DBRS Morningstar Finalises Provisional Ratings on Santander Consumo 3, FT

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following classes of notes (collectively, the Rated Notes) issued by Santander Consumo 3, FT (the Issuer):

-- Series A Notes at AA (sf)
-- Series B Notes at A (sf)
-- Series C Notes at A (low) (sf)
-- Series D Notes at BBB (sf)
-- Series E Notes at BB (high) (sf)

DBRS Morningstar does not rate the Series F issued in this transaction.

The rating of the Series A Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal maturity date in December 2031 The ratings on the Series B Notes, Series C Notes, Series D Notes, and Series E Notes address the ultimate payment of interest and ultimate repayment of principal by the legal maturity date.

DBRS Morningstar based its ratings on a review of the following analytical considerations:
-- The transaction’s capital structure, including form and sufficiency of available credit enhancement.
-- Credit enhancement levels are sufficient to support DBRS Morningstar’s projected expected net losses under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the notes.
-- The seller’s, originator’s, and servicer’s financial strength and their capabilities with respect to originations, underwriting, and servicing.
-- The other parties’ financial strength to their respective roles.
-- DBRS Morningstar’s operational risk review on Banco Santander, which it deemed to be an acceptable servicer.
-- The credit quality, diversification of the collateral and historical and projected performance of the seller’s portfolio.
-- DBRS Morningstar’s current sovereign rating of the Kingdom of Spain at “A” with a Positive trend.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, the presence of legal opinions that address the true sale of the assets to the Issuer.

The transaction represents the issuance of Series A Notes, Series B Notes, Series C Notes, Series D Notes, and Series E Notes backed by a portfolio of approximately EUR 2.0 billion fixed-rate and floating-rate receivables related to consumer loans granted by Banco Santander, S.A (the originator) to private individuals residing in Spain. The originator also services the portfolio. Series F Notes were issued to fund the cash reserve.

The transaction includes an 11-month revolving period scheduled to end in March 2021. During the revolving period, the originator may offer additional receivables that the Issuer will purchase provided that eligibility criteria and concentration limits set out in the transaction documents are satisfied. The revolving period may end earlier than scheduled if certain events occur, such as the breach of performance triggers, insolvency of the originator, or replacement of the servicer.

The transaction allocates payments on a combined interest and principal priority and benefits from a amortising EUR 30.0 million cash reserve funded through the subscription proceeds of the Series F Notes. The cash reserve can be used to cover senior costs, interest on Series A Notes, Series B Notes, Series C Notes, Series D Notes, and Series E Notes but cannot be used to offset losses.

The repayment of the notes will start after the end of the revolving period on the first principal payment date in June 2021 on a pro rata basis unless certain events such as breach of performance triggers, insolvency of the originator, or the termination of the servicer occur. Under these circumstances, the principal repayment of the notes will become fully sequential, and the switch is not reversible.

The Rated Notes pay interest indexed to three-month Euribor whereas most of the portfolio pays a fixed-interest rate.

The interest rate risk arising from the mismatch between the Issuer’s liabilities the portfolio is hedged through a swap agreement with an eligible counterparty.

Banco Santander acts as the account bank for the transaction. Based on the DBRS Morningstar rating of Banco Santander at A (high) (COR at AA (low)), the downgrade provisions outlined in the transaction documents, and structural mitigants, DBRS Morningstar considers the risk arising from the exposure to Banco Santander to be consistent with the rating assigned to the Series A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Banco Santander acts as the swap counterparty for the transaction. DBRS Morningstar's Long-Term Issuer and Long-Term COR ratings of Banco Santander at A (high) and AA (low), respectively, are consistent with the First Rating Threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker, considering the default rates at which the Rated Notes did not return all specified cash flows.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is “Rating European Consumer and Commercial Asset-Backed Securitisations” (13 January 2020).

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

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found at: http://www.dbrsmorningstar.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.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include the Originator, Banco Santander, the Issuer, and Santander de Titulización S.G.F.T. S.A.

DBRS Morningstar received default vintage data (more than 90 days in arrears) from the period ranging between Q1 2012 until Q3 2019. Data was split between total pool of consumer loans, pre-approved consumer loans and regular consumer loans, including all internal probability of defaults (PD) of Santander consumer loans. The same sets of data were received considering those loans with a maximum internal PD of 6%, according the representation and warranties of the portfolio. DBRS Morningstar received the same set of information for recoveries for more than 90 days in arrears.

Data received by DBRS Morningstar was consistently split between internal PD, all internal PD and PD lower than 6.0% according transaction documents, Stratification tables and portfolio were also provided as at the beginning of March 2020.

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

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.

These ratings concern a newly issued financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

This is the first rating action since the Initial Rating Date.

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

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

-- PD used: Expected PD of 4.8% and a 21.5%,14.5%, 12.7%, 9.7%, and 7.9%, respectively, for AA (sf), A (sf), A (low) (sf), BBB (sf), BB (high) (sf) scenarios, a 25% and 50% increase on the applicable PD.
-- Recovery rate used: Expected recovery rate of 23.3%.
-- Loss given default (LGD) used: Expected LGD of 17.5%,18.7%, 19.1%, 19.8%, and 22.6%, respectively, for AA (sf), A (sf), A (low) (sf), BBB (sf), BB (high) (sf) scenarios, a 25% and 50% increase on the applicable LGD.

Scenario 1: A 25% increase in the expected default.
Scenario 2: A 50% increase in the expected default.
Scenario 3: A 25% increase in the expected LGD.
Scenario 4: A 25% increase in the expected default and a 25% increase on the expected LGD.
Scenario 5: A 50% increase in the expected default and a 25% increase on the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected default and a 50% increase on the expected LGD.
Scenario 8: A 50% increase in the expected default and a 50% increase on the expected LGD.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are, respectively:
-- Series A Notes: A (high) (sf), A (sf), AA (low) (sf), A (sf), A (low) (sf), AA (low) (sf), A (sf), A (low) (sf).
-- Series B Notes: A (sf), BBB (high) (sf), A (low) (sf), BBB (high) (sf), BBB (sf), A (low) (sf), BBB (high) (sf), BBB (sf).
-- Series C Notes; BBB (high) (sf), BBB (low) (sf), BBB (sf), BBB (low) (sf), BB (sf), BBB(sf), BBB (low) (sf), BB (sf).
-- Series D Notes: BBB (sf), BB (high) (sf), BBB (low) (sf), BB (sf), B (high) (sf), BBB (low) (sf), BB (sf), B (high) (sf)..
-- Series E Notes: BB (high) (sf), BB (low) (sf), BB (sf), B (high) (sf), B (low) (sf), BB (sf), B (sf), B (low) (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, Sucursal en España are subject to EU and US regulations only.

Lead Analyst: María López, Senior Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 31 March 2020

DBRS Ratings GmbH, Sucursal en España
Calle del Pinar, 5
28006 Madrid
Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
Tel. +49 (69) 8088 3500

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

--Rating European Consumer and Commercial Asset-Backed Securitisations (13 January 2020)
https://www.dbrsmorningstar.com/research/355533/rating-european-consumer-and-commercial-asset-backed-securitisations
--Legal Criteria for European Structured Finance Transactions (11 September 2019)
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions
--Operational Risk Assessment for European Structured Finance Servicers (28 February 2020)
https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers
--Operational Risk Assessment for European Structured Finance Originators (28 February 2020)
https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators
--Interest Rate Stresses for European Structured Finance Transactions (10 October 2019)
https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions
--Derivative Criteria for European Structure Finance Transactions (26 September 2019)
https://www.dbrsmorningstar.com/research/350907/derivative-criteria-for-european-structured-finance-transactions
--Rating European Structured Finance Transactions Methodology (28 February 2020)
https://www.dbrsmorningstar.com/research/357428/rating-european-structured-finance-transactions-methodology

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].