DBRS Morningstar Upgrades Ratings on Two SC Germany Consumer Transactions

DBRS Ratings GmbH (DBRS Morningstar) upgraded its ratings on the notes issued by SC Germany Consumer 2015-1 UG (haftungsbeschränkt) (SCGC 2015-1) and SC Germany Consumer 2017-1 UG (haftungsbeschränkt) (SCGC 2017-1) as follows:

SCGC 2015-1:
-- Class B Fixed-Rate Notes upgraded to AAA (sf) from AA (high) (sf)
-- Class C Fixed-Rate Notes upgraded to AA (high) (sf) from AA (sf)
-- Class D Floating-Rate Notes upgraded to AA (sf) from A (high) (sf)

SCGC 2017-1:
-- Class A Fixed-Rate Notes upgraded to AAA (sf) from AA (sf)
-- Class B Fixed-Rate Notes upgraded to AA (sf) from A (sf)
-- Class C Fixed-Rate Notes upgraded to A (sf) from BBB (sf)
-- Class D Floating-Rate Notes upgraded to BBB (high) (sf) from BB (high) (sf)

For SCGC 2015-1, the rating on the Class B Fixed-Rate Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in December 2028. The ratings on the Class C Fixed-Rate Notes and Class D Floating-Rate Notes address the ultimate payment of interest and principal on or before the legal final maturity date.

For SCGC 2017-1, the rating on the Class A Fixed-Rate Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in November 2030. The ratings on the Class B Fixed-Rate Notes, Class C Fixed-Rate Notes and Class D Floating-Rate Notes address the ultimate payment of interest and principal on or before the legal final maturity date.

The upgrades follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults and losses as of the November 2019 payment date.
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the notes to cover the expected losses at their respective rating levels.

SCGC 2015-1 and SCGC 2017-1 are securitisations of consumer loans granted to individuals residing in Germany, originated and serviced by Santander Consumer Bank AG (SCB), a subsidiary of Santander Consumer Finance SA (SCF). SCGC 2015-1 closed in December 2015 with an initial portfolio of EUR 1.4 billion and had a 12-month revolving period, which ended in December 2016. SCGC 2017-1 closed in November 2017 with an initial portfolio of EUR 850 million and had a 12-month revolving period, which ended in November 2018.

PORTFOLIO PERFORMANCE
As of the November 2019 payment date, loans more than 90 days delinquent in SCGC 2015-1 were 0.2% of the outstanding principal balance. Gross cumulative defaults stood at 3.2% of the aggregated original portfolio, of which 12.2% have been recovered to date. Loans more than 90 days delinquent in SCGC 2017-1 were 0.1% of the outstanding principal balance. Gross cumulative defaults stood at 1.4% of the aggregated original portfolio, of which 5.3% have been recovered to date.

PORTFOLIO ASSUMPTIONS
For both transactions, DBRS Morningstar conducted a loan-by-loan analysis of the remaining pools of receivables and has updated its base case PD and LGD assumptions to 6.2% and 80.0%, respectively.

CREDIT ENHANCEMENT
Credit enhancement is provided to the rated notes by the subordination of the respective junior obligations. As of the November 2019 payment date, credit enhancement for the transactions are as follows:

SCGC 2015-1:
Credit enhancement to the Class B Fixed-Rate Notes increased to 65.9% from 35.0% at the time of the previous annual review; credit enhancement to the Class C Fixed-Rate Notes increased to 47.9% from 25.5%; and credit enhancement to the Class D Floating-Rate Notes increased to 27.0% from 14.4%.

SCGC 2017-1:
Following the end of the revolving period in November 2018 and start of amortisation, credit enhancement to the Class A Fixed-Rate Notes increased to 30.0% from 16.2% at the time of the previous annual review; credit enhancement to the Class B Fixed-Rate Notes increased to 18.4% from 9.9%; credit enhancement to the Class C Fixed-Rate Notes increased to 11.1% from 6.0%; and credit enhancement to the Class D Floating-Rate Notes increased to 8.2% from 4.4%.

The transactions benefit from a liquidity reserve available upon the occurrence of a Servicer Termination Event to cover senior fees, expenses and senior swap payments, as well as interest due on the Class A Fixed-Rate Notes for SCGC 2017-1. They have remained at their target balance since closing and have current balances of EUR 2.5 million for SCGC 2015-1 (equal to the floor level) and EUR 2.3 million for SCGC 2017-1, equal to its target level of 0.5% of the outstanding balance of performing collateral.

The transactions are exposed to potential commingling and set-off risks as debtors may open accounts with the originator and collections are swept to the account bank on each monthly payment date. As a mitigant, SCB in its capacity as servicer and originator, respectively, will fund separate commingling and set-off reserves if the DBRS Morningstar rating of SCB’s parent company – SCF – falls below specific thresholds or certain ownership thresholds are breached, as defined in the legal documentation. These reserves continue to be unfunded as neither trigger has been breached to date.

DBRS Morningstar notes that there are fixed–to-floating interest rate swaps related to the junior-most Class D and Class E Notes in both transactions. The regular swap payments rank ahead of interest and principal payments on the senior notes in the waterfall. The interest rate scenarios and the impact of regular swap payments on the cash flows have been considered in accordance with the relevant methodologies.

The Bank of New York Mellon, Frankfurt Branch acts as the account bank for SCGC 2015-1, while HSBC Bank plc acts as the account bank for SCGC 2017-1. Based on the DBRS Morningstar private ratings of both institutions, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account banks to be consistent with the ratings assigned to the notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Unicredit Bank AG acts as the swap counterparty for SCGC 2015-1. In accordance with DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology, and given the current rating of the Class D Notes and DBRS Morningstar’s private rating of Unicredit Bank AG, the swap agreement was not considered in the cash flow analysis of the Class D Notes.

DZ Bank AG acts as the swap counterparty for SCGC 2017-1. DBRS Morningstar's Long Term Critical Obligations Rating (COR) of DZ Bank AG at AA is above the First Rating Threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology, given the rating assigned to the Class D Notes.

The transaction structures were analysed in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

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

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

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

Other methodologies referenced in these transactions 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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include investor and servicer reports provided by SCB and loan-level data provided by the European DataWarehouse GmbH.

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

At the time of the initial ratings, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

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

The last rating action on SCGC 2015-1 took place on 27 November 2018, when DBRS Morningstar confirmed the ratings on the Class A and Class B Notes at AAA (sf) and AA (high) (sf), respectively, and upgraded the ratings on the Class C and Class D Notes to AA (sf) and A (high) (sf), respectively.

The last rating action on SCGC 2017-1 took place on 26 November 2018, when DBRS Morningstar confirmed the ratings on the Class A, Class B, Class C and Class D Notes at AA (sf), A (sf), BBB (sf) and BB (high) (sf), respectively.

The lead analyst responsibilities for these transactions have been transferred to Daniel Rakhamimov.
Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies is available at www.dbrs.com.
To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the Base Case):

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pools 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.
-- The base case PD and LGD of the current pools of loans for the transactions are 6.2% and 80.0%, 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 of the Class B Fixed-Rate Notes of SCGC 2015-1 would be expected to remain at AAA (sf), ceteris paribus. If the PD increases by 50%, the rating of the Class B Fixed-Rate Notes of SCGC 2015-1 would be expected to remain at AAA (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class B Fixed-Rate Notes of SCGC 2015-1 would be expected to remain at AAA (sf).

SCGC 2015-1 Class B Fixed-Rate 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 AAA (sf)

SCGC 2015-1 Class C Fixed-Rate Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)

SCGC 2015-1 Class D Floating-Rate 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 A (sf)
-- 50% increase in PD, expected rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

SCGC 2017-1 Class A Fixed-Rate Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (low) (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 (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

SCGC 2017-1 Class B Fixed-Rate Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

SCGC 2017-1 Class C Fixed-Rate Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD, expected rating of BBB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (sf)

SCGC 2017-1 Class D Floating-Rate Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in LGD, expected rating of BBB (low) (sf)
-- 25% increase in PD, expected rating of BBB (low) (sf)
-- 50% increase in PD, expected rating of BB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (sf)

For further information on DBRS Morningstar 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Daniel Rakhamimov, Senior Financial Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 26 November 2015 (SCGC 2015-1); 20 November 2017 (SCGC 2017-1)

DBRS Ratings GmbH
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The rating methodologies used in the analysis of these transactions can be found at: http://www.dbrs.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Interest Rate Stresses for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions

A description of how DBRS Morningstar 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 these credits or on this industry, visit www.dbrs.com or contact us at [email protected].