DBRS Finalises Provisional Rating on Fondo de Titulizacion RMBS Prado IV

DBRS Ratings Limited (DBRS) has today finalised the provisional rating of AAA (sf) on the Class A notes issued by FT RMBS Prado IV (the Issuer).

The rating on 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 a securitisation of residential mortgage loans secured by first-lien mortgages originated by the Unión de Créditos Inmobiliarios S.A., E.F.C (UCI or the Seller) in Spain. The Issuer used the proceeds of the Class A notes and Class B notes to fund the purchase of the mortgage portfolio from the Seller. UCI is appointed as servicer of the portfolio. In addition, UCI provided a separate additional subordinated loan to fund both the initial expenses and the Reserve Fund. The securitisation takes place in the form of a fund in accordance with Spanish Securitisation Law.

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

The rating is based on DBRS’s review 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 21.79% subordination provided by the Class B notes. The Class A notes will benefit from an amortising Reserve Fund with a target amount equal to 2.5% of the outstanding balance of the mortgage portfolio, funded through the Subordinated Loan. The Reserve Fund provides liquidity support and is available to cover senior expenses as well as interest on the Class A notes.

The Class A target amortisation amount is equal to the positive difference between the outstanding principal balance of the Class A notes and the outstanding principal balance of the non-defaulted collateral; however, if a Class A turbo amortisation event occurs, then all available funds after the payment of the senior fees, the amounts due to the Swap Counterparty, the interest due on the Class A notes and the replenishment of the Reserve Fund, will be used to pay principal on the Class A notes. The Class A turbo amortisation event will occur when the cumulative default ratio is greater than or equal to 1% one year after the closing date, 2% two years after the closing date, 3% three years after the closing date, 4% four years after the closing date and 5% five years after the closing date.

-- DBRS was provided with the mortgage portfolio equal to EUR 390 million as of 30 March 2017. 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 includes 93.0% of the portfolio that has never been restructured, which was assigned a Spanish Underwriting Score of 4. The second sub-pool, which represents 7.0% of the portfolio, includes loans that were restructured in the past, but have been performing over the last three years, to which a Spanish Underwriting Score of 6 was assigned. The main characteristics of the total portfolio include (1) 71.3% weighted-average current loan-to-value (WACLTV) and 85.9% indexed WACLTV (INE, Q4 2015); (2) the top three geographical concentrations of Madrid (25.2%), Catalonia (23.2%) and Andalusia (21.6%); (3) WA loan seasoning of 4.6 years; and (4) the WA remaining term of the portfolio, which is 27.2 years with 25.3% of the loans having a remaining term greater than 30 years.

-- The loans are primarily floating-rate mortgages linked to 12-month Euribor (16.3%) or IRPH (35.4%). Approximately 15.3% of the portfolio comprises short-term fixed-rate loans with a compulsory switch to floating. 32.9% of the portfolio comprises fixed-rate for life loans. The loans that are currently paying a short-term fixed rate have fixed-rate periods of three, five, seven or ten years with a current interest rate of 2.70%. The short-term fixed-rate loans revert to Euribor or IRPH. The WA remaining term of this short-term fixed-rate period is 5.5 years. Fixed-rate for life loans have a WA interest rate of 2.89%.

Once all of the loans switch to floating rate, the interest rate index across the entire pool will be distributed as follows: 36.8% IRPH and 30.3% 12-month Euribor with the remaining 32.9% representing the fixed-rate for life 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 Issuer has entered into an interest rate swap with Santander to mitigate the interest rate mismatch between the fixed-rate loans and the three-month Euribor paid on the notes. The Issuer will pay a fixed rate of 0.9% on a notional balance linked to the outstanding balance of the performing fixed-rate loans to the swap counterparty and will receive three-month Euribor in return.

Santander has a public DBRS rating and is an eligible swap counterparty. The transaction documents envisage language consistent with criteria DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

Amounts standing to the credit of the Reserve Fund are also available to cover the interest rate and basis risk for the Class A notes. DBRS stressed the interest rates as described in its “Unified Interest Rate Model for European Securitisations” methodology. DBRS has also stressed the spread between IRPH and Euribor in its cash flow analysis.

-- The credit quality of the mortgages backing the notes and the servicer’s ability to perform its servicing responsibilities. DBRS was provided with UCI’s historical mortgage performance data.

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 documents, the servicers are able to grant loan modifications without the management company’s consent 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. DBRS’s Critical Obligations Rating of Santander is A (high) while its 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 9.7% and LGD of 31.5%, which resulted in an EL of 3.1 % 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 12 cash flow scenarios were applied to test the capital structure and ratings of the notes. DBRS also tested for a 0% CPR scenario with rated notes passing in all scenarios. 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 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 or independently verify the data or information it receives in connection with the rating process.

This rating concerns a newly issued financial instrument. This is the first DBRS rating since the initial rating date.

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

To assess the impact of 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 Class A notes, the PDR of 37.3% and LGD of 52.4%, 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 (low) (sf).
-- A hypothetical increase of the PDR of 50%, ceteris paribus, would lead to a downgrade to A (sf).
-- A hypothetical increase of the LGD of 25%, ceteris paribus, would lead to a downgrade to AA (high) (sf).
-- A hypothetical increase of the LGD of 50%, would lead to a downgrade to A (high) (sf).
-- A hypothetical increase of the PDR of 25% and LGD by 25%, ceteris paribus, would lead to a downgrade to A (high) (sf).
-- A hypothetical increase of the PDR of 25% and LGD by 50%, ceteris paribus, would lead to a downgrade to A (low) (sf).
-- A hypothetical increase of the PDR of 50% and LGD by 25%, ceteris paribus, would lead to a downgrade to BBB (high) (sf).
-- A hypothetical increase of the PDR of 50% and LGD by 50%, ceteris paribus, would lead to a downgrade to BBB (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.

Lead Analyst: Belén Bulnes, Senior Financial Analyst
Rating Committee Chair: Erin Stafford, Managing Director
Rating Date: 6 April 2017

Initial Rating Date: 23 March 2017
Lead Surveillance Analyst: Antonio Di Marco, Senior Financial Analyst

DBRS Ratings Limited
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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.

-- European RMBS Insight Methodology and European RMBS Insight: Spanish Addendum
-- 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
-- Derivative Criteria for European Structured Finance Transactions

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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.