DBRS Morningstar Confirms Ratings on Three Santander Transactions

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings on the following notes (the Rated Notes) issued by three Santander RMBS transactions:

FTA, Santander Hipotecario 7 (SH7):
-- Series A notes at AAA (sf)
-- Series B notes at BB (high) (sf)
-- Series C notes at C (sf)

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

FTA, Santander Hipotecario 9 (SH9):
-- Series A notes at AA (sf)
-- Series B notes at BB (low) (sf)
-- Series C notes at C (sf)

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

The confirmations 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 available to the Rated Notes to cover the expected losses for the Series A and Series 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 Santander RMBS transactions are securitisations of Spanish prime residential mortgage loans originated and serviced by Banco Santander SA (Santander).

PORTFOLIO PERFORMANCE
The portfolios are performing within DBRS Morningstar’s expectations. For SH7, as of the March 2020 payment date, loans in arrears for more than 90 days represented 0.6% of the collateral portfolio, while the current cumulative default ratio stood at 4.1% of the original portfolio balance. For SH8, as of the February 2020 payment date, the 90+ delinquency ratio was at 0.7% of the collateral portfolio, while the current cumulative default ratio stood at 5.4%. For SH9, as of the February 2020 payment date, the 90+ delinquency ratio was at 0.4% of the collateral portfolio, while the current cumulative default ratio stood at 2.6%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis on the remaining collateral pools of receivables and updated its PD and LGD assumptions. For SH7 the base-case PD and LGD are 5.4% and 41.3%, respectively. For SH8, the base-case PD and LGD are 5.5% and 42.3%, respectively, while for SH9, they are 6.7% and 40.8%, respectively.

CREDIT ENHANCEMENT
The credit enhancements available to all the rated notes have continued to increase as the transactions continue to deleverage. The Series A notes in 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 2020, the credit enhancement to the Series A notes and Series B notes was 46.3% and 6.9%, respectively, increasing from 42.3% and 5.9%, as of March 2019. For SH8, as of February 2020, the credit enhancement to the Series A notes and Series B notes was 42.8% and 2.7%, respectively, increasing from 39.3% and 2.3% as at February 2019. For SH9, as of February 2020, the credit enhancement to the Series A notes and Series B notes was 50.1% and 6.9%, respectively, increasing from 46.6% and 6.4% as at February 2019.

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

The Reserve Funds in all three transactions 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 63.6 million, EUR 10.8 million, and EUR 28.6 million, which is at the targets for SH7 and SH9, and below the target of EUR 28.1 million for SH8.

Santander acts as the account bank for all three transactions and as the Swap Counterparty for SH7 and SH8. Based on Santander’s reference rating of A (high), being one notch below its DBRS Morningstar Long-Term Critical Obligations Rating (COR) of AA, 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 bank to be consistent with the ratings assigned to the most senior notes in each transaction, as described in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology; Santander’s COR is also consistent with the First Rating Threshold as described in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

The ratings on the Series B notes for SH7 and SH8 transactions materially deviates from the higher ratings implied by the quantitative model. DBRS Morningstar considers a material deviation to be a rating difference of three or more notches between the assigned rating and the rating implied by a quantitative model that is a substantial component of a rating methodology; in this case, the current performance trend might not be sustainable amid the potential additional stresses arisen in the current Coronavirus Disease (COVID-19) pandemic.

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.

DBRS Morningstar analysed the transaction structures in Intex DealMaker.

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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (13 December 2019). 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 transaction 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 at: https://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 reports and information provided by Santander de Titulización, SGFT, S.A. and loan-level data from 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 rating of each respective transaction, 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 purpose 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 these transactions took place on 12 April 2019, when DBRS Morningstar confirmed the ratings on the Series A and Series C Notes on the three transactions and upgraded the ratings of the Series B Notes.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies is available at www.dbrsmorningstar.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 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 5.4% and 41.3%, respectively.
-- For SH8, the base case PD and LGD assumptions for the remaining collateral pool 5.5% and 42.3%, respectively.
-- For SH9, the base case PD and LGD assumptions for the remaining collateral pool are 6.7% and 40.8%, 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 remain 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 remain 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 fall to AA (high) (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 (high) (sf)

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

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 AA (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 A (high) (sf)

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

SH9 Series A notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of A (high) (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 Series B notes risk sensitivity:
-- 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in LGD, expected rating of BB (low) (sf)
-- 25% increase in PD, expected rating of BB (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 B (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (sf)

For the three transactions, the ratings of the Class C notes would not be affected by any hypothetical change to either PD or LGD.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:
https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Shalva Beshia, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
SH7 Initial Rating Date: 28 July 2011
SH8 Initial Rating Date: 20 December 2011
SH9 Initial Rating Date: 2 July 2013

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

-- Master European Structured Finance Surveillance Methodology (13 December 2019) https://www.dbrsmorningstar.com/research/354616/master-european-structured-finance-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019) https://www.dbrsmorningstar.com/research/350907/derivative-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.
-- 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.
-- European RMBS Insight Methodology (12 April 2018) and European RMBS Insight Model 4.2.0.0
https://www.dbrsmorningstar.com/research/325874/european-rmbs-insight-methodology.
-- European RMBS Insight: Spanish Addendum (10 July 2019)
https://www.dbrsmorningstar.com/research/347838/european-rmbs-insight-spanish-addendum.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at https://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].