DBRS Takes Rating Actions on FTA RMBS Santander 3

DBRS Ratings Limited (DBRS) has today taken the following rating actions on the bond issued by FTA RMBS Santander 3 (the Issuer):

-- €4,704,845,525 Series A Notes confirmed at AA (sf)
-- €1,568,400,000 Series B Notes downgraded to CCC (sf) from BB (sf)
-- €313,600,000 Series C Notes confirmed at C (sf)

The rating action reflects the following analytical considerations, as described more fully below:
-- An amendment to the transaction signed on 20 July 2015.
-- Portfolio performance, in terms of delinquencies and defaults, as of the May 2015 payment date.
-- Updated portfolio default rate, loss given default and expected loss assumptions for the remaining collateral pool.
-- Current available credit enhancement to the Series A, B and C Notes to cover the expected losses at the AA (sf), CCC (sf) and C (sf) rating level respectively.

FTA RMBS Santander 3 (Santander 3) is a securitisation of a portfolio of prime residential mortgage loans originated by Banco Santander SA (Santander) and Banco de Crédito Español (Banesto) which is now part of Santander. The transaction follows the Spanish Securitisation Law and closed in November 2014.

The amendment consists of retranching the Series A and B Notes and reducing the Reserve Fund. The initial balance of the Series A Notes have been decreased from €5,395,000,000 to €4,931,600,000 while the Series B Notes have been increased from €1,105,000,000 to €1,568,400,000. The Series C Notes, issued to fund the Reserve Fund have been reduced from €975,000,000 to €313,600,000 and are currently 5% of the outstanding amount of senior and subordinated tranches. In addition, Santander is introducing a floor at 0% for the interest rate of the Notes.

Prior to this amendment, the Reserve Fund was able to amortise once it had reached 30% of the Outstanding Balance of the Series A and B Notes, maintaining such percentage until the Reserve Fund reaches the floor of 7.5% of the initial amount of the Series A and B notes. After restructuring, the ratio of 30% has been modified at 10% as well as the floor at 2.41%.

As of the May 2015 payment date, the main characteristics of the portfolio have not substantially changed since closing. One- to two-month arrears are at 1.29% and current two- to three-month arrears are at 0.59%. The 90+ delinquency ratio is currently at 0.66% and the current cumulative default ratio (as a percentage of the original portfolio) is currently at 0.0033%.

The Series A Notes are supported by the subordination of Series B Notes and Reserve Fund, which is available to cover senior fees, interest and principal of the Series A and B Notes. The Series B Notes are solely supported by the Reserve Fund. Series A and B Notes credit enhancement after restructuring is at 30% and 5% respectively, down from 32% and 15% at the initial DBRS rating and original structure respectively. The Series C Notes will be repaid according to the Reserve Fund amortisation.

Santander acts as Account Bank (as holder of the Treasury Account) for this transaction. Santander Issuer and Senior Debt public rating by DBRS is currently at “A”, which complies with the Minimum Institution Rating given the rating assigned to the Series A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is the “Master European Structured Finance Surveillance Methodology”, which can be found on www.dbrs.com at http://www.dbrs.com/about/methodologies. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

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

The sources of information used for this rating include investor reports and an amendment agreement provided by Santander de Titulización, SGFT, SA and data from the European DataWarehouse GmbH. 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; DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

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 19 November 2014, when DBRS assigned the ratings on the Series A, B and C Notes at AA (sf), BB (sf) and C (sf).

Information regarding DBRS ratings, including definitions, policies and methodologies is available at www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with 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 assets. 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 15.5% and 37.53%, respectively. At the AA (sf) rating level, the corresponding PD is 37.64% and the LGD 54.85%.
-- 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 the Series A Notes would be expected to fall to A (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Series A Notes would be expected to fall to BBB (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A1 Notes would be expected to fall to BB (high) (sf).

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

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

For further information on DBRS historic default rates published by the European Securities and Markets Administration 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 Rating Date: 19 November 2014
Initial Rating Committee Chair: Quincy Tang

Lead Surveillance Analyst: Antonio Di Marco
Rating Committee Chair: Quincy Tang

DBRS Ratings Limited
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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 (December 2014)
-- Master European Structured Finance Surveillance Methodology (April 2015)
-- Operational Risk Assessment for European Structured Finance Servicers (January 2015)
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (July 2015)
-- Unified Interest Rate Model for European Securitisations (January 2013)

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.