DBRS Assigns Provisional Ratings to Notes Issued by FT Santander RMBS 4

DBRS Ratings Limited (DBRS) has today assigned provisional ratings to the following notes issued by FT Santander RMBS 4:

-- A (high) (sf) to €2,360,000,000 issuance of Class A bonds
-- CCC (sf) to €590,000,000 issuance of Class B bonds
-- C (sf) to €147,500,000 issuance of Class C bonds

FT Santander RMBS 4 (Santander 4) is a securitisation of a portfolio of prime residential mortgage loans, including a portion of borrowers with higher risk characteristics and secured by first-ranking lien mortgages on properties in Spain, originated by Banco Santander SA (Santander) and Banco Español de Credito (Banesto), which is now part of Santander (A, Stable; R-1 (low), Stable). At the closing date of the transaction, Santander 4 will use the proceeds of the Class A and B bonds issuance to fund the purchase of the mortgage portfolio. In addition, the Class C bonds 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 and the form and sufficiency of available credit enhancement. The rated Class A bonds benefit from 25% of credit enhancement in the form of the €590 million (20%) subordination of the Class B bonds and the €147.5 million (5%) of the reserve fund, which is available to cover senior fees, interest and principal of the Class A and B bonds. The Class A bonds also benefit from a fully sequential amortisation, where principal on the Class B will not be paid until the Class A bonds have been redeemed in full. The Class C bonds will be repaid according to the reserve fund amortisation.

The main characteristics of the portfolio as of 11 May 2015 cut-off date include: (i) 69.6% weighted-average current unindexed loan–to-value (WA CLTV) and 103.8% Indexed WA CLTV (INE HPI Q1 2015); (ii) the top three portfolio geographical concentrations, which are Andalusia (20.0%), Madrid (18.9%) and Catalonia (15.1%); (iii) 13.5% self-employed borrowers; (iv) 4.9% of non-national borrowers; (v) a weighted-average seasoning of 6.9 years; and (vi) 1.0% of loans originated through brokers.

Of the mortgage portfolio, 94.4% pays a variable interest rate linked to 12-month Euribor and the remaining 5.6% pays a fixed rate linked to the IRPH (Indice de Referencia de Préstamos Hipotecarios). In contrast to the mortgage portfolio, the issued notes’ variable interest rate is linked to three-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 three-month Euribor in favour of 12-month Euribor, as well as compared to IRPH; (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.

Of the underlying borrowers, 23.3% were classified by DBRS as higher-risk borrowers. Higher-risk borrowers are those with (i) a loan modification or (ii) no loan modification, but (a) the loan has a principal grace period or (b) had a missed payment date within the past two years and an amendment in the loan agreement. In DBRS’s view, these characteristics indicate a higher chance of future payment problems, as they do not occur frequently and in combination. According to Santander’s annual financial statement, modified loans are part of Santander’s forbearance portfolio, which contains borrowers likely to incur problems on paying their outstanding debts (e.g., not only mortgage loans, but other consumer loans) with Santander, but have never been more than three months in arrears (which would trigger a classification as non-performing). As a result, borrowers might apply for some form of debt consolidation or might be given a principal payment holiday or an extension of the maturity. Currently, 9.6% of the mortgage loans are in grace period, with an average remaining term of approximately nine months, the longest grace period ending in 2020. DBRS applied higher default probabilities to loans with these characteristics and adjusted its cash flow modelling for the loans with a 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’s credit analysis of the mortgage portfolio at A (high) (sf), CCC (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 the final payment date in August 2059. DBRS stressed the margin of loans with a margin above 1.0% and the repayment of the portfolio for longer amortisation in its cash flow modelling.

The transaction’s account bank agreement and respective replacement trigger require Santander acting as the treasury account bank to find (i) a replacement account bank or (ii) an account bank guarantor upon loss of a BBB (high) rating. DBRS concluded that the assigned ratings are in line with its account bank criteria.
DBRS used a combination of default timing curves (front- and back-ended), rising and declining interest rates and low, medium 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 5.0%, 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.

As a result of the analytical considerations, DBRS derived a base case Probability of Default (PD) of 18.1% and Loss Given Default (LGD) of 40.3%, which resulted in an Expected Loss (EL) of 7.3%.

DBRS cash flow model assumptions focus on the amount and timing of defaults and recoveries, prepayment speeds and interest rates. Based on a combination of these assumptions, a total of 16 cash flow scenarios were applied to test the capital structure and derive the rating of the Notes.

Notes:
All figures are in euros unless otherwise noted.

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

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

For a more detailed discussion of the 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 SA and Santander de Titulización, S.G.F.T., S.A. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; however, Agreed upon Procedures (AUP) are included in the requested documentation. DBRS was not provided with an AUP for the provisional rating analysis. However this did not impact the rating analysis.

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.

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

To assess the impact of potential changes in the transaction’s parameters on the ratings, DBRS considered two additional stresses assuming a 25% and 50% increase in both the PD and LGD assumptions for the bonds.

The hypothetical results of the sensitivity analysis on the Series A notes would be:

In case of a constant LGD and a hypothetical increase of 25% and 50% of the EL, every other assumption in the transaction being the same, the resulting rating would be BBB (high) (sf) and BBB (low) (sf).

In case of a hypothetical increase of LGD by 25% and a hypothetical increase of 25% and 50% of the EL, every other assumption in the transaction being the same, the resulting rating would be BBB (low) (sf) and BB (high) (sf).

In case of a hypothetical increase of LGD by 50% and a hypothetical increase of 25% and 50% of the EL, every other assumption in the transaction being the same, the resulting rating would be BB (high) (sf) and BB (sf).

The Series B and C notes’ ratings would not be affected by any hypothetical change in neither LGD nor EL.

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, Vice President
Initial Rating Date: 7 May 2015
Initial Rating Committee Chair: Erin Stafford, Managing Director
Lead Surveillance Analyst: Vito Natale, Senior Vice President

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 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

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.