DBRS Assigns Provisional Ratings to FTA RMBS Santander 2

DBRS Ratings Limited (‘DBRS’) assigns provisional ratings to the following notes issued by Fondo de Titulización de Activos (FTA) RMBS Santander 2:

-- A (sf) to €2,520,000,000 to Series A notes
-- B (sf) to €480,000,000 to Series B notes
-- C (sf) to €450,000,000 to Series C notes

FTA RMBS Santander 2 (‘Santander 2’) is a securitisation of a portfolio of residential mortgage loans and secured by first ranking lien mortgages on properties in Spain, originated and serviced by Banco Santander, S.A (A/Neg Trend/R-1L/Stable). At the closing date of the transaction Santander 2 will use the proceeds of the Series A and B notes issuance to fund the purchase of the mortgage portfolio. In addition the Series C notes proceeds will fund the reserve fund. The securitisation will take place in the form of a fund, in accordance with Spanish Securitisation Law.

The ratings are based upon a review by DBRS of the following analytical considerations:

• Transaction’s capital structure, form and sufficiency of available credit enhancement. The rated Series A notes benefit from 31% of credit enhancement in the form of the €480 million (16%) subordination of the Series B notes and the €450 million (15%) of the reserve fund, which is available to cover senior fees, interest and principal of the Series A and B notes. The Series A notes also benefit from a fully sequential amortisation, where principal on the Series B will not be paid until the Series A notes have been redeemed in full. The Series C notes will be repaid according to the reserve fund amortisation.

• The main characteristics of the portfolio include: (i) 67.9% weighted average current unindexed loan–to-value (‘WA CLTV’) and 103.1% indexed WA CLTV (INE HPI Q4 2013); (ii) top three portfolio geographical concentrations are Madrid (21.8%), Andalucia (17.1%) and Cataluña (16.9%); (iii) 10.1% self-employed borrowers; (iv) 3.3% of non-national borrowers; (v) a high weighted average seasoning of 6.9 years, with 39.8% of loans originated after the peak of the housing market in 2008 and after; (vi) 2.3% of loans originated through brokers; and (vii) 2.1% second home properties.

• 99.7% of the mortgage portfolio pays a variable interest rate linked to 12 month Euribor (with one loan’s interest rate indexed to 3 month and one loan’s interest rate indexed to 6 month Euribor) and the remaining 0.3% pays a fixed rate. In contrast to the mortgage portfolio the issued notes variable interest rate is linked to 3 month Euribor. DBRS considers there to be limited basis risk in the transaction which is mitigated by i) the historical positive spread between 12 and 3 month Euribor in favour of 12 month Euribor; ii) the monies standing to the credit of the reserve fund; and iii) the available credit enhancement to cover for potential shortfalls from the mismatch. DBRS stressed the existing risk in its cash flow modelling.

• 24.6% of the underlying borrowers were classified by DBRS as higher risk borrowers. Higher risk borrowers are those with i) no loan modification, but one missed payment within the last year (13.4% of the total portfolio); or ii) a loan modification with a missed payment within the past two years (11.2% of the total portfolio). Loan modifications are the result of a restructuring process where borrowers with less than three months in arrears were granted either one or more changes to their original loan agreements such as a) the reduction in margin; b) extension of maturity; or c) granting of a grace period. Currently 15.4% of the mortgage loans are in grace period with an average remaining term of approximately 11 months, the longest grace period ending in February 2019. DBRS applied higher default probabilities to loans with these characteristics and adjusted its cash flow modelling for the loans with current grace period in place.

• The credit quality of the mortgages backing the notes and the ability of the servicer to perform its servicing duties. DBRS was provided with the bank’s historical mortgage performance data as well as with loan level data for the mortgage portfolio. Details of the defaults, loss given default and expected losses resulting from DBRS credit analysis of the mortgage portfolio at A (sf), B (sf) and C (sf) stress scenarios are highlighted below.
In accordance with the transaction documentation, the Servicer is able to grant loan modifications without the consent of the management company within the range of permitted variations. According to the documentation permitted variation include the reduction of the loans margins down to a weighted average of 1.0% of the mortgage portfolio and maturity extension for 10% of the portfolio up to three years before legal final maturity in 2057. Given the current weighted average coupon of 0.6% DBRS did not stress the margin compression, but stressed the repayment of the portfolio for longer amortisation in its cash flow modelling.

• DBRS used a combination of default timing curves (front- and back-ended), rising and declining interest rates and low, mid and high prepayment scenarios in accordance with the DBRS rating methodology to stress the cash flows. Given the low prepayment level observed in Spain, currently below 5%, DBRS also tested a scenario with zero prepayments.

• The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with the DBRS Legal Criteria for European Structured Finance Transactions.

Notes:
All figures are in euro unless otherwise noted.

The principal methodology applicable is:

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 Banco Santander S.A. and their agents. 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.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

To assess the impact of potential changes in the transactions’ parameters on the ratings, DBRS considered in addition to its base case further stress scenarios for its main rating parameters Probability of Default (‘PD’) and Loss Given Default (‘LGD’) in its cash flow analysis. The two additional stresses assume a 25% and 50% increase in both the PD and LGD assumptions for each series of notes.

The following scenarios constitute the parameters used to determine the ratings (the “Base Case”):

• In respect of the Series A notes and a rating category of ‘A (sf)’, PD of 31.6% and the LGD of 52.6%.
• In respect of the Series B notes and a rating category of ‘B (sf)’, PD of 13.1% and the LGD of 40.5%.
• In respect of Series C notes and a rating category of ‘C (sf)’, DBRS expects the rating of the Series C notes to remain at ‘C (sf)’.

DBRS concludes that for the Series A Notes:

• A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Series A notes to A (low) (sf).
• A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Series A notes to A (low) (sf).
• A hypothetical increase of both, the PD and the LGD by 50%, ceteris paribus, would lead to a downgrade of the Series A notes to BBB (sf).

In the remaining six stress scenarios the ratings of the Series A notes would remain at A (sf).

DBRS concludes that for the Series B Notes:

In all possible nine stress scenarios of increase in PD and LGD the ratings of the Series B notes would remain at B (sf).

DBRS concludes that for the Series C notes:

The Series C notes were issued to fund the reserve fund which is meant to serve the transaction as first loss piece. Subject to this and the rating level of the Series C notes at C (sf) a stress analysis is not appropriate.

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: Sebastian Hoepfner
Initial Provisional Rating Date: July 08, 2014
Initial Provisional Rating Committee Chair: Quincy Tang
Lead Surveillance Analyst: Dylan Cissou

DBRS Ratings Limited
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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
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