf)

....GBP 1,125,000,000 Class A3 Senior Secured Floating Rate Notes due 2039, Assigned Aaa (sf)

RATINGS RATIONALE

Moody's definitive ratings of the rated notes address the expected loss posed to noteholders by the legal final maturity of the notes in 2039. The definitive ratings reflect the risks due to defaults on the underlying portfolio of loans given the characteristics and eligibility criteria of the constituent assets, the relevant portfolio tests and covenants as well as the transaction's capital and legal structure. Furthermore, Moody's is of the opinion that the collateral manager, Barclays Bank PLC ("Barclays"), has sufficient experience and operational capacity and is capable of managing this CLO.

Sirius Funding plc is a managed cash flow balance-sheet collateralized loan obligation ("CLO") transaction. Under the terms and conditions of the CLO, Barclays will transfer the credit risk of a GBP 4.5 billion equivalent portfolio to the Issuer. The portfolio consists of senior secured and senior unsecured loans originated by Barclays and extended predominantly to large corporate obligors in western Europe. Up to 12.5% of the portfolio may consist of leveraged loans. The underlying loans are denominated in Euro, US Dollars and British Pounds. The portfolio is expected to be 100% ramped up as of the closing date.

Barclays Bank PLC will manage the CLO. Subject to certain restrictions, it will direct the disposition of collateral on behalf of the Issuer during the transaction's two-year reinvestment period, while the selection and acquisition of replacement loans will be subject to pre-defined selection criteria. Thereafter, purchases are permitted using principal proceeds from unscheduled principal payments and proceeds from sales of credit impaired obligations, and will be subject to additional restrictions. The initial reference portfolio comprises of 706 corporate loans of 325 reference entities. In terms of geographical diversification, the initial portfolio is concentrated wholly within Europe (UK 71%, Netherlands 6%, Spain 6%, France 5%, Ireland 4%, Switzerland 3%, Luxembourg 3%, Germany 2%, Denmark 1% and Norway 0.5%). The top five industries in the initial reference portfolio are business services (14%), construction & building (10%), healthcare and pharmaceuticals (7%), beverage, food and tobacco (7%) and banking (6%).

In addition to the three classes of notes rated by Moody's, the Issuer issued GBP 1,125M of subordinated notes, which are not rated.

Each of the three rated classes notes will receive interest and principal payments from the loans denominated in the same currency. In certain cases, if there is a shortfall in one of the currencies, then interest and/or principal proceeds will be converted from proceeds of loans denominated in the other two currencies to ensure that any potential payment shortfall will be equally borne by all three rated classes of notes. Following redemption of any of the rated classes of notes, proceeds from loans denominated in the same currency will be also used to make payments to the outstanding senior class(es) of notes until such time that all rated classes of notes are fully redeemed. This additional risk caused by potential FX rate movements is addressed as described under the Loss and Cash Flow Analysis section below.

The transaction also incorporates par coverage tests which, if triggered, will divert interest and principal proceeds to pay down the notes in order of seniority.

In assigning definitive ratings to the transaction, Moody's has relied on:

(1) the eligibility criteria with regards to the loan amount, currency, maturity, credit quality and legal enforceability of each reference obligation as well as the domicile of the reference entities;

(2) the CDOROM 'managed-to-model' test which has to be satisfied following any reinvestment;

(3) the portfolio covenants that need to be satisfied or if already failing, maintained or improved; and

(4) the concentration limits of the portfolio.

Methodology underlying the Rating Action:

The methodologies used in these ratings were "Moody's Global Approach to Rating Collateralized Loan Obligations" published in August 2017 and "Moody's Approach to Rating Corporate Synthetic Collateralized Debt Obligations" published in August 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Factors that would lead to a downgrade of the ratings:

The rated notes' performance is subject to uncertainty. The notes' performance is sensitive to the performance of the underlying portfolio, which in turn depends on economic and credit conditions that may change. Fluctuations of the exchange rates between the three currencies of the portfolio may also have an impact on the expected loss of the rated notes. Barclays' investment decisions and management of the transaction will also affect the notes' performance.

Loss and Cash Flow Analysis:

Moody's CDOROM model ("CDOROM") was used to measure the potential expected loss incurred by the noteholders of the rated classes of notes. CDOROM performs a Monte Carlo simulation that takes Moody's default probability assumption as input. Each reference obligor is modelled individually, with a standard multi-factor model incorporating intra- and inter-industry correlations. The correlation structure is based on a Gaussian copula. In each Monte Carlo scenario, defaults and recovery rates are simulated which the model then allocates to the tranches of the CDS in reverse order of seniority. By repeating this process and averaging the number of simulations, Moody's can derive a default distribution as well as an estimate of the expected loss on the tranches.

Moody's modelled each of the three classes of notes individually, giving benefit to the collateralisation provided by loans in all three currencies. The notional of the loans in the two currencies different to the one of the modelled rated class of notes was subject to a par haircut. This par reduction addresses the fact that such assets will provide support to two other classes of senior notes with the level of such support also depending on the relevant currency exchange rate applicable at the time of conversion from one currency to the other.

The default probability assumptions used in the analysis by Moody's were derived either from public ratings of the reference entities or through a rating mapping between Barclays; internal rating categories for corporate obligors and Moody's rating scale. The mapping process was carried out in December 2017 and will be refreshed on a periodic basis. Ultimately, the default probability assumption for the overall reference portfolio is 4.0% over a 2.9 years horizon, which corresponds to a Ba2 rating. For the recovery rate we assumed a mean of 35% and a standard deviation of 30% as per our standard assumption for senior unsecured loans.

Moody's used the following base-case modeling assumptions:

Par amount: GBP 4,500,000,000 (comprised of GBP 1,500,000,000, EUR 1,687,500,000 and USD 2,036,700,000)

Weighted Average Rating Factor (WARF): 1075

Weighted Average Spread (WAS): 1.50%

Weighted Average Recovery Rate (WARR): 35%

Weighted Average Life (WAL): 2.9 years

For comparison purposes, the Diversity Score of the closing portfolio was calculated to be 69.

Stress Scenarios:

Together with the set of modelling assumptions above, Moody's conducted additional sensitivity analysis, which was an important component in determining the definitive ratings assigned to the rated notes. This sensitivity analysis includes increased default probability relative to the base case. Below is a summary of the impact of an increase in default probability (expressed in terms of WARF level) on each of the rated notes (shown in terms of the number of notch difference versus the current model output, whereby a negative difference corresponds to higher expected losses), holding all other factors equal.

Percentage Change in weighted average default probability ("WADP"): WADP + 15% (to 4.6% from 4.0%)

Ratings Impact in Rating Notches:

Class A1 Senior Secured Floating Rate Notes: 0

Class A2 Senior Secured Floating Rate Notes: 0

Class A3 Senior Secured Floating Rate Notes: 0

Percentage Change in WADP : WADP + 30% (to 5.2% from 4.0%)

Class A1 Senior Secured Floating Rate Notes: 0

Class A2 Senior Secured Floating Rate Notes: 0

Class A3 Senior Secured Floating Rate Notes: 0

Further details regarding Moody's analysis of this transaction may be found in the upcoming new issue report, available soon on Moodys.com.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Moody's describes its loss and cash flow analysis in the section "Ratings Rationale" of this press release.

Moody's describes the stress scenarios it has considered for this rating action in the section "Ratings Rationale" of this press release.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

George Zittis
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Thorsten Klotz
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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