DBRS Morningstar Confirms and Upgrades Ratings on Four RMBS Santander Transactions

DBRS Ratings GmbH (DBRS Morningstar) confirmed and upgraded the ratings on the bonds issued by four Santander Spanish residential mortgage-backed securities (RMBS) transactions as follows:

FTA RMBS Santander 1 (SAN1):
-- Series A Notes confirmed at AAA (sf)
-- Series B Notes confirmed at CCC (sf)
-- Series C Notes confirmed at C (sf)

FTA RMBS Santander 3 (SAN3):
-- Series A Notes confirmed at AAA (sf)
-- Series B Notes upgraded to BB (low) (sf) from B (high) (sf)
-- Series C Notes confirmed at C (sf)

FT RMBS Santander 4 (SAN4):
-- Series A Notes confirmed at AA (sf)
-- Series B Notes confirmed at B (sf)
-- Series C Notes confirmed at C (sf)

FT RMBS Santander 5 (SAN5):
-- Series A Notes confirmed at AA (sf)
-- Series B Notes upgraded to BB (low) (sf) from B (low) (sf)
-- Series C Notes confirmed at C (sf)

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

The rating actions follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performances, in terms of delinquencies, defaults, and losses.
-- Portfolio default rates (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the Series A and Series B Notes to cover the expected losses at their respective rating levels. The Series C Notes of each transaction were issued to fund the cash reserve 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.
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

All four transactions are securitisations of Spanish first-lien residential mortgage loans and include a portion of borrowers with higher-risk characteristics. The pool of SAN1 was originated and is serviced by Banco Santander S.A. (Santander). The pools of SAN3 and SAN4 were originated by Santander and Banco de Crédito Español (Banesto, integrated in Santander since 2013) and are serviced by Santander. The pool of SAN5 is originated by Santander, Banesto and Banco Banif S.A.U. and is also serviced by Santander.

PORTFOLIO PERFORMANCE
The portfolios are performing within DBRS Morningstar’s expectations. As of the latest payment dates, the 90+ delinquency ratios stood at 1.2%, 1.2%, 1.4%, and 1.5% of the outstanding collateral pools of SAN1, SAN3, SAN4 and SAN5, respectively. The cumulative default ratios were 4.3%, 2.7%, 2.4%, and 1.9%, computed on the original portfolio balances of SAN1, SAN3, SAN4, and SAN5, respectively.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted loan-by-loan analyses on the remaining collateral pools of receivables and updated its PD and LGD assumptions as follows:

-- In SAN1, the base case PD and LGD are 10.9% and 27.1%, respectively;
-- In SAN3, the base case PD and LGD are 7.3% and 34.2%, respectively;
-- In SAN4, the base case PD and LGD are 8.7% and 32.0%, respectively;
-- In SAN5, the base case PD and LGD are 10.8% and 33.5%, respectively.

CREDIT ENHANCEMENT
The credit enhancements available to the Series A and B Notes continue to increase as the transactions continue to deleverage. The Series C Notes funded the reserve funds and hence do not benefit from credit enhancement.

The credit enhancements consist of the overcollateralisation provided by the outstanding collateral portfolios and include the reserve funds in all transactions. The credit enhancements were as follows:

-- In SAN1, the Series A and Series B Notes credit enhancements were 52.6% and 4.4% as of the June 2020 payment date, up from 47.1% and 3.9% as of the June 2019 payment date;
-- In SAN3, the Series A and Series B Notes credit enhancements were 45.3% and 6.8% as of the August 2020 payment date, up from 41.6% and 6.1% as of the August 2019 payment date;
-- In SAN4, the Series A and Series B Notes credit enhancements were 36.9% and 6.5% as of the June 2020 payment date, up from 33.8% and 5.8% as of the June 2019 payment date;
-- In SAN5, the Series A and Series B Notes credit enhancements were 36.7% and 6.7% as of the July 2020 payment date, up from 33.7% and 6.1% as of the July 2019 payment date.

The reserve funds were funded through the issuances of junior series and are available to cover principal losses, senior fees, and interest shortfall on the rated Notes. As of the latest payment dates, the reserves were at EUR 33.7 million in SAN1, EUR 275.6 million in SAN3, EUR 126.1 million in SAN4, and EUR 57.9 million in SAN5. None of the reserve funds are at their target levels but they have been increasing over the last year in all transactions.

Banco Santander S.A. acts as the Account Bank of all four transactions. Based on the DBRS Morningstar account bank reference rating of A (high), one notch below the DBRS Morningstar public Long-Term Critical Obligations Rating (COR) of Banco Santander of AA (low), the downgrade provisions outlined in the transactions’ documents, and other mitigating factors inherent in the transactions’ structures, DBRS Morningstar considers the risk arising from the exposure to the Account Bank in all four transactions to be consistent with the ratings assigned to the Series A Notes of each transaction, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structures in Intex DealMaker.

The coronavirus pandemic and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many RMBS transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For these transactions, DBRS Morningstar increased the expected default rate for self-employed borrowers, incorporated a moderate reduction in residential property values, and conducted additional sensitivity analysis to determine that the transactions benefit from sufficient liquidity support to withstand potential high levels of payment holidays in the portfolios.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated RMBS transactions in Europe. For more details please see https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.
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.

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” (22 April 2020). DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction 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 action.

Other methodologies referenced in these transactions 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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include investor reports provided by Santander de Titulización, S.G.F.T., S.A., 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 actions on the transactions took place on 4 October 2019, as follows:

-- SAN1: Series A Notes confirmed at AAA (sf); Series B Notes confirmed at CCC (sf); Series C Notes confirmed at C (sf).
-- SAN3: Series A Notes confirmed at AAA (sf); Series B Notes upgraded to B (sf) (high) from B (low) (sf); Series C Notes confirmed at C (sf).
-- SAN4: Series A Notes confirmed at AA (sf) (sf); Series B Notes upgraded to B (sf) from B (low) (sf); Series C Notes confirmed at C (sf).
-- SAN5: Series A Notes confirmed at AA (sf); Series B Notes upgraded to B (low) (sf) from CCC (sf); Series C Notes confirmed at C (sf).

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 rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (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.

-- In SAN1, the base case PD and LGD of the pool of mortgages are 10.9% and 27.1%, respectively. At the AAA (sf) rating level, the corresponding PD is 33.6% and the LGD is 50.2%.
-- In SAN3, the base case PD and LGD of the pool of mortgages are 7.3% and 34.2%, respectively. At the AAA (sf) rating level, the corresponding PD is 27.3% and the LGD is 56.1%.
-- In SAN4, the base case PD and LGD of the pool of mortgages are 8.7% and 32.0%, respectively. At the AA (sf) rating level, the corresponding PD is 25.9% and the LGD is 49.3%.
-- In SAN5, the base case PD and LGD of the pool of mortgages are 10.8% and 33.5%, respectively. At the AA (sf) rating level, the corresponding PD is 29.9% and the LGD is 50.2%.

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 in SAN1, if the LGD increases by 50%, the rating of the 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 of the Series A Notes would be expected to remain at AAA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Series A Notes would still be expected to remain at AAA (sf).

SAN1: 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 AAA (sf)

SAN1: Series B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in LGD, expected rating of CC (sf)
-- 25% increase in PD, expected rating of CCC (sf)
-- 50% increase in PD, expected rating of CCC (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of CCC (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 below CCC (sf)

SAN3: Series A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (low) (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)

SAN3: Series B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in LGD, expected rating of B (high) (sf)
-- 25% increase in PD, expected rating of BB (low) (sf)
-- 50% increase in PD, expected rating of B (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (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 (low) (sf)

SAN4: Series 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)

SAN4: Series B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of B (sf)
-- 50% increase in LGD, expected rating of B (sf)
-- 25% increase in PD, expected rating of B (sf)
-- 50% increase in PD, expected rating of B (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (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 CCC (sf)

SAN5: Series 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)

SAN5: Series B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in LGD, expected rating of B (high) (sf)
-- 25% increase in PD, expected rating of BB (low) (sf)
-- 50% increase in PD, expected rating of B (high)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (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 (low) (sf)

The ratings on the Series C Notes would not be affected by a change in either the 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:
http://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
Initial Rating Dates:

SAN1 Initial Rating Date: 18 June 2014
SAN3 Initial Rating Date: 17 November 2014
SAN4 Initial Rating Date: 24 June 2015
SAN5 Initial Rating Date: 10 December 2015

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 these transactions can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (22 April 2020), https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology

-- Interest Rate Stresses for Structured Finance Transactions (28 September 2020)
https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-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 (2 April 2020) and European RMBS Insight Model 4.3.1.0.,
https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology

-- European RMBS Insight: Spanish Addendum (26 August 2020),
https://www.dbrsmorningstar.com/research/366107/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 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].