DBRS Morningstar Assigns Provisional Ratings to FT Santander Consumo 4

DBRS Ratings GmbH (DBRS Morningstar) assigned provisional ratings to the following series of notes to be issued by FT Santander Consumo 4, (the Issuer):

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

DBRS Morningstar does not rate the Series F notes expected to be issued in this transaction.

The rating on the Series A Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal final maturity date in September 2032. The ratings on the Series B Notes, Series C Notes, Series D Notes, and Series E Notes address the ultimate payment of interest and the ultimate repayment of principal by the legal final 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 with regard to their respective roles.
-- DBRS Morningstar’s operational risk review of Banco Santander, S.A., which it deemed to be an acceptable servicer.
-- The credit quality, diversification of the collateral, and historical and projected performance of the portfolio.
-- DBRS Morningstar’s current sovereign rating of the Kingdom of Spain at “A” with a Stable trend.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, and 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 fixed-rate (floating-rate receivables could be included during the revolving period) receivables related to consumer loans granted by Banco Santander, S.A (the originator) to private individuals residing in Spain. The originator will also service the portfolio. Series F Notes will be issued to fund the cash reserve.

The transaction includes an 13-month revolving period scheduled to end in March 2022 (included). 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 of payments basis and benefits from an amortising cash reserve funded through the subscription proceeds of the Series F Notes, that represents 2.0% of the rated notes. The cash reserve can be used to cover senior costs and interest on the Series A Notes, Series B Notes, Series C Notes, Series D Notes, and Series E Notes. The cash reserve will be part of the available funds.

The repayment of the notes will start after the end of the revolving period on the first principal payment date in June 2022 on a pro rata basis unless certain events such as breach of performance triggers, insolvency of the servicer, or termination of the servicer occur. Under these circumstances, the principal repayment of the notes will become fully sequential, and the switch is not reversible.

Interest and principal payments on the notes will be made quarterly on the 18th of March, June, September and December. The Series A Notes and Series B Notes pay interest indexed to three-month Euribor whereas the majority of the portfolio pays a fixed-interest rate (the entire provisional portfolio pays fixed-interest rate). The interest rate risk arising from the mismatch between the Issuer’s liabilities and the portfolio is hedged through a cap collateral agreement with an eligible counterparty.

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

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

The provisional ratings are based on information provided to DBRS Morningstar by the Issuer and by its agents as of the date of this press release. The ratings can be finalised upon review of final information, data, legal opinions, and the executed version of the governing transaction documents. To the extent that the information or the documents provided to DBRS Morningstar as of this date differ from the final information, DBRS Morningstar may assign different final ratings to the notes.

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 delinquencies may arise in the coming months for many ABS 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 this transaction DBRS Morningstar assumed a moderate decline in the expected recovery rate.

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 28 January 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/372842/global-macroeconomic-scenarios-january-2021-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.

For more information on DBRS Morningstar considerations for European ABS transactions and Coronavirus Disease (COVID-19), please see the following commentary: https://www.dbrsmorningstar.com/research/360734.

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 European Consumer and Commercial Asset-Backed Securitisations” (3 September 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 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 the Originator, the Issuer, and Santander de Titulización S.G.F.T., S.A.

DBRS Morningstar received static default vintage data (more than 90 days in arrears) static recoveries vintage data from the period Q1 2012 to Q1 2020. 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 December 2020.

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

DBRS Morningstar was not 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.

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

-- PD used: Expected base case PD of 6.1%, and 21.7%, 17.5%, 13.6%, 9.8% and 7.7%, respectively, for AA (sf), A (high) (sf), A (low) (sf), BBB (low) (sf), and BB (low) (sf) scenarios, on a 25% and 50% increase in the applicable PD.
-- Recovery rate used: Expected recovery rate of 21.7%.
-- Loss given default (LGD) used: Expected LGD of 83.9%, 83.1%, 82.2%, 80.9% and 79.6% respectively, for AA (sf), A (high) (sf), A (low) (sf), BBB (low) (sf), and BB (low) (sf) scenarios, on a 25% and 50% increase in 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 in the expected LGD.
Scenario 5: A 50% increase in the expected default and a 25% increase in 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 in the expected LGD.
Scenario 8: A 50% increase in the expected default and a 50% increase in the expected LGD.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are

-- Series A Notes: AA (low) (sf), A (high) (sf), AA (sf), A (high) (sf), A (low) (sf), AA (sf), A (high) (sf) and A (low) (sf).
-- Series B Notes: A (sf), BBB (high) (sf), A (low) (sf), BBB (sf), BBB (low) (sf), A (low) (sf), BBB (sf), BBB (low) (sf).
-- Series C Notes: BBB (high) (sf), BBB (sf), BBB (sf), BB (high) (sf), BB (low) (sf), BBB (sf), BB (high) (sf) and BB(low) (sf).
-- Series D Notes: BB (high) (sf), BB (low) (sf), BB (sf), B (high) (sf), B (low) (sf), BB (sf), B (sf) and for scenario 8, no quantitative rating is obtain.
-- Series E Notes: B (sf) and B (low) (sf) for scenarios 3 and 6 and no other quantitative rating is obtain for the other scenarios.

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. 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.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: María López, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 28 January 2021

DBRS Ratings GmbH, Sucursal en España
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28046 Madrid
Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
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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: http://www.dbrsmorningstar.com/about/methodologies.

--Rating European Consumer and Commercial Asset-Backed Securitisations (3 September 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 (19 November 2020)
https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.
--Operational Risk Assessment for European Structured Finance Originators (30 September 2020) https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators.
--Interest Rate Stresses for European Structured Finance Transactions (28 September 2020)
https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.
--Derivative Criteria for European Structure Finance Transactions (24 September 2020)
https://www.dbrsmorningstar.com/research/350907/derivative-criteria-for-european-structured-finance-transactions.
--Rating European Structured Finance Transactions Methodology (21 July 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].