DBRS Assigns Provisional Ratings to FT PYMES SANTANDER 13

DBRS Ratings Limited (DBRS) assigned provisional ratings to the following notes to be issued by Fondo de Titulizacion PYMES SANTANDER 13 (FT PYMES Santander 13 or the Issuer):

--EUR 2,254.5 million Series A Notes at A (sf) (the Series A Notes)
--EUR 445.5 million Series B Notes at CCC (high) (sf) (the Series B Notes)
--EUR 135.0 million Series C Notes at C (sf) (the Series C Notes, together, the Notes)

The transaction is a cash flow securitisation collateralised by a portfolio of term loans and credit lines originated by Banco Santander, S.A. (Banco Santander or the Originator) to small- and medium-sized enterprises (SMEs) and self-employed individuals based in Spain. As of 27 December 2017, the transaction’s provisional portfolio included 61,893 loans and credit lines to 52,938 obligors, totalling EUR 3,062.2 million. At closing, the Originator will select the final portfolio of EUR 2,700 million from the provisional pool.

The portfolio also contains loans and credit lines originated by Banesto and Banif prior to their integration into Banco Santander completed in April 2014.

The rating on the Series A Notes addresses the timely payment of interest and the ultimate repayment of principal payable on or before the Legal Maturity Date in May 2043. The ratings on the Series B and Series C Notes address the ultimate payment of interest and principal payable on or before the Legal Maturity Date in May 2043.

The provisional pool has some exposure to the “Building & Development” industry, representing 19.9% of the outstanding balance. The “Business Equipment & Services” (11.0%) and “Farming/Agriculture” (9.3%) sectors have the second and third largest exposure based on the DBRS Industry classification.

The provisional portfolio exhibits low obligor concentration. The top obligor and the largest ten obligor groups represent 0.9% and 4.6% of the outstanding balance, respectively. The top three regions for borrower concentration are Madrid, Catalonia and Andalusia respectively representing approximately 21.9%, 18.0% and 14.7% of the portfolio balance.

The historical data provided by Santander reflects the portfolio composition which includes secured and unsecured loans as well as credit lines. DBRS assumed an annualised probability of default (PD) rate of 3.60% for this portfolio.

Final ratings will be issued upon receipt of executed versions of the governing transaction documents. To the extent that the documents and information provided by FT PYMES Santander 13, Santander de Titulización, S.G.F.T., S.A. and Banco Santander, S.A. to DBRS as of this date differ from the executed versions of the governing transaction documents, DBRS may assign lower final ratings to the Notes.

At closing, the Series A Notes will benefit from a total credit enhancement of 21.5%, which DBRS considers to be sufficient to support its A (sf) rating. The Series B Notes will benefit from a credit enhancement of 5%, which DBRS considers to be sufficient to support its CCC (high) (sf) rating. Credit enhancement is provided by subordination and the Reserve Fund. In addition, the Series A, Series B and Series C Notes benefit from available excess spread.

The Series C Notes will be issue for the purpose of funding the EUR 135.0 million Reserve Fund. The Reserve Fund will be allowed to amortise after the first two years if certain conditions related to the performance of the portfolio and deleveraging of the transaction are met. The Reserve Fund cannot amortise below EUR 67.5 million.

The transaction also acquired the obligation to fund any future drawing requests by the borrowers under the credit lines. Any future drawings will be funded via available proceeds from principal and interest collections in the period. The transaction also benefits from a Liquidity Line provided by Banco Santander that can be used if available proceeds are insufficient to meet the drawings on the credit lines. The drawn balance on the credit lines is EUR 595.2 million (equivalent to 19.4% of the provisional portfolio balance) and a further EUR 155.2 million is currently undrawn.

DBRS determined its ratings as per the principal methodology specified below and based on the following analytical considerations:
-- The PD for the Originator was determined using the historical performance information supplied. For this transaction DBRS assumed an annualised PD of 3.60%.
-- The assumed weighted-average life (WAL) of the portfolio was 2.91 years.
-- The PD and WAL were used in the DBRS Diversity Model to generate the hurdle rates for the assigned ratings.
-- The recovery rate was determined by considering the market value declines (MVDs) for Spain, the security level and type of the collateral. For the Series A Notes, DBRS applied a 69.28% recovery rate for secured loans and a 16.25% recovery rate for unsecured loans. For the Series B Notes, DBRS applied an 83.03% recovery rate for secured loans and a 21.5% recovery rate for unsecured loans.
-- The break-even rates for the interest rate stresses and default timings were determined using the DBRS cash flow tool.
-- The rating of the Series C Notes is based upon DBRS’s review of the following considerations:
-- The Series C Notes are in the first loss position and, as such, are highly likely to default.
-- Given the characteristics of the Series C Notes as defined in the transaction documents, the default most likely would only be recognised at the maturity or early termination of the transaction.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating CLOs Backed by Loans to European SMEs.”

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of information used for this rating include the parties involved in the rating, including but not limited to the Originator, Banco Santander S.A., and Santander de Titulización S.G.F.T., S.A.

DBRS did 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 data and 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.

These ratings concern newly issued financial instruments. This is the first DBRS rating on these financial instruments.

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

To assess the impact a change of the transaction parameters would have on the ratings, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
-- PD Rates Used: Base Case PD of 3.60%, a 10% increase of the base case and a 20% increase of the base case PD.
-- Recovery Rates Used: Base Case Recovery Rates of 28.0% at the A (sf) stress level and 35.1% at the CCC (high) (sf) stress level for the Class A Notes and Class B Notes respectively, a 10% and 20% decrease in the Base Case Recovery Rates.

DBRS concludes that, in relation to the Series A notes a hypothetical increase of the base-case PD by 20% or a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would each lead to a confirmation of the Series A notes at A (sf). A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a confirmation of the Series A notes at A (sf).

Regarding the Series B Notes, a hypothetical increase of the base-case PD by 20% or a hypothetical decrease of the Recovery Rate by 20%, ceteris paribus, would each lead to a downgrade of the Series B notes to CCC (low) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a downgrade of the Series B notes to CCC (low) (sf).

Regarding the Series C Notes, the stress analysis is not appropriate.

For further information on DBRS’s 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 and US regulations only.

Initial Lead Analyst: María López, Vice President
Initial Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 19 January 2018

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.

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.

--Rating CLOs Backed by Loans to European SMEs
--Legal Criteria for European Structured Finance Transactions
--Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
--Interest Rate Stresses for European Structured Finance Transactions
--Rating CLOs and CDOs of Large Corporate Credit
--Cash Flow Assumptions for Corporate Credit Securitizations
--Operational Risk Assessment for European Structured Finance Servicers
--Operational Risk Assessment for European Structured Finance Originators
--European RMBS Insight: Spanish Addendum

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.