DBRS Morningstar Confirms Ratings of FT PYMES Santander 13

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings of the bonds issued by FT PYMES Santander 13 (the Issuer), as follows:

-- Series A Notes at A (high) (sf)
-- Series B Notes at BBB (high) (sf)
-- Series C Notes at C (sf)

The rating of the Series A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in May 2043. The ratings of the Series B and Series C Notes address the ultimate payment of interest and principal on or before the legal final maturity date.

The rating confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the November 2020 payment date.
-- Base case probability of default (PD) and updated default and recovery rates on the remaining pool of receivables.
-- Current available credit enhancement to the Series A and Series B Notes to cover the expected losses assumed at their respective rating levels.
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease
(COVID-19) pandemic.

The Series C Notes, issued for the purpose of funding the reserve fund, are in the first loss position and, as such, are highly likely to default. Given the characteristics of the Series C Notes, as defined in the transaction documents, DBRS Morningstar notes that the default would most likely only be recognised at the maturity or early termination of the transaction.

The Issuer is a cashflow securitisation collateralised by a portfolio of bank loans and credit lines originated and serviced by Banco Santander S.A. (Santander) to self-employed individuals and small and medium-size enterprises (SMEs) based in Spain.

PORTFOLIO PERFORMANCE
The portfolio is performing within DBRS Morningstar’s expectations. As of November 2020, the 90+ delinquency ratio remained unchanged at 1.3% compared with November 2019, and the cumulative default ratio was at 0.8.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis on the remaining pool of receivables and updated its default rate and recovery assumptions. The base case PD has been updated to 4.6%, following the coronavirus adjustments.

CREDIT ENHANCEMENT
The credit enhancement available to the Series A and Series B Notes consists of the subordination of the junior notes and the reserve fund. The Series C Notes funded the reserve fund and hence do not benefit from the credit enhancement. As of the November 2020 payment date, the credit enhancement available to the Series A and Series B Notes was 95.5% and 12.6%, respectively, up from 61.2% and down from 13.3%, respectively, one year ago.

The transaction benefits from the reserve fund currently at its target level of EUR 67.5 million. It is available to cover senior expenses as well as missed interest and principal payments on the Series A and Series B Notes throughout the life of the transaction.

Santander acts as the Account Bank for the transaction. Based on its Long-Term Issuer Rating of Santander at A (high), DBRS Morningstar considers the risk arising from the exposure to 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. Considering the replacement triggers, the A (high) (sf) rating of the Series A Notes is not fully delinked from the creditworthiness of the Account Bank. DBRS Morningstar notes that a downgrade of the Account Bank’s Long-Term Issuer Rating by one notch, ceteris paribus, would likely lead to a downgrade of the Series A Notes to A (sf).

DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cash flow engine.

The Coronavirus Disease (COVID-19) 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 payment holidays and delinquencies may continue to increase in the coming months for many SME transactions, some meaningfully. The ratings are based on additional analysis and, where appropriate, adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar increased the expected default rate for obligors in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus.

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 2 December 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/370672/global-macroeconomic-scenarios-december-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 18 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated Structured Credit transactions in Europe. For more details please see, https://www.dbrsmorningstar.com/research/361098/european-structured-credit-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: “Rating CLOs Backed by Loans to European SMEs” (30 September 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of 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 this transaction 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 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 the management company, 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 action on this transaction took place on 20 January 2020, when DBRS Morningstar confirmed the rating of the Series A and Series C Notes at A (high) (sf) and C (sf), respectively, and upgraded the rating of the Series B Notes to BBB (high) (sf) from B (high) (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 ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings (the base case):
-- PD Rates Used: One-year base case PD of 4.60%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rates of 47.6% at the A (high) (sf) stress level and 48.7% at the BBB (high) (sf) stress level for the Series A and Series B Notes, respectively.
-- Account Bank Rating: One-notch downgrade of Santander as the account bank provider.
DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Series A Notes at A (high) (sf) and downgrade of the Series B Notes to BBB (low) (sf). A scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10%, ceteris paribus, would also lead to a confirmation of the Series A Notes at A (high) (sf) and downgrade of the Series B Notes to BBB (low) (sf).

A hypothetical downgrade of the Account Bank Long-Term Issuer Rating by one notch, ceteris paribus, would likely lead to a downgrade of the Series A Notes to A (sf), given the large transaction exposure to Santander, and to a confirmation of the Series B Notes at BBB (high) (sf).

The rating on the Series C Notes would not be affected by a change in the PD, LGD, or account bank rating.

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.

DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Shalva Beshia, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 19 January 2018

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.

-- Rating CLOs Backed by Loans to European SMEs (30 September 2020) and SME Diversity Model v.2.4.2.0, https://www.dbrsmorningstar.com/research/367642/rating-clos-backed-by-loans-to-european-smes.

-- Rating CLOs and CDOs of Large Corporate Credit (21 July 2020),
https://www.dbrsmorningstar.com/research/364310/rating-clos-and-cdos-of-large-corporate-credit.

-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.

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

-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.

-- European RMBS Insight: Spanish Addendum (26 August 2020),
https://www.dbrsmorningstar.com/research/366107/european-rmbs-insight-spanish-addendum.

-- European RMBS Insight Methodology (2 April 2020),
https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology.

-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.

-- Cash Flow Assumptions for Corporate Credit Securitizations (21 July 2020),
https://www.dbrsmorningstar.com/research/364311/cash-flow-assumptions-for-corporate-credit-securitizations.

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].