DBRS Upgrades and Confirms Ratings on Three Santander RMBS Transactions

DBRS Ratings Limited (DBRS) upgraded and confirmed its ratings on three Santander RMBS transactions:

FTA, Santander Hipotecario 7 (SH7):
-- Series A notes confirmed at AAA (sf)
-- Series B notes upgraded to B (high) (sf) from CCC (sf)
-- Series C notes confirmed at C (sf)

FTA, Santander Hipotecario 8 (SH8):
-- Series A notes confirmed at AAA (sf)
-- Series B notes confirmed at CCC (sf)
-- Series C notes confirmed at C (sf)

FTA, Santander Hipotecario 9 (SH9):
-- Series A notes confirmed at AA (sf)
-- Series B notes upgraded to B (high) (sf) from CCC (sf)
-- Series C notes confirmed at C (sf)

The ratings of the notes address the timely payment of interest and the ultimate payment of principal on or before their respective legal final maturity dates.

Today’s rating actions follow an annual review of the transactions and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies and defaults, as of the latest payment date for each transaction;
-- Portfolio default rate (PD), loss given default (LGD) and expected loss assumptions for the outstanding collateral pools; and
-- The current credit enhancement (CE) available to the rated notes to cover the expected losses for the Series A and B notes at their respective rating levels for each transaction.

The Series C notes of each transaction were issued to fund the Reserve Fund and are in a first-loss position supported only by available excess spread. Given the characteristics of the Series C notes as defined in the transaction documents, the default would most likely be recognised at maturity or following an early termination of the transaction.

The three transactions are securitisations of Spanish prime residential mortgage loans originated and serviced by Banco Santander SA (Santander). The transactions follow Spanish Securitisation Law.

PORTFOLIO PERFORMANCE AND ASSUMPTIONS
The portfolios are performing within DBRS’s expectations. For SH7, as of the March 2018 payment date, the arrears over 90 days were at 0.6% of the collateral portfolio, while the current cumulative default ratio stood at 3.7% of the original portfolio balance. For SH8, as of the February 2018 payment date, the 90+ delinquency ratio was at 1.1% of the collateral portfolio, while the current cumulative default ratio stood at 4.7%. For SH9, as of the February 2018 payment date, the 90+ delinquency ratio was at 0.5% of the collateral portfolio, while the current cumulative default ratio stood at 2.3%.

DBRS conducted a loan-by-loan analysis on the remaining collateral pools of receivables and maintained its PD and LGD assumptions. For SH7 the base-case PD and LGD are 7.8% and 51.4%, respectively. For SH8 the base-case PD and LGD are 7.6% and 51%, respectively, while for SH9, they are 9.4% and 49.4%, respectively.

CREDIT ENHANCEMENT
The CEs available to all rated notes have continued to increase as the transactions continue to deleverage. The Series A notes to all three transactions are supported by the subordination of the Series B notes and the Reserve Fund, which is available to cover senior fees, interest and principal of the Series A and Series B notes. The Series B notes are solely supported by the Reserve Fund. For SH7, as of March 2018, the CE to the Series A notes and Series B notes was 38.8% and 4.8%, respectively, increasing from 35.7% and 4.2% as of March 2017. For SH8, as of February 2018, the CE to the Series A notes and Series B notes was 36.1% and 2%, respectively, increasing from 33% and 1.3% as at February 2017. For SH9, as of February 2018, the CE to the Class A notes and Class B notes was 42.4% and 5.5%, respectively, increasing from 39.3% and 4.9% as at February 2017.

The Series C notes will be repaid according to the Reserve Fund amortisation.

All three Reserve Funds are able to amortise once they have reached 10% of the Outstanding Balance of the Series A and Series B notes, maintaining such percentage until the Reserve Fund reaches the floor of 1.8% of the initial amount of the Series A and Series B notes for SH7 and SH8, and the floor of 2.2% for SH9. The Reserve Funds are currently at EUR 50.7 million, EUR 9.3 million and EUR 26.3 million, which is below the targets of EUR 63.6 million, EUR 28.1 million and EUR 28.6 million for SH7, SH8 and SH9, respectively.

Santander acts as the Account Bank for all three transactions and the Swap Counterparty for SH7 and SH8. Santander’s reference rating of ‘A’, being one notch below its DBRS public Long-Term Critical Obligations Rating (COR) of A (high), is consistent with the Minimum Institution Rating as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology, and meets the First Rating Threshold as described in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology, given the AAA (sf) ratings of the Series A notes.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology.”

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

A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating actions.

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 data and information used for these ratings include reports and information received from Santander de Titulización, SGFT, S.A. and loan-level data from the European DataWarehouse GmbH.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, 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 these ratings to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on the transactions took place on 9 May 2017, when DBRS confirmed its ratings on the Series A notes, Series B notes and Series C notes at AAA (sf), CCC (sf) and C (sf), respectively for SH7 and SH8, and the ratings on the Class A notes, Class B notes and Class C notes of SH9 at AA (sf), CCC (sf) and C (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Francesco Amato.

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 to the parameters used to determine the rating (the base case):

-- DBRS expected a lifetime base-case PD and 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.

-- For SH7, the base case PD and LGD assumptions for the remaining collateral pool are 7.8% and 51.2%, respectively. At the AAA (sf) rating level, the corresponding PD and LGD are 29.5% and 64.7%, respectively. At the B (high) (sf) rating level, the corresponding PD and LGD are 8.8% and 52.2%, respectively.

-- For SH8, the base case PD and LGD assumptions for the remaining collateral pool are 7.6% and 51.0%, respectively. At the AAA (sf) rating level, the corresponding PD and LGD are 29.2% and 65%, respectively.

-- For SH9, the base case PD and LGD assumptions for the remaining collateral pool are 9.4% and 49.4%, respectively. At the AA (sf) rating level, the corresponding PD and LGD are 29.1% and 61.2%, respectively.
At the B (high) (sf) rating level, the corresponding PD and LGD are 10.5% and 51.5%, respectively.

-- 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 on SH7 Series A notes would be expected to be at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating on SH7 Series A notes would be expected to be at AAA (sf), assuming no change in the LGD. Furthermore, if both the PD and the LGD increase by 50%, the rating on SH7 Series A notes would be expected to be at AA (low) (sf).

SH7 Series A notes risk sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

SH7 Series B notes risk sensitivity:
-- 25% increase in LGD, expected rating of B (sf)
-- 50% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD, expected rating of B (sf)
-- 50% increase in PD, expected rating of B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of CCC (sf)

For SH7, the Series C notes rating would not be affected by any hypothetical change to either PD or LGD.

SH8 Series A notes risk sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (sf)

For SH8, the Series B notes and Series C notes ratings would not be affected by any hypothetical change to either PD or LGD.

SH9 Class A notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (sf)

SH9 Class B notes risk sensitivity:
-- 25% increase in LGD, expected rating of B (sf)
-- 50% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD, expected rating of B (sf)
-- 50% increase in PD, expected rating of B (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of CCC (sf)

For SH9, the Class C notes rating would not be affected by any hypothetical change to either PD or LGD.

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 and US regulations only.

Lead Analyst: Francesco Amato, Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
SH7 Initial Rating Date: 28 July 2011
SH8 Initial Rating Date: 20 December 2011
SH9 Initial Rating Date: 2 July 2013

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.

-- Master European Structured Finance Surveillance Methodology
-- European RMBS Insight Methodology
-- European RMBS Insight: Spanish Addendum
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Derivative Criteria for European Structured Finance Transactions
-- Interest Rate Stresses 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.

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