DBRS Finalises Provisional Ratings on FT RMBS Prado VI

DBRS Ratings Limited (DBRS) finalised its provisional ratings of AAA (sf) of the Class A notes and BBB (high) (sf) of the Class B notes issued by FT RMBS Prado VI (the Issuer).

The rating on the Class A notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date. The rating on the Class B notes addresses the ultimate payment of interest and principal on or before the legal final maturity date. Deferral of interest is permitted on the Class B notes, as per the transaction documents. DBRS does not rate the Class C notes.

The transaction is a securitisation 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. The Issuer used the proceeds of the Class A, Class B and Class C notes to fund the purchase of the mortgage portfolio from the Seller. In addition, UCI provided a separate additional subordinated loan 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.

The originator and servicer of the transaction is UCI, which is jointly owned by Banco Santander and BNP Paribas. The account bank is Banco Santander S.A. (Santander) and the principal paying agent is BNP Paribas, Securities Services (Spanish Branch).

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 (18.0%) subordination provided by the Class B notes and the Class C notes. The Class B notes benefit from (8.0%) subordination provided by the Class C notes. The Class A notes and the Class B notes benefit from an amortising reserve fund with a target amount equal to 2.25% 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 and the Class B notes and, at maturity, the principal of the Class A and Class B notes.

The Class A target amortisation amount is equal to the positive difference between the outstanding principal balance of the notes and the outstanding principal balance of the non-defaulted collateral. However, if a turbo amortisation event occurs then all collections will be paid to the Class A notes principal until its paid in full after the payment of the senior fees, the amounts due to the swap counterparty, the interest due on the Class A notes, the interest due on the Class B notes (if a Class B interest deferral event has not happened) and the replenishment of the reserve fund. The Class B target amortisation amount (once the Class A notes have been redeemed in full) is equal to the positive difference between the outstanding principal balance of the notes and the outstanding principal balance of the non-defaulted collateral. However, if a turbo amortisation event occurs then all collections will be paid to the Class B notes as principal until paid in full after the payment of the senior fees, the amounts due to the swap counterparty, the interest due on the Class A notes, the interest due on the Class B notes and the replenishment of the reserve fund.

The 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% for three years after the closing date, 4% four years after the closing date and 5% for five years after the closing date.

-- DBRS analysed the final portfolio, which was equal to EUR 428.0 million as of 2 July 2018, 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 sub-pool comprises the 93.3% of the portfolio by loan balance that has never been restructured; it was assigned a Spanish Underwriting Score of 4. The second sub-pool, which comprises the remaining 6.7% of the portfolio, includes loans that were restructured in the past but have been performing over the last three years. The second sub-pool was assigned a Spanish Underwriting Score of 6.

-- The main characteristics of the final portfolio include (1) 67.9% weighted-average current loan-to-value (WACLTV) and 78.5% indexed WACLTV (Instituto Nacional de Estadística, INE Q4 2015); (2) the top three geographical concentrations of Madrid (28.7% of the portfolio by loan balance), Catalonia (27.3%) and Andalusia (19.9%); (3) weighted-average loan seasoning of 5.8 years; (4) the weighted-average remaining term of the portfolio is 26.7 years, with 13.6% of the loans having a remaining term equal or greater than 30 years.

-- The loans are primarily floating-rate mortgages linked to 12-month Euribor (34.77%) or Índice de Referencia de Préstamos Hipotecarios (IRPH) (23.16%). Approximately 17.15% of the portfolio comprises fixed-rate loans with a compulsory switch to floating while 24.92% of the portfolio comprises fixed-rate-for-life loans. The current weighted-average interest rate of the loans that are fixed rate is 2.64%. The fixed-rate loans with a compulsory switch to floating will revert to 12-month Euribor after the end of their fixed rate period. The weighted-average remaining term of the fixed-rate period is 11 years. Fixed-rate-for-life loans have a weighted-average interest rate of 2.82%. The notes are floating-rate liabilities indexed to three-month Euribor. The Issuer has entered an interest rate swap with Banco Santander, S.A. to mitigate the interest rates mismatch between the fixed-rate loans and the three-month Euribor paid on the notes. The Issuer will pay a fixed rate of 0.98%, 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.

Banco Santander S.A., is the eligible swap counterparty for this transaction. DBRS’s rating of Banco Santander S.A. at A (high) is consistent with criteria in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

The loans in the portfolio are paying monthly instalments with a weighted-average reset interval of six months, while the Class A, Class B and Class C notes will pay a quarterly coupon. Hence, there is some basis risk in the transaction that is not hedged.

Amounts standing in the reserve fund are also available to cover the interest rate and basis risk for the Class A notes and the Class B notes. DBRS stressed the interest rates as described in its “Interest Rate Stresses for European Structured Finance Transactions” 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 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 (PD), loss given default (LGD) and expected losses (EL) resulting from DBRS’s credit analysis of the mortgage portfolio at AAA (sf) and BBB (high) (sf) stress scenario are detailed below.

-- In accordance with the transaction documentation, the servicer can grant loan modifications without consent of the management company within the range of permitted variations. Floating-rate loans can be renegotiated to fixed-rate loans up to a maximum of 5% of the initial balance of the portfolio; the margin can be reduced to 0.75 basis points (bps) for loans linked to Euribor and -0.25bps for loans linked to IRPH and the maturity of the loan can be extended to the final maturity date of the notes. These modifications are subject to a limit of 15% of the initial balance of the portfolio. DBRS has considered this permitted variation and factored them in its cash flow analysis.

-- 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 AA (low), while the DBRS rating for Santander’s Senior Unsecured Debt is A (high).

As a result of the analytical considerations, DBRS derived a base case PD of 8.8% and LGD of 29.5%, which resulted in an EL of 2.6 % using the European RMBS Insight Model.

As part of its cash flow assessment, DBRS applied two default timing curves (front-ended and back-ended), prepayment curves (low, medium and high assumptions) and interest rate stresses as per its “Interest Rate Stresses for European Structured Finance Transactions” methodology. DBRS applied an additional 0% constant principal repayment stress. The cash flows were analysed using Intex DealMaker.

The legal structure and presence of legal opinions were deemed consistent with the DBRS “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the ratings are: “European RMBS Insight Methodology” and “European RMBS Insight: Spanish Addendum”.

DBRS has applied the principal methodologies 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 data and 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 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.

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

-- In respect of the Class A Notes, a PD and LGD at the AAA (sf) stress scenario of 31.5% and 46.8%, respectively.
-- In respect of the Class B Notes, the PD and LGD at the BBB (high) (sf) stress scenario of 19.4% and 36.1%, respectively.

To assess the impact of changing the transaction parameters on the ratings, DBRS considered the following stress scenarios, as compared with the parameters used to determine the ratings:

DBRS concludes the following impact on the Class A Notes:
-- A 25% increase of the PD, ceteris paribus would lead to a downgrade to AA (sf).
-- A 50% increase of the PD, ceteris paribus would lead to a downgrade to A (high) (sf).
-- A 25% increase of the LGD, ceteris paribus would lead to a downgrade to AA (high) (sf).
-- A 50% increase of the LGD, ceteris paribus would lead to a downgrade to AA (low) (sf).
-- A 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (high) (sf).
-- A 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (low) (sf).
-- A 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (sf).
-- A 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).

DBRS concludes the following impact on the Class B Notes:
-- A 25% increase of the PD, ceteris paribus would lead to a downgrade to BBB (low) (sf).
-- A 50% increase of the PD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- A 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (low) (sf).
-- A 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- A 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf).
-- A 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (sf).
-- A 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (sf).
-- A 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (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 and US regulations only.

Lead Analyst: Belén Bulnes, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 14 June 2018

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.

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

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.