DBRS Assigns Provisional Ratings to FONDO DE TITULIZACION RMBS PRADO III

DBRS Ratings Limited (DBRS) has today assigned a provisional rating of AAA (sf) to the EUR 319 million Class A notes to be issued by FT RMBS PRADO III (the Issuer).

The rating of the Class A notes addresses timely payment of interest and ultimate payment of principal on or before the legal final maturity date.

The Issuer is expected to be a securitsation of residential mortgage loans secured by first-lien mortgages originated by the Union de Créditos Inmobiliarios S.A., E.F.C (UCI or the Seller) in Spain. At the closing of the transaction, the Issuer will use the proceeds of the Class A notes and a subordinated loan (Subordinated Loan 1) to fund the purchase of the mortgage portfolio from the Seller. UCI will also be the servicer of the portfolio. In addition, UCI will provide a separate additional subordinated loan (Subordinated Loan 2) to fund both the initial expenses and the Reserve Fund. The securitisation will take place in the form of a fund, in accordance with Spanish Securitisation Law.

This is the third residential mortgage-backed security (RMBS) transaction originated by UCI under the PRADO series and the second rated by DBRS. The originator and servicer of the transaction is UCI, which is jointly owned by Banco Santander and BNP Paribas. The Account Bank and the Principal Paying Agent is Banco Santander S.A. (Santander).

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

-- The transaction’s capital structure and the form and sufficiency of available credit enhancement. The Class A notes benefit from EUR 101 million (24.05%) subordination provided by the Subordinated Loan 1 disbursement. The notes will benefit from a Reserve Fund (EUR 10.5 million), funded through the Subordinated Loan 2, which is available to cover senior expenses as well as interest of the Class A notes until paid in full. The Reserve Fund will amortise with a target equal to 2.5% of the outstanding balance of the Portfolio.

-- DBRS was provided with the provisional portfolio equal to EUR 430.4 million as of 20 September 2016. The portfolio was analysed using the European RMBS Insight Model (the Model) to estimate the defaults and losses of the portfolio. DBRS divided the portfolio into two sub-pools: The first one includes 92.9% of the portfolio that has never been restructured, which was assigned a Spanish Underwriting Score of 4. The second sub-pool of 7.1% of the portfolio includes loans that were restructured in the past but have been performing over the last two years, to which a Spanish Underwriting Score of 6 was assigned. The main characteristics of the total portfolio include (1) 68.7% weighted-average current loan-to-value (WACLTV) and 83.5% indexed WACLTV (INE Q4 2015); (2) the top three geographical concentrations of Madrid (25.9%), Andalusia (24.4%) and Catalonia (18.4%); (3) weighted-average loan seasoning of 5.7 years; (4) the weighted-average remaining term of the portfolio is 27.2 years, with 40.9% of the loans having a remaining term greater than 30 years; and (5) 53.1% of the total portfolio as high-margin loans (greater than 0.9%).

-- The loans are primarily floating-rate mortgages linked to 12-month Euribor (62.3%) or IRPH (29.3%). Approximately 18.1% of the portfolio comprises fixed-rate loans with compulsory switch to floating.
These are loans that are currently paying a short-term fixed rate for a residual 1.9 years on a weighted-average basis and that will switch to Euribor or IRPH once the fixed period finishes. Moreover, 8.4% of the pool comprises pure fixed-rate loans until their maturity, which is 26 years on a weighted-average basis. Once all of the loans switch to floating rate, the interest rate index across the entire pool will be distributed as follows: 29.3% IRPH and 62.3% 12-month Euribor, with the remaining 8.4% being the fixed-rate loans. The notes are floating-rate liabilities indexed to three-month Euribor. The loans in the portfolio are paying monthly instalments, while the Class A notes will pay a quarterly coupon. The interest rate risk and basis risk are unhedged. Amounts standing in the Reserve Fund are available to cover the interest rate and basis risk for the rated notes. DBRS stressed the interest rates as described in its “Unified Interest Rate Model for European Securitisations” methodology.

-- The credit quality of the mortgages backing the notes and the ability of the servicer to perform its servicing responsibilities. DBRS was provided with UCI’s historical mortgage performance data. Details of the portfolio default rate (PDR), loss given default (LGD) and expected losses (EL) resulting from DBRS’s credit analysis of the mortgage portfolio at AAA (sf) stress scenario are detailed below.

-- In accordance with the transaction documentation, the servicers are able to grant loan modifications without consent of the management company within the range of permitted variations. DBRS stressed the margin of the portfolio and extended the maturity to the longest possible date in its cash flow analysis for 15% of the portfolio.

-- The transaction’s account bank agreement and respective replacement trigger require Santander, acting as treasury account, to find (1) a replacement account bank or (2) an account bank guarantor upon the loss of an “A” account bank applicable rating. The DBRS Critical Obligation Ratio (COR) of Santander is A (high), while the DBRS rating for Santander’s Senior Unsecured Debt is “A.”

-- The legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and the consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

As a result of the analytical considerations, DBRS derived a Base Case PDR of 9.8% and LGD of 34.5%, which resulted in an EL of 3.4 % using the European RMBS Credit Model. DBRS cash flow model assumptions stress the 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 ratings of the notes. The cash flows were analysed using Intex DealMaker.

For further details on the analysis, please refer to the rating report available on www.dbrs.com.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable are:

European RMBS Insight Methodology and European RMBS Insight: Spanish Addendum.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may 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 Unión de Créditos Inmobiliarios, S.A. E.F.C. (UCI) and Santander de Titulización, S.G.F.T., S.A.
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 considers the information available to it for the purposes of providing this rating to be 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.

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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):

In respect of the Series A notes, the PDR of 33.5% and LGD of 49.9%, corresponding to a AAA (sf) stress scenario, were stressed assuming 25% and 50% increase on the PDR and LGD:
-- A hypothetical increase of the PDR of 25%, ceteris paribus, would lead to a downgrade to AA (high) (sf).
-- A hypothetical increase of the PDR of 50%, ceteris paribus, would lead to a downgrade to AA (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would not have an impact on the rating of AAA (sf).
-- A hypothetical increase of the LGD of 50%, would lead to a downgrade to AA (high) (sf).
-- A hypothetical increase of the PDR of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to AA (sf).
-- A hypothetical increase of the PDR of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to A (high) (sf).
-- A hypothetical increase of the PDR of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to A (high) (sf).
-- A hypothetical increase of the PDR of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to A (low) (sf).

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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: Belén Bulnes, Senior Financial Analyst
Initial Rating Date: 10 October 2016
Initial Rating Committee Chair: Quincy Tang, Managing Director

Lead Surveillance Analyst: Antonio Di Marco, Senior Financial Analyst
DBRS Ratings Limited
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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
-- Unified Interest Rate Model Methodology for European Securitisations
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators

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