DBRS Takes Ratings Action on FTA, Santander Hipotecario 7

DBRS Ratings Limited (“DBRS”) has reviewed FTA, Santander Hipotecario 7 (the “Issuer”) and taken the following rating actions:
• Series A, downgraded from AAA (sf) to AA (high) (sf)
• Series B, confirmed at BBB (high) (sf)
• Series C, confirmed at C (sf)

The Notes are backed by a portfolio of mortgage loans secured by residential properties in Spain originated and serviced by Banco Santander SA (“Santander”).

The downgrade of the Series A Notes is based on an updated analysis of the transaction exposure to the Treasury Account provider, Santander. Santander is currently rated ‘A’ with a Negative Trend by DBRS. The Issuer has a replacement trigger for the Treasury Account; where, in the event Santander were to be downgraded below “BBB (high)” by DBRS, the Management Company shall find a replacement institution, which is rated at least “BBB (high)” by DBRS. However, the DBRS Legal Criteria for European Structured Finance Transactions as of 13 June 2013 refers to the Account Bank having the “minimum rating [of ‘A’ with respect to a transaction where the highest rating assigned is AA (low) (sf) or higher]…combined with a provision to replace within 30 calendar days of a downgrade below that level, is generally sufficient to mitigate the risk of that counterparty’s default such that risk may not need to be specifically modelled.” Given the combination of the current rating of Santander and the replacement provision described above, additional cash flow analysis for the Series A Notes included scenarios where the transaction did not benefit from the Cash Reserve Fund. In these scenarios, the available credit enhancement to the Series A Notes was insufficient to cover DBRS expected losses at the AAA (sf) rating level, but sufficient to cover expected losses at the AA (high) (sf) rating level.

The pool of mortgages supporting the transaction is performing within DBRS expectations and the available credit enhancement for the Series B Notes is sufficient to cover DBRS expected losses at the current rating level. The rating analysis incorporates a sovereign related stress component to address the impact of macroeconomic variables on collateral performance.

The Series C Notes were issued to fund the Cash Reserve Fund and are in a first loss position supported only by available excess spread. The rating for the Series C Notes addresses ultimate payment of interest and principal.

As of 17 March 2014, the current 90+ delinquency ratio as a percentage of the performing balance of the portfolio was 1.39%, while the cumulative default ratio was 4.53%.

Credit enhancement for the Series A Notes (as a percentage of the collateral balance) consists of subordination of the Series B Notes (26.24% as of 17 March 2014) and a Cash Reserve Fund (24.95%) initially funded via the issuance of the Series C Notes. Credit enhancement of the Series B Notes consists solely of the Cash Reserve Fund (24.95%), which also provides liquidity support to the Notes. As of 17 March 2014, the Cash Reserve Fund was equal to EUR 342.3 million, below the target amount of EUR 359.7 million.

Notes:
All figures are in Euro unless otherwise noted.

The principal methodology applicable is the Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

This can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include investor reports provided by Banco Santander SA and data from the European DataWarehouse. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The last rating action on this transaction took place on 01 March 2013, when the ratings on the Series A Notes, Series B Notes and Series C Notes were confirmed.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):
• DBRS expected a lifetime base case Probability of Default (PD) and Loss Given Default (LGD) for the pool based on a review of the current receivables. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
• The base case PD and LGD of the current pool of mortgages for the Issuer are 14.31% and 43.87%, respectively. The corresponding levels at the AAA (sf) rating level are 44.65% and 67.17%.
• The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of Series A Notes would be expected to decrease at A (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Series A Notes would be expected to decrease to BBB (high) (sf), assuming no change in the LGD. Furthermore, if both PD and LGD increase by 50%, the rating would be expected to decrease to BB (high) (sf).

Series A Notes Risk Sensitivity:
• 25% increase in LGD, expected rating of AA (sf)
• 50% increase in LGD, expected rating of A (high) (sf)
• 25% increase in PD, expected rating of A (high) (sf)
• 50% increase in PD, expected rating of BBB (high) (sf)
• 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
• 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
• 50% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
• 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

Series B Notes Risk Sensitivity:
• 25% increase in LGD, expected rating of BBB (high) (sf)
• 50% increase in LGD, expected rating of BBB (high) (sf)
• 25% increase in PD, expected rating of BBB (high) (sf)
• 50% increase in PD, expected rating of BBB (high) (sf)
• 25% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
• 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
• 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
• 50% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)

Series C Notes Risk Sensitivity:
• 25% increase in LGD, expected rating of C (sf)
• 50% increase in LGD, expected rating of C (sf)
• 25% increase in PD, expected rating of C (sf)
• 50% increase in PD, expected rating of C (sf)
• 25% increase in PD and 25% increase in LGD, expected rating of C (sf)
• 25% increase in PD and 50% increase in LGD, expected rating of C (sf)
• 50% increase in PD and 25% increase in LGD, expected rating of C (sf)
• 50% increase in PD and 50% increase in LGD, expected rating of C (sf)

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Lain Gutierrez
Initial Rating Date: 28 July 2011
Initial Rating Committee Chair: Claire Mezzanotte

Last Rating Date: 01 March 2013

Lead Surveillance Analyst: Dylan Cissou
Rating Committee Chair: Claire Mezzanotte

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom

Registered in England and Wales: No. 7139960

The rating methodologies and criteria used in the analysis of this transaction can be found at http://www.dbrs.com/about/methodologies

• Legal Criteria for European Structured Finance Transactions
• Master European Structured Finance Surveillance Methodology
• Operational Risk Assessment for European Structured Finance Servicers
• Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
• Unified Interest Rate Model for European Securitisations